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Review of Canadian Tax Developments in 2020

The year 2020 was anything but normal with the global COVID-19
pandemic creating both human and fiscal challenges in Canada and
abroad. The federal government’s attention was fixed firmly on
the pandemic for most of the year, and it was only in November that
tax legislation was released that did not respond directly to the
crisis. Although this legislation contained a significant new
revenue-raising measure, in the form of changes to the GST/HST
rules as they relate to cross-border e-commerce, it remains to be
seen how the government will deal with a projected record deficit
of over $381 billion for 2020-21.

Tax Legislation

In an otherwise eventful year, 2020 was a quiet one for tax
legislation. Typically, the federal government tables an annual
budget in the spring of each year, which is generally followed by
the provincial budgets. The timing for this year coincided with the
beginning of the COVID-19 pandemic. Hence, although the provinces
issued their budgets, the federal government deferred its own
budget to focus on Canada’s response to the pandemic. This
response included a raft of legislation aimed at supporting
businesses and individuals, such as a wage subsidy for employers in
the form of the Canada Emergency Wage Subsidy (CEWS); direct
payments to eligible individuals and workers under the Canada
Emergency Response Benefit (CERB) and Canada Recovery Benefit
(CRB); interest-free, partially forgivable loans to small
businesses and not-for-profits through the Canada Emergency
Business Account (CEBA); and commercial rent relief under the
Canada Emergency Commercial Rent Assistance (CECRA) and later the
Canada Emergency Rent Subsidy (CERS). The government has estimated
the total cost of the COVID-19 response, in the form of direct
fiscal and health measures, deferred revenue and accelerated
spending, at approximately $407 billion, nearly 19% of GDP.

It was not until November 30, 2020, that the federal government
released a mini budget in the guise of the Fall Economic Statement.
This provided details of the extension into 2021 of COVID-19 relief
legislation, including the CEWS. A small number of tax changes were
also proposed, such as the previously announced changes to the
taxation of employee stock options, along with new sales tax
provisions directed at the digital economy.

Federal corporate and personal tax rates remained unchanged. On
the provincial side, in 2019 Alberta adopted corporate tax cuts
that will see the general corporate rate drop to 8% starting in
2022 (it is 9% for 2021). In its 2020 provincial budget,
Québec announced that effective in 2021 it will reduce its
corporate tax rate to 2% (from currently 11.5%) on patent royalties
and on up to 75% of profits from certain other forms of specified
IP-related income, provided that the relevant taxpayer has carried
out scientific research and experimental development (SR&ED) in
Québec and the IP being commercialized results in whole or
in part from SR&ED carried out in Québec.

Taxation of Employee Stock Options

The Fall Economic Statement updated the previously announced
changes to the taxation of employee stock options, which are to be
effective for certain options granted on or after July 1, 2021.
Under the existing rules, employees of corporations and mutual fund
trusts who are issued stock options are able to access preferential
personal income tax treatment (50% of ordinary tax rates) in the
form of a deduction for qualifying stock option benefits (Option
Deduction), which replicates the capital gains’ rate.

The proposed rules limit the availability of the Option
Deduction for options with the same vesting year to the extent that
the fair market value of the securities under the options exceeds
$200,000 at the time the options are granted. If the vesting year
is unclear on the date of the grant, the option will be deemed to
vest on a pro rata basis over the term of the option agreement up
to a maximum of five years. The Fall Economic Statement proposals
also limit the charitable deduction available in respect of stock
options to the same extent as the Option Deduction, so that an
employee can benefit only from the charitable deduction on $200,000
of securities.

Options granted by Canadian-controlled private corporations
(CCPCs) and non-CCPCs whose annual gross revenue does not exceed
$500 million will not be subject to the Option Deduction
limitations.

The proposals allow employers to claim a deduction in respect of
the stock option benefits included in their employee’s income
to the extent that the employees are not entitled to an Option
Deduction because of the $200,000 limit.

Sales Tax Changes Relating to the Digital
Economy

The Fall Economic Statement proposed detailed changes to the
sales tax rules relating to e-commerce transactions, effective July
1, 2021. The proposals are aimed particularly at digital sales and
websites advertising short-term accommodation.

    • Cross-Border Digital Products and
      Services.
       The proposed rules provide that
      non-resident vendors that have no physical presence in Canada and
      sell digital products or services to Canadian consumers would be
      required to register for GST/HST and collect and remit tax on
      taxable sales to Canadian consumers. Registration, collection and
      remittance of GST/HST is currently not required by these vendors. A
      simplified GST/HST regime would apply for these entities.

 

    • Online Marketplaces and Fulfillment
      Warehouses.
       Distribution platform operators (and
      non-resident vendors that do not sell through a distribution
      platform) would be required to collect and remit GST/HST on sales
      to Canadian purchasers by non-registered vendors of goods shipped
      from a fulfillment warehouse or other location in Canada. In
      addition, distribution platform operators and fulfillment
      warehouses would be required to provide certain information to the
      Canada Revenue Agency (CRA) and maintain records relating to their
      non-resident clients.

 

    • Short-Term Rental Accommodation.¬†GST/HST
      would apply to all platform-based short-term rental accommodation
      supplied in Canada. The burden of collecting and remitting GST/HST
      would fall on either the property owner, if registered for GST/HST,
      or the digital accommodation platform if the owner is not
      registered. A simplified GST/HST regime would be available for
      non-resident accommodation platform operators that are not carrying
      on business in Canada.

 

Canada Emergency Wage Subsidy

The CEWS, which was introduced in April 2020 in response to the
pandemic, provides a subsidy to qualifying employers for wages paid
to employees. When first introduced, it was scheduled to run for
the 12-week period from March 15 to June 6, and it provided a
subsidy of up to 75% of wages for employers that suffered a 70%
drop in revenue relative to the comparable period pre-pandemic.
Over the course of the year the program was extended and modified,
applying more broadly and at different rates, depending on the
extent of an employers’ revenue reduction. A detailed
discussion of the CEWS can be found in our bulletin.

The Fall Economic Statement further extended the CEWS to June
2021. For the period commencing December 20, 2020, and ending March
13, 2021, a subsidy of up to 65% of eligible wages is available to
all eligible employers that experience a decline in revenue, with a
base subsidy of up to 40% of eligible wages and an additional
top-up subsidy of up to 35% for employers that experience a decline
in revenue of 70% or more.

Details of the wage subsidy for any period beyond March 13,
2021, are to be provided at a later date.

Tax Administration

Temporarily Extended Deadlines Under the Income
Tax Act
 and Excise Tax Act

On August 31, 2020, the Minister of National Revenue issued
orders extending various periods under the Income Tax Act (ITA) and
the Excise Tax Act (ETA) by virtue
of new powers granted to the Minister under the Time
Limits and Other Periods Act (COVID-19)
 (Time Limits
Act), which received royal assent on July 27, 2020.

Statute-Barring Periods

Under the ministerial orders, the period within which the CRA
can issue reassessments was extended by six months or until
December 31, 2020, whichever is earlier, in respect of years or
periods that would otherwise have become statute-barred under the
ITA or ETA on or after May 20, 2020. These ministerial orders are
no longer in force and no further extensions have been
announced.

Relief for Late-Filed Notices of Objection

The one-year time limit for making late-filed objection requests
was also extended. Time limits for making relief requests that
otherwise would have expired between March 13 and September 13,
2020 were extended by the earlier of six months of the normal
relief request deadline and December 31, 2020. The same extension
was also applied to the time within which a taxpayer or registrant
may contest, before the Tax Court of Canada, a refusal by the
Minister to grant such an extension. Again, no further extensions
have been announced.

Canada’s Response to International Tax Issues Raised
by COVID-19

On May 19, 2020, the CRA issued Guidance on
International Income Tax Issues Raised by the COVID-19
Crisis
 (Guidance), in which it outlined potential
Canadian income tax issues resulting from pandemic-related travel
restrictions, as well as its proposed response to address such
issues.

Income Tax Residency: Individuals and Corporations

With respect to the common law test of tax residency, the
Guidance provided that individuals will
not be considered tax residents of Canada solely by virtue of the
fact that they remained physically present in Canada as a result of
COVID-19-related travel restrictions. Similarly, in computing the
183-day threshold for deemed tax residency, the CRA confirmed that
it would not take into account days during which the individual was
present in Canada and unable to return to his or her country of
residence solely as a result of travel restrictions.

For corporations resident
in treaty countries, dual corporate residency
is typically resolved by applying a residency “tie-breaker
rule” that looks to,¬†inter alia, the
corporation’s place of effective management. According to the
Guidance, such corporations were not to be considered resident in
Canada solely because a director participated in a board meeting
from Canada due to COVID-19 travel restrictions. However, corporate
residency determinations involving potential dual residents
of non-treaty countries will be
determined on a case-by-case basis.

These administrative concessions were applicable for the period
between March 16 and September 30, 2020. It is unclear whether they
will be renewed if travel restrictions are tightened again in
response to the second wave of COVID-19.

Carrying on Business and Permanent Establishments

Residents of treaty countries are
subject to tax in Canada on their business income only if their
business activities are carried on through a permanent
establishment (PE) situated in Canada. The Guidance provided that,
for the period between March 16 and September 30, 2020, a
non-resident entity will not be considered to have a PE in Canada
solely because its employees were required to perform their
employment duties in Canada as a result of travel restrictions. The
Guidance also provides similar relief in circumstances in which,
due to travel restrictions, the non-resident entity could be viewed
as having either an “agency” PE or a “services”
PE (e.g., Articles V(5) and V(9)(a) of the Canada-U.S. tax treaty).
In the case of residents of non-treaty
countries
, the CRA stated that it would decide on a
case-by-case basis whether any administrative relief would be
appropriate.

Cross-Border Employment

The Canada-U.S. tax treaty provides (in Article XV(2)) a limited
safe harbour for U.S. resident persons employed in Canada,
exempting them from Canadian tax on their Canadian source
employment income if the income does not exceed $10,000 or they are
not present in Canada for more than 183 days in a 12-month period
and the income is not borne by a PE. As a result of the
COVID-19-related travel restrictions, certain U.S. employees that
regularly perform employment duties in Canada may have been
required to remain physically present in Canada beyond the 183-day
limit. The Guidance confirmed that the days during which such
individuals were physically present in Canada because of travel
restrictions will not be taken into account in computing the
183-day period. Similar administrative measures would also apply in
computing the days of presence test in
respect of employees ordinarily resident in other treaty
countries.

Similarly, non-resident employers with Canadian resident
employees are required to deduct withholdings at source, regardless
of where the employment services are being rendered. However, such
withholdings can be reduced by obtaining a “letter of
authority” (LOA) from the CRA, which will take into account
any foreign taxes payable by the Canadian employee. In the event
that such Canadian resident employees ‚Äď having previously
obtained a LOA for 2020 ‚Äď performed their employment duties
from Canada as a result of travel restrictions, they would
nevertheless continue to benefit from the reduced Canadian
withholdings at source outlined in the LOA.

Lastly, the Guidance also provided that the CRA will not assess
or penalize a non-resident employer for failing to withhold the
required Canadian payroll deductions during 2020. Certain criteria
need to be satisfied to benefit from this measure, including
demonstrating that the employee is not ordinarily resident in
Canada and that his or her remuneration would otherwise be exempt
from taxation in Canada under a tax treaty. It should be noted
that, unlike the other measures outlined in the Guidance, this
administrative concession potentially applied through December 31,
2020.

Tax Cases

Decision on Derivatives by Supreme Court
in MacDonald

The Supreme Court of Canada (SCC) has upheld the Federal Court
of Appeal (FCA) decision in MacDonald v The Queen,
concerning whether a derivative contract entered into by the
taxpayer was a hedge on capital account or, alternatively, a
speculative investment on income account.

The taxpayer owned a large number of Bank of Nova Scotia (BNS)
shares, which he held on capital account. He obtained a credit
facility from the Toronto-Dominion Bank, for which he was required
to pledge the BNS shares as partial security and enter into a
cash-settled forward contract relating to a large number of BNS
shares. If the BNS share price increased, the forward contract
would decline in value; if the price decreased, the contract would
increase in value. As it turned out the BNS share price increased,
the taxpayer settled the contract over time, and he suffered a
loss. The taxpayer took the position that the loss was on income
account, on the grounds that his intention was to use the forward
contract for speculation, not to hedge risk.

The SCC disagreed, holding that the forward contract was a hedge
and, since the BNS shares were held on capital account, the loss
was a capital loss. In coming to this conclusion, the Court
acknowledged that a taxpayer’s stated intentions are relevant
to the determination of whether a derivative contract is a hedge,
but emphasized that objective evidence of a taxpayer’s
intentions is generally more persuasive. With regard to hedging,
the primary evidence of the purpose of a derivative contract is the
degree to which the contract mitigates the attendant economic risks
of the asset, liability or transaction that it purportedly hedges.
The more effective a derivative contract is at mitigating or
neutralizing such economic risks, the stronger the inference that
the purpose of the contract is to hedge those risks.

In concluding that the forward contract acquired by Mr.
MacDonald was a hedge, the SCC took into account two related facts:
the contract almost perfectly neutralized fluctuations in the price
of the BNS shares and, from the perspective of the Toronto-Dominion
Bank, this meant that the value of the collateral for the loan was
protected from market fluctuations. The fact that he did not sell
his BNS shares to offset the losses did not, in the opinion of the
SCC, sever the linkage between the contract and the underlying
shares.

In ascertaining whether a taxpayer intends to use a derivative
contract to hedge an underlying asset, liability or transaction,
the decision of the SCC in MacDonald represents
a significant shift in the weight given to the extent to which the
contract mitigates or neutralizes economic risks inherent in the
asset, liability or transaction. The SCC decision held that the
evidentiary burden regarding establishing a taxpayer’s
intention is primarily determined by the objective factors
indicating whether the derivative contract substantially mitigates
the economic risks of an underlying asset, liability or
transaction, even if those risks are ones that the taxpayer was not
intending to hedge. In a lengthy dissent, Justice C√īt√©
raised concerns that this shift will introduce uncertainty into the
tax treatment of derivative contracts. It remains to be seen how
the CRA will apply the principles set out in the majority
decision.

Tax Treaty Benefits Upheld in Alta Energy

The FCA rendered its judgment in Alta Energy Luxembourg
SARL v The Queen
, affirming the decision of the Tax Court of
Canada (TCC) that treaty benefits claimed by a Luxembourg special
purpose company on the sale of shares of a Canadian oil and gas
company were not abusive treaty-shopping under Canada’s
domestic general anti-avoidance rule. Alta
Energy
 was decided just as Canada formally embarked on a
new era of international coordination under the
OECD’s¬†Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Profit
Shifting
¬†(MLI), which became effective for Canada’s
tax treaties with many other ratifying countries for withholding
taxes on January 1, 2020, and for other taxes (including capital
gains taxes) for tax years beginning on or after June 1, 2020. The
SCC has granted leave to appeal from the judgment of the FCA.

Transfer Pricing Recharacterization Rejected
in Cameco

The FCA rendered its judgment in the Cameco Corporation
v Canada
 transfer pricing case, affirming the decision of
the TCC in favour of the taxpayer. Cameco is a large producer and
supplier of uranium, which is bought and sold in an unregulated
market under bilateral contracts but is not traded on a commodity
exchange. The taxpayer had entered into long-term contracts with
its European subsidiary for the purchase and sale of uranium based
on fixed prices. Owing to ensuing market price increases, the
subsidiary earned substantial profits.

The case concerns the interpretation of the recharacterization
rule in Canada’s transfer pricing legislation. Before the FCA,
the Crown argued that the Minister could book the profits of the
European subsidiary in Cameco’s hands, because Cameco would not
have entered into the transactions that it did with an arm’s
length person. In rejecting this submission, Webb JA observed that
the relevant test under the transfer pricing rules is whether the
transaction would have been entered into between persons dealing
with each other at arm’s length (an objective test based on
hypothetical persons) and not whether the particular taxpayer would
have entered into the transaction with an arm’s length party (a
subjective test).

The FCA recognized the extraordinary nature of the transfer
pricing recharacterization rule and held that it does not allow the
Minister to simply reallocate all of the profit of a foreign
subsidiary to its Canadian parent company on the basis that the
Canadian corporation would not have entered any transactions with
its foreign subsidiary if they had been dealing with each other at
arm’s length. The Crown has sought leave from the SCC to appeal
the decision of the FCA.

Transfer Pricing for Cross-Border Services Affirmed
in Agra City

The judgment of the TCC in AgraCity Ltd. v The
Queen
 represents another loss for the Minister in its
increasingly aggressive challenges to transfer pricing
arrangements. The taxpayer, a Saskatchewan-based corporation, was a
member of an agricultural buying group that supplied agriproducts
to Canadian farmers. The group incorporated a subsidiary in
Delaware to purchase a glyphosate-based herbicide manufactured in
the United States from third-party U.S. suppliers for resale to
Canadian farmers. Although the herbicide was not registered for
sale in Canada, it could be imported into Canada under a special
program established by the federal government to permit Canadian
farmers to purchase designated herbicides for personal use from
non-Canadian sources. Note, as discussed further below, that the
non-Canadian suppliers (initially the Delaware subsidiary) were
prohibited from offering, in Canada, the herbicide to the farmers
who had to reach out, in the United States, to the suppliers. Much
of this import and resale business was subsequently transferred to
a newly incorporated Barbados subsidiary in order to reduce U.S.
taxes paid on the profits from sales to Canadian farmers. During
the years at issue, the taxpayer provided logistics services to
both the Delaware and the Barbados companies in return for service
fees.

The Minister challenged the services relationship between the
taxpayer and the Barbados subsidiary on the basis that it was a
sham intended to conceal the fact that all income-earning
activities were instead performed by the taxpayer. In the
alternative, the Minister reassessed the appellant under the
transfer pricing rules in the ITA on the basis that all of the
profits of the Barbados subsidiary from its sales to Canadian
farmers should be reallocated to the taxpayer.

The TCC rejected all of the Minister’s arguments. With
respect to the Minister’s sham theory, the evidence clearly
established that the taxpayer had not deceitfully misrepresented
the rights and obligations of the parties and that the business of
importing and reselling the herbicide to Canadian farmers was
indeed conducted by the Barbados subsidiary, with the taxpayer
providing only ancillary services. The Court accorded particular
significance to the fact that the regulatory regime for importing
the herbicide into Canada made a foreign subsidiary structure, in
some form, essential to the business because it was illegal for
anyone to offer the herbicide for sale in Canada or to sell it in
Canada. Further, the Court held that the transactions at issue
between the taxpayer and the Barbados subsidiary were commercially
rational in light of the functions performed by each party and
accepted the expert evidence that the fees charged by the taxpayer
for its services were within the arm’s length range of prices.
The Minister has not appealed the decision to the FCA.

Offshore Bank Structure Affirmed
in Loblaw

The FCA decision in Loblaw Financial Holdings v The
Queen
 concerned whether a Barbados subsidiary in the
Loblaw group, Glenhuron Bank Limited (GBL), carried on an
“investment business” for purposes of the “foreign
affiliate” rules. The TCC had concluded that it did, on which
basis the income of GBL was “foreign accrual property
income” (FAPI), and as such was required to be included in the
income of the Canadian parent corporation on an accrual basis. The
case turned on the interpretation of the regulated foreign bank
exception, which provides that a business carried on by a regulated
foreign bank is not an investment business if certain conditions
are met. Although changes were made to the regulated foreign bank
exception, effective 2015, that would have denied GBL access to the
exception had the changes applied in the years at issue, the
decision in Loblaw remains relevant for a number
of reasons.

GBL engaged in various financing activities, which were funded
with a combination of capital received from members of the Loblaw
group of companies and retained earnings. The sole question before
the FCA was whether the TCC erred in concluding that GBL did not
conduct business principally with arm’s length persons for
purposes of the investment business definition. The TCC had based
its conclusion on the fact that GBL had received its financing from
non-arm’s length persons. Since, in its view, the business
activities of a bank extend to both the receipt and the use of
funds, the non-arm’s length nature of these receipts should be
taken into account. In addition, while substantially all of the
investments made by GBL were with arm’s length persons, the TCC
framed GBL’s activities in terms that suggested GBL was
carrying on business for its parent company and not for its own
account.

The FCA rejected both of these positions. On the matter of the
nature of a banking business, the FCA held that there was no basis
to conclude that the arm’s length test requires looking to both
the receipt and the use of funds and that, on the particular facts
in the case, the capital investments received from other Loblaw
entities were not part of the business conducted by GBL. This
conclusion is in line with the long-standing distinction between
the capital that allows a person to conduct its business and the
activities by which it earns its income. On the second point, the
FCA held that the TCC had failed to respect the distinction between
a corporation and its shareholders when it determined that GBL was
acting on behalf of its parent in the course of its business
activities. While the parent may have provided direction and
oversight, this did not mean that GBL carried on business either
with or for its parent.

The FCA therefore concluded that GBL carried on its business
with arm’s length persons and that its income was therefore not
FAPI. In October 2020, however, the SCC granted the Crown’s
leave to appeal.

Canadian Tax Development Outlook for 2021

Tax Legislation

The absence of a federal budget in 2020 has raised expectations
for the 2021 budget, which, it is hoped, will see Canada out of the
COVID-19 pandemic. The upcoming budget will most likely continue
the government’s policy of massive stimulus to help Canada
emerge from the economic consequences of the pandemic. The budget
may also see some revenue-raising measures to address the
government’s ballooning deficit.

Building Back Better

The Fall Economic Statement set out an investment plan for
Canada’s recovery based on post-pandemic stimulus spending of
$70 to $100 billion over three years. In its September 23, 2020,
Speech from the Throne, the federal government made commitments to
“build back better to create a stronger, more resilient
Canada” to address the existential threat of climate change.
For now, the particulars of how the government intends to usher in
this promised green recovery are still unknown, but it is likely
that fiscal policy will be a key driver of these initiatives.

The ITA currently contains four tax incentives specifically
designed to promote investment in “green” energy
generation projects:

    • an accelerated capital cost allowance rate for specified clean
      energy generation equipment;

 

    • an immediate deduction for certain expenses incurred in the
      development of clean energy or “green energy” generation
      projects;

 

    • a flow-through share mechanism by which principal-business
      corporations may renounce certain expenditures to their
      shareholders, allowing such shareholders to shelter other sources
      of income; and

 

    • the 10% Atlantic investment tax credit, which applies to the
      capital cost of certain prescribed energy generation and
      conservation properties.

 

Possible upgrades to these measures that could come in the 2021
federal budget might include the following:

    • First, the accelerated capital cost allowance is currently
      useful only to renewable energy businesses that are already
      profitable; moreover, its availability is limited to the income
      from renewable energy properties or from a business selling the
      product of such properties. One way to expand this incentive would
      be to make it generally deductible against other sources of income,
      including through a partnership. This would be consistent with the
      U.S. tax policy of allowing flip partnership structures.

 

    • Second, the Canadian renewable and conservation expense
      deduction, which is effectively an extension of the Canadian
      exploration expense system for oil and gas, could be expanded in
      scope in line with deductions available to the oil and gas sector.
      This would also increase the potential for flow-through share
      financing deals of renewable energy companies.

 

    • Third, the 10% Atlantic investment tax credit for renewable
      energy could possibly be extended to the rest of the country or
      transferred into a new category of investment tax credit for
      renewable energy.

 

Possible Revenue-Raising Measures

Much ink has been spilled over the past several months
speculating on how and when the government will start to raise
revenue to fund the extraordinary costs of the pandemic response.
The changes to the GST/HST rules for e-commerce transactions,
estimated to bring in around $3 billion over five years, will be
part of this, but these changes have been in the works for some
time. While we have no more insight into this than anyone else, we
see two broad categories of possible revenue-raising measures:
targeting wealthy Canadians and taxing foreign multinationals.

The government’s prior initiatives to tax the wealthy,
including the most recent stock option changes described above,
have fuelled consistent rumours that the government may scale back
the favoured tax treatment of capital gains by increasing the
current 50% inclusion rate. Other possible changes, which have been
canvassed in the media, include the adoption of an estate or an
inheritance tax on large successions. However, as the current
minority Liberal government might be expected to trigger an
election later in 2021 in the hopes of capitalizing on its pandemic
management performance, it seems unlikely that any substantial
revenue-raising personal tax measures that would upset a section of
the electorate will be proposed.

A more likely approach for this government is to enact corporate
tax increases on foreign multinationals. Canada has been working
within the OECD/G20 Inclusive Framework on Base Erosion and Profit
Shifting (BEPS) with a view to developing a coordinated approach to
the tax challenges arising from digitalization by mid-2021. While
the government has committed to a multilateral solution, it has
expressed concern about the delay in arriving at a consensus.
Accordingly, in the Fall Economic Statement the government proposed
implementing a tax on corporations providing digital services,
starting on January 1, 2022. The Fall Economic Statement did not
provide details on the exact measures the federal government will
pursue, but it appears to be considering a digital services tax
(DST), similar to the one adopted by France, consistent with prior
statements made by the governing Liberal Party as part of its
re-election platform. On a provisional basis, the government
estimates that the new measure would increase federal revenues by
$3.4 billion over five years. Considering that this month France
started raising its digital services tax and the United States
announced it would not immediately retaliate (by imposing tariffs
on French luxury goods), the way may be clear for a Canadian DST.
Finally, Canadian-based multinationals will be keeping a close eye
on the OECD-led discussions now taking place (noted in the
accompanying bulletin on U.S. tax laws) regarding a
potential “minimum tax” (under the so-called Pillar 2
mechanics) on foreign subsidiary profits and whether the views of
those who oppose the notion gain traction.

Tax Administration

What is highly likely is that in 2021 and beyond, the CRA will
be under much increased pressure to bring in needed funds to
service Canada’s public debt. In the Fall Economic Statement,
the government promised to provide additional funding by committing
an additional $606 million over five years to enable the CRA to
target offshore tax compliance, commencing in 2021-22. The Fall
Economic Statement also indicated that the government would be
launching a consultation in early 2021 on potential amendments to
Canada’s anti-avoidance rules, including the general
anti-avoidance rule. All of this will likely result in more
aggressive audits and more frequent assessments in cross-border
situations.

Tax Cases

Two high-profile tax cases will be heard and possibly decided by
the SCC in 2021: Loblaw and Alta
Energy
. The narrow issues in Loblaw are only of historical
relevance because the availability of the offshore bank structure
at issue in that case has been substantially legislatively
curtailed since 2015; however, the fundamental issues relating to
the interpretation of the scope and purpose of Canada’s foreign
affiliate and foreign accrual property income regime (equivalent to
the U.S. Internal Revenue Code Subpart F provisions) could have far
reaching consequences.

The SCC’s consideration of¬†Alta Energy¬†is
also eagerly awaited. If upheld, both the SCC decision and the
unanimous decision of the FCA in favour of the taxpayer may have
dual significance: on the one hand, it may dampen the Canadian
government’s confidence in the application of the general
anti-avoidance rule to defeat treaty benefit claims it regards as
abusive; and on the other hand, it should provide guidance on how
the principal purpose test that is the centrepiece of the MLI
should be applied to perceived treaty-shopping cases.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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