Canada Opens Consultation on Tax Base Avoidance Measures To Strengthen Transfer Pricing Rule

August 3, 2019by TPA Global

The Canadian Department of Finance has opened a consultation on proposed tax measures that would improve transfer pricing rules, counter tax base erosion via foreign affiliate dumping, and apply withholding tax to cross-border share lending arrangements.

Legislative proposals

on July 30, Department of Finance of Canada published draft legislative proposals and explanatory notes detailing how it plans to implement several budget measures that have yet to be legislated. The proposed measures would improve the transfer pricing rules that apply in transactions occurring across international borders by persons who are not dealing at arm’s length.

According to the release, the Canadian government also proposed measures to ensure that the appropriate tax consequences is applied to cross-border share lending arrangements that are being used to avoid Canadian dividend withholding tax. Specifically, there are eleven measurements that the proposal would implement.

Details of undertaken measures

The government proposed amending clause 152 (4)(b)(iii)(A) of the ITA, which applies when an assessment arises because of a non-arm’s-length transaction involving a taxpayer and a nonresident person. The amendment would expand the definition of the term “transaction” to include “an arrangement or event”. According to the explanatory notes, the amendment would apply to the tax year for which the normal reassessment period ends, on or after March 19, 2019.

Other measures would tighten foreign affiliate anti-dumping rules in section 212.3 of the ITA to tackle base erosion arising from transactions involving a resident corporation controlled by a nonresident that invests in a foreign affiliate. Changes would include the addition of special rules for trusts and the provision of exceptions from foreign affiliate anti-dumping rules in specific cases, like those involving resident corporations controlled by a group of parents.

Other draft measures would amend rules barring taxpayers from converting fully taxable ordinary income into capital gains via derivative transactions and ensure the efficiency of the “requirement for information” process by allowing those requests to be sent electronically to banks and credit unions.

Source: Canadian Government

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