Canada

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.

Partnerships

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.

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 the 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. On 10 October 2022, the OECD released amendments to the CRS, which will:

• require financial institutions to include additional information in their annual CRS reporting
• align the CRS with the new Crypto-Asset Reporting Framework (CARF) (see ‘Crypto-asset reporting’ below) and include crypto-assets in relevant CRS definitions, and
• integrate certain frequently asked questions into the body of the CRS text and guidance.

Participating jurisdictions, including Canada, will need to agree to these amendments and update their domestic legislation to implement the more significant changes. The 2024 federal budget proposes, starting the 2026 calendar year, to implement amendments to the Canadian rules relating to the CRS that have been endorsed by the OECD in connection with the CARF, including changes relating to electronic money products and central bank digital currencies.

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.

Crypto-asset reporting

The OECD has developed a framework for the automatic exchange of tax information relating to transactions in crypto-assets, the Crypto-Asset Reporting Framework (CARF). The 2024 federal budget proposes to implement the CARF in Canada, starting the 2026 calendar year. The new reporting rules would apply to crypto-asset service providers that are resident in Canada, or carry on business in Canada, and that provide services effectuating exchange transactions in crypto-assets. These service providers will need to report certain information regarding their customers and crypto-asset transactions.

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 7,000 for 2024 (CAD 6,500 for 2023, CAD 6,000 for 2019 to 2022, and 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

Grandfathered inter vivos trusts and certain testamentary trusts and estates are taxed at the highest federal marginal tax rate. In contrast, two specifically defined trusts, '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 
• be designated as a GRE in its trust tax return for its first taxation year.

An estate can only qualify as a GRE within the first 36 months of the 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,' and
• in its trust tax return, jointly elect to be a QDT with one or more trust beneficiaries who qualify for the disability tax credit.

Reporting requirements for trusts

Certain trusts were previously exempted from an annual T3 'Trust Income Tax and Information Return' filing obligation. However, for trust taxation years ending after 30 December 2023, this exemption is no longer available for certain Canadian-resident and non-resident trusts.

For taxation years ending after 30 December 2023, updated rules require:

• an 'express trust' (generally a trust created by a settlor during his or her lifetime, or at death in a will) that are resident in Canada
• a non-resident trust that is required to file a T3 return, and
• a 'bare trust' arrangement (where a trust can reasonably be considered to act as an agent for its beneficiaries with respect to all dealings in all of the trust’s property)

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 new reporting rules. However, for the 2023 and 2024 tax years, because of the unintended impact that these requirements have had on Canadians, the CRA does not require 'bare trust' arrangements to file a T3 return, unless the CRA makes a direct request for it. 

To deal with this unintended impact on certain Canadians, draft legislative proposals:

• reduce the number of trusts, including bare trust arrangements, that would need to file a trust return (and report the additional information)
• defer the start of the revised bare trust filing requirement until the 2025 taxation year

Effective 1 January 2024, trusts must make all tax payments or remittances of more than CAD 10,000 to the Receiver General for Canada electronically, except in special circumstances that preclude it.

Employee Ownership Trusts (EOTs)

Recently enacted legislation, effective 1 January 2024, introduces rules to define and facilitate the use of EOTs. An EOT is a Canadian resident trust that holds shares for the benefit of employees of a corporation controlled by the trust and makes distributions to employees based on their length of service, remuneration, and hours worked. An EOT facilitates the purchase of a business by its employees, without requiring them to pay directly for the shares, and provides an additional succession planning alternative for business owners. To encourage the use of an EOT, the first CAD 10 million in capital gains realised on the sale of a business to an EOT occurring after 2023 and before 2027 will be exempt from tax (subject to certain conditions).