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What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
The following is a summary of recent actions, initiatives and pronouncements by the Canadian government concerning efforts to combat tax avoidance:
- In the 2017 federal budget, without setting out any specific new measures, the government highlighted existing measures that have been implemented or are in the process of being implemented, but expressed that it “will continue to work with its international partners to ensure a coherent and consistent response to fight tax avoidance”.
- The 2017 federal budget also notes that the Canada Revenue Agency (CRA) is applying revised international guidance on transfer pricing by multinational enterprises in response to OECD Base Erosion and Profit Shifting (BEPS) recommendations.
- In the 2016 federal budget, the government undertook extensive expansions to the back-to-back loan rules and the Income Tax Act’s cross-border surplus stripping provisions.
- Administratively, the CRA has increased its international audit activities, especially concerning transfer pricing audits.
In the 2017 federal budget, the government announced C$524 million of new funding to boost the CRA’s audit activity in order to probe tax evasion and tax avoidance.
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
Although the 2017 federal budget contains no new legislative proposals to implement the OECD BEPS project, it did highlight Canada’s ongoing work to implement the project’s minimum standards – for example:
- in April 2016 the CRA published Information Circular 70-6R7 to outline the types of tax ruling that Canada intends to share spontaneously with other jurisdictions (Action 5);
- Canada was involved in developing the OECD BEPS Multilateral Instrument that would modify existing income tax treaties to implement various BEPS project measures, including BEPS Action 6 on treaty abuse (Action 6);
- Canada introduced country-by-country reporting requirements effective for taxation years commencing on or after January 1 2016 (Action 13); and
- Canada is committed to improving the efficiency and effectiveness of the mutual agreement procedures in its income tax treaties (Action 14).
On June 7 2017 Canada signed the BEPS Multilateral Instrument. The following points are notable:
- The government has indicated that certain measures could come into force as early as January 2019.
- The BEPS Multilateral Instrument could impact as many as 75 of Canada’s 93 bilateral tax treaties.
- Canada has opted for the principal purpose test as the substantive technical rule. This test is a general anti-abuse rule based on the principal purpose of transactions or arrangements. It will have the effect of denying a benefit under a tax treaty where one of the principal purposes of a transaction is to obtain a benefit under the treaty.
- Although the BEPS Multilateral Instrument contains certain other optional provisions, Canada has adopted only the minimum standard provisions and the binding mandatory arbitration provision and has registered reservations on all other optional provisions.
Is there a legal distinction between aggressive tax planning and tax avoidance?
What penalties are imposed for non-compliance with anti-avoidance provisions?
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