On April 21, 2015, the Canadian government tabled the 2015 federal budget. With lower income tax rates for small businesses proposed, many small business owners in Canada found themselves winners in regards to the domestic tax measures announced.
The 2015 budget also contains several international tax measures, which are highlighted below.
Changes to Withholding Tax Regime
Generally, non-Canadian employers who send employees to work in Canada must withhold and remit Canadian tax on the income earned by such employees in Canada. The requirement applies even in cases where the duration of the work period in Canada is short, or the income is not subject to Canadian tax at all. The latter is possible because many of Canada’s tax treaties provide that employees who are non-Canadian residents generally are not required to pay tax in Canada if the number of their working days, or the total remuneration earned, in Canada is relatively nominal. As such, the requirement to withhold and remit Canadian tax in these circumstances gives rise to an unnecessary administrative burden.
The budget introduces an exception to these withholding requirements for payments made after 2015. To qualify, the employee must be exempt from Canadian income tax in respect of the payment because of a tax treaty. Also, the employee cannot be in Canada for 90 days or more in any 12-month period. Meanwhile, the employer must be resident in a treaty jurisdiction, must not carry on business in Canada through a permanent establishment, and must be certified by the Canadian tax authorities.
In order to be certified, an employer must apply to the Canadian government in prescribed form; if approved, the employer will receive certified status. The new measure will apply to payments made after 2015.
Captive Insurance Companies
The 2014 Canadian federal budget introduced specific anti-avoidance rules focused on the use of captive insurance companies to shift income from the insurance of Canadian risks to a foreign affiliate resident in a lower-tax jurisdiction.
The 2015 budget introduces additional measures to further tighten these anti-avoidance rules, effective for taxation years that begin on or after April 21, 2015.
In an effort to catch those with unreported income earned outside Canada, all Canadian residents (whether individuals, corporations or trusts) are required to file form T1135 “Foreign Income Verification Statement” if they own specified foreign property with total cost exceeding CAD$100,000. “Specified foreign property” includes funds and investments held outside Canada, but excludes property that is for personal use, held in registered plans, or used exclusively in carrying on an active business.
The 2015 budget proposes to simplify the reporting process where the total cost of specified foreign property is greater than CAD$100,000 but less than CAD$250,000 throughout the year.
Tax Information Sharing
To further promote tax compliance and combat tax evasion, the Canadian government will seek to provide information to foreign tax authorities relating to financial accounts in its jurisdiction held by non-Canadian residents where not already negotiated in tax treaties, and vice versa. The Canadian government proposes to implement the information exchange programme on July 1, 2017, allowing the first exchange of information in 2018.
Please contact us if you would like to discuss business or tax planning opportunities in Canada or abroad.
Charles Fu is a partner with Sloan Partners with many years experience in all tax and financial matters. Contact Charles for an appointment to discuss tax savings opportunities and financial strategy for your business.