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 stay in Canada, but rather focuses on the nature of the work activities to be performed in Canada. ‘Work,’ for which a work permit is required, is defined as an activity that competes directly with activities of Canadian citizens or permanent residents within the Canadian labour market and/or where wages or commissions are earned in Canada. A work permit holder may be on a foreign country payroll or Canadian payroll.
Foreign nationals who do not require a Temporary Resident Visa (TRV) to board a flight to Canada (e.g. US citizen) may apply for their work permit at the border upon arrival in Canada. If a TRV is required, the work permit application must be filed online to the Canadian visa office in their country of citizenship or residence. If the application is approved, the foreign national's passport is requested and a non-immigrant visa is pasted into it. The foreign national may then travel to Canada based on their valid TRV and present their work permit approval letter, in order to have their work permit document issued at the border.
To limit the spread of COVID-19, the Canadian border was closed to all but 'essential travel' in March 2020. Essential travel includes that for:
- work or study
- critical infrastructure support, including services deemed essential to the health, safety and security of Canadians
- economic services and supply chains, and
- purposes of family reunification, except family visits
The border closure will remain in place until at least 21 July 2020, but Canada is still processing applications for economic and family class immigrants, as well as temporary foreign workers and international students.
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
As of 2016, grandfathered inter vivos trusts and certain testamentary trusts and estates are taxed at the highest federal marginal tax rate. In contrast, certain specifically-defined trusts, including 'graduated rate estates' (GRE) and 'qualifying disability trusts' (QDT) have access to graduated tax rates.
There are numerous conditions required to meet the definition of either a GRE or a QDT. Among other conditions, a GRE must:
- arise on, and as a consequence of, an individual's death
- qualify as a 'testamentary trust,' and
- designate itself as a GRE in the return for its first taxation year.
A GRE can only qualify as such within the first 36 months of an individual's death.
A QDT must, among other conditions:
- arise on, and as a consequence of, an individual's death
- qualify as a 'testamentary trust'
- be a resident of Canada
- have beneficiaries who qualify for the disability tax credit, and
- make a joint election with one or more of the beneficiaries under the trust.
Reporting requirements for trusts
Current legislation and the CRA's current administrative position exempt certain trusts from an annual T3 'Trust Income Tax and Information Return' filing obligation. However, starting with trust taxation years ending on or after 31 December 2021, federal budget proposals intend to remove these exemptions from certain Canadian-resident and non-resident trusts.
For taxation years ending on or after 31 December 2021, proposed reporting rules will require 'express trusts' (generally a trust created by a settlor during his or her lifetime, or at death in a will) and non-resident trusts that are currently required to file a T3 return, to report with its T3 return the name, address, date of birth (in the case of an individual), jurisdiction of residence and taxpayer identification number for each settlor, trustee, beneficiary and person who has the ability to exert influence over trustee decisions regarding appointment of income or capital of the trust (e.g. a protector) in the year. There will be significant penalties for non-compliance with these proposed reporting rules.