Treatment of flow-through business entities
Specified investment flow-throughs (SIFTs)
Certain earnings of SIFTs (i.e. publicly traded income trusts and partnerships) are subject to a SIFT tax and are deemed to be dividends when distributed.
For Canadian tax purposes, a partnership is treated as a conduit, and the partners are taxed on their share of the partnership income, whether or not distributed. Income is determined at the partnership level and is then allocated among the partners according to the terms of the partnership agreement. However, certain deductions, such as depletion allowances, exploration and development expenses, and donations, will flow through to be deducted by the various partners directly, as will any foreign tax credits, dividend tax credits, or investment tax credits. Partners generally may deduct expenses incurred directly, such as interest on borrowings to acquire partnership interests, in computing income from the partnership.
A person who is not a Canadian citizen or permanent resident that seeks entry to Canada for a temporary assignment must obtain appropriate work authorisation to provide services in Canada, with limited exceptions. The requirement for a work permit has little to do with the duration of the stay in Canada. Rather, the focus is on the work activities to be performed in Canada. ‘Work’ is defined as an activity for which wages or commissions are earned and/or an activity that competes directly with activities of Canadian citizens or permanent residents in the Canadian labour market. In addition, whether the individual is paid from a foreign country or from Canada does not determine if a work permit is required.
Individuals who do not require a temporary resident visa to enter Canada can apply for a work permit either upon entry to Canada or at a Canadian visa office in their country of nationality or country where they have been legally admitted. Individuals who require a temporary resident visa to enter Canada and who seek work in Canada for a temporary duration must apply for both a work permit and temporary resident visa at a Canadian visa office in their country of nationality or country where they have been legally admitted. In this case, if the application for the work permit is approved, the individual will also receive a non-immigrant visa, typically issued for the duration requested in the work permit application or until the expiry of the individual’s passport, whichever occurs first.
Alternatively, an applicant who seeks to reside in Canada permanently can apply for permanent residence; if approved, a permanent resident visa would be issued. The applicant would obtain permanent resident status in Canada by presenting this visa upon entry to the country or, for those currently in Canada with work authorisation, by scheduling an appointment with a local immigration office. Permanent resident status allows an individual to remain and work in Canada indefinitely, subject to certain conditions. Obtaining a permanent resident visa involves longer processing times than a non-immigrant visa.
Cross-border tax compliance
Convention on Mutual Administrative Assistance in Tax Matters
Under the Convention on Mutual Administrative Assistance in Tax Matters, Canada exchanges tax information with other signatories of the convention (member states of the Council of Europe and the member countries of the Organisation for Economic Co-operation and Development (OECD)), based on OECD standards, but is not required to collect taxes on behalf of another country or provide assistance in the service of related documents. Canada will continue to negotiate a provision on helping to collect tax on a bilateral basis, and has agreed to include such a provision in some of its bilateral tax treaties.
Common Reporting Standard (CRS)
The CRS for the automatic exchange of financial account information between foreign tax authorities requires Canadian financial institutions to have procedures to identify accounts held by residents of any country other than Canada or the United States, and to report the required information to the CRA. Having satisfied itself that each jurisdiction has appropriate capacity and safeguards in place, the CRA will formalise exchange arrangements with other jurisdictions, leading to the exchange of information on a multilateral basis.
US Foreign Account Tax Compliance Act (FATCA)
Canada reports enhanced tax information to the United States under an Intergovernmental Agreement between Canada and the United States to improve international tax compliance and to implement the US FATCA.
Personal services business income
The personal services business rules prevent employees from establishing corporations to take advantage of the small business income tax rate, rather than paying the higher personal rate imposed on employment income. They also limit the expenses a personal services business can deduct. The federal corporate tax rate that applies to ‘personal services business’ income is 33%.
Tax-Free Savings Account (TFSA)
Canadian residents aged 18 years and older who have a social insurance number can contribute each year to a TFSA, up to CAD 6,000 for 2019 and later years (CAD 5,500 for 2016 to 2018). Contributions to a TFSA are not tax-deductible but income (including capital gains) earned in a TFSA is exempt from income tax. Withdrawals (whether from capital or income) are tax-free and will increase the taxpayer’s contribution room in future years. Any unused contribution room can be carried forward indefinitely.
Trusts and estates
A flat top‑rate tax (instead of graduated tax rates) applies to testamentary trusts, estates, and grandfathered inter vivos trusts. For estates that are not settled by 36 months after death, the testamentary trust will be required to have taxation year ending on 31 December. Graduated tax rates apply to testamentary trusts that:
- arise as a consequence of an individual’s death (the first 36 months of an estate trust only), or
- have beneficiaries who qualify for the disability tax credit.
Reporting requirements for trusts
The 2019 federal budget confirms the government's intention to implement a 2018 federal budget measure that, starting with 2021 taxation years, requires a trust to report the identity of all trustees, beneficiaries, and settlors of the trust, and each person who has the ability to exert control over trustee decisions regarding appointment of income or capital of the trust (e.g. a protector). The new reporting requirements will apply to certain trusts resident in Canada and non-resident trusts that are currently required to file a T3 ‘Trust Income Tax and Information Return’. A T3 filing obligation could result for certain Canadian-resident trusts for which a filing requirement does not currently exist. Penalties will apply for non-compliance.