The Canadian economy was impacted in 2008 by the global economic crisis. Canadian stock markets and the Canadian dollar experienced severe volatility, influenced by swings in commodity prices (including particularly the price of oil). Canada’s economic growth has also stalled (due in part to Canada’s dependence on the ailing US auto industry but also to the fact that key exports from Canada are sensitive to the impact of reduced consumer demand in the US and globally).

The Canadian banking system is subject to strict regulation and capitalization requirements and fared relatively well in 2008 compared to financial institutions in other countries. Nevertheless, global market conditions have contributed to a significant reduction in liquidity and tightening of access to credit.

Non bank sponsored asset backed commercial paper (ABCP) in Canada has seen little trading activity since the market effectively froze in August, 2007 when a very large holder of ABCP liquidated its holdings over concerns about the nature of the assets underlying its position. Several other large holders of ABCP collaborated in a solution to the crisis which was embodied in a plan of arrangement to restructure the ABCP program, which received final court approval in September, 2008 and is now being implemented.

Canadian Government Initiatives

Unlike the US, the Canadian government has not, so far, enacted any specific legislative measures designed to provide direct tax relief to Canadian taxpayers caught by the economic crisis. However, the Canadian federal government did take several steps in 2008 to promote liquidity in the Canadian financial markets and to ensure Canadian financial institutions had access to funds. Like many other countries’ central banks, the Bank of Canada first addressed the financial problems with reductions in monetary policy interest rates and with the provision of liquidity to the banking system. Restrictions on short selling were also imposed. In addition, in connection with commitments made by Canada under the G7 Plan of Action, the Bank of Canada pursued measures to provide exceptional liquidity to the Canadian financial system. On November 12, 2008, the Bank of Canada announced plans for an $8 billion Canadian dollar term loan facility, transacted through a single price auction process, designed to permit Canadian financial institutions access to loans using non mortgage loans as eligible collateral.

The Canadian government also implemented several measures to support Canada’s credit markets, both long term and short term. Starting in October, 2008, it began purchasing up to $25 billion in insured mortgages to help Canadian financial institutions raise longer term funds and extend credit to consumers, homebuyers and businesses in Canada through a competitive auction process. On November 12, 2008, the Canadian government announced it would purchase up to an additional $50 billion of insured mortgages by the end of the fiscal year, bringing the total up to $75 billion.

The Canadian government also established the Canadian Lenders Assurance Facility, a temporary program (operating from November, 2008 to May, 2009) which provides insurance on the wholesale term borrowing of federally regulated deposit taking institutions. Given similar measures announced by other countries, the program was intended to ensure that Canadian financial institutions are not put at a competitive disadvantage when raising funds in wholesale markets. Designed primarily as an emergency backstop, the original interest rate floor priced into the program had the unintended effect of raising borrowing costs for Canadian financial institutions. In a move to correct the problem, on November 12, 2008, the Canadian government reduced the base commercial pricing of the facility and waived a surcharge for insurance provided under the facility.

The Office of the Superintendent of Financial Institutions, which regulates Canadian financial institutions, also announced on November 11, 2008 a relaxation of certain regulatory capital requirements for financial institutions. The relieving measure will allow Canadian financial institutions to increase their allowable limit of innovative and preferred shares which can be used toward meeting certain minimum capital requirements for regulatory purposes.

On December 20, 2008, one day after the U.S. announced a $17.4 billion auto bailout package, the Canadian and Ontario governments announced a $4 billion short-term emergency loan package for General Motors Canada and Chrysler Canada, with the Ontario government providing $1.3 of the $4 billion total. Conditions were imposed for drawing down on the loans, including the payment of amounts outstanding to parts suppliers, the acceptance of limits on executive compensation and the provision to the government of warrants for non-voting stock. The governments also indicated that the loans would remain outstanding beyond March 31, 2009 only if they are satisfied with the borrowers’ progress on their restructuring plans.

Trends for 2009

Canada’s current economic environment has created significant uncertainty for investors. In light of tightened credit and its impact on private equity investment, domestic and foreign investors who do invest in Canada will likely focus on strategic acquisitions, on developing more innovative and creative ways of raising or reallocating capital, on reducing costs, realizing efficiencies and consolidating existing businesses. As values decline, going private transactions and forced divestitures of distressed assets and businesses are more likely to occur. The conversion of Canadian income trusts to corporations will also likely begin to accelerate following the long awaited release of draft tax legislation providing tax deferred conversion options.

These activities will occur in the context of recent and possibly additional changes to Canada’s international tax rules following the release on December 10, 2008 of the final report by the Advisory Panel on Canada’s System of International Taxation. The impact of the current tax system and the Panel’s recommendations for change, some of which may be included in the 2009 federal budget proposals to be issued on January 27, 2009, will be of vital concern to investors during this period of economic uncertainty.

2008 Tax Changes

The Fifth Protocol to the Canada–US Income Tax Convention in Force

Among the significant changes made by the Fifth Protocol to the Canada–US Income Tax Convention are those relating to fiscally transparent entities. On the positive side, US resident members of fiscally transparent entities such as US limited liability companies (LLCs) will be granted treaty benefits in 2009. However, the anti hybrid treaty benefit denial rules contained in the Protocol, which are expected to come into force in 2010, will deny treaty benefits with respect to many cross border structures between the US and Canada, where an entity by or through which payments are made is regarded as transparent in one jurisdiction and recognized in the other. The US Treasury Department’s Technical Explanation to the Protocol, to which Canada has subscribed, has not alleviated concerns that the anti hybrid rules will negatively affect certain Canadian unlimited liability companies (ULCs) and a variety of partnership structures which have been common vehicles of choice for Americans investing into Canada. Furthermore, new limitation on benefits (LOB) provisions, which are a first for Canada, will extend treaty benefits only to those US residents who are “qualifying persons” or who satisfy certain active trade or business or derivative benefits tests.

The Advisory Panel did not address the anti-hybrid rules in its report. It is uncertain whether the concerns raised about the anti hybrid rules will be addressed prior to their taking effect. Existing cross-border hybrid arrangements will not be grandfathered. Accordingly, Canadian and US taxpayers with hybrid entities in their group corporate structures are advised to consider their options, and restructure as required before the new rules take effect.

Alternatives to existing cross border hybrid financing structures are being developed on the assumption that the rules will be implemented as they are currently formulated. These alternatives include the use of hybrid instruments or the interposition in current Canadian/US hybrid structures of foreign fiscally transparent entities in tax friendly jurisdictions. In light of these developments, and Canada’s difficulty so far in successfully challenging treaty shopping and other perceived abusive international tax planning in the Canadian Courts (see MIL (Investments) S.A. and Prévost Car (under appeal)), LOB provisions similar to those in the Canada–US Income Tax Convention may become more common features of Canada’s tax treaties. On the issue of treaty shopping, the Advisory Panel has concluded that businesses should be able to organize their affairs so that they can obtain access to treaty benefits. While the Panel acknowledges that there may be situations where treaty benefits are accessed inappropriately, in its view, Canada has adequate resources in its tax treaties and domestic law and in international jurisprudence to combat treaty shopping.

Challenges Facing Cross Border Service Providers into Canada

The Fifth Protocol will also significantly broaden the scope of the permanent establishment (PE) concept, which generally limits the circumstances under which a contracting state may levy tax on a resident of the other contracting state carrying on business in the former state. Prior to the effective date of the Protocol’s changes (January 1, 2010), the two bases on which a resident of the US or Canada would be considered to have a PE in the other country under the Convention are “fixed place of business” or “dependent agent”. The Fifth Protocol introduces a third basis: “a deemed services PE”. The new rule provides that if a Canadian or US enterprise has neither a fixed place of business PE nor a dependent agent PE in the other country, but provides services in the other country and, among other requirements, an individual is present or services are provided in the other country for a period of 183 days or more in a 12 month period, then the resident will be deemed to provide those services through a PE in the other country.

The provision, which is very similar to one included in the 2008 update to the OECD Model Convention, is extremely unusual. In fact, it is the first time that Canada has requested such a provision be added to a bilateral tax treaty between it and one of its major trading partners. It poses significant challenges for businesses in both Canada and the US because the provision may be triggered despite the parties’ best efforts to ensure that the duration of services does not violate the 183 day threshold, meaning that such businesses can easily find themselves inadvertently having a taxable presence in both jurisdictions.

The “deemed services” rule is intended by Canada to override the Canadian Federal Court of Appeal’s decision in The Queen v. Dudney. In that case, the Canadian government was unsuccessful in asserting that a US resident individual, under subcontract with a US corporation, had a PE in Canada at the premises of the Canadian corporation to which he was providing services for about 340 days over two consecutive years. It may also affect the outcome in situations similar to the recent US insurer cases of American Income Life Insurance Company and Knights of Columbus, where the Canadian courts held that US resident insurers had no PE in Canada under the current PE rules.  

The appropriateness of this type of protective provision in a treaty between Canada and the US is questionable, as is its potential impact on Canada’s tax competitiveness and its openness to foreign investment, both of which were key issues within the mandate of the Advisory Panel. Although the Advisory Panel did not directly address the deemed services rule in its report to the government, it recommended eliminating withholding tax requirements under Regulation 105 in respect of a nonresident who performs services in Canada where the non-resident certifies that the income is exempt under a tax treaty with Canada, and described how such a certification system could be implemented. The Panel also acknowledged that further administrative changes may be required to deal more efficiently with non-resident service providers who do not qualify for an exemption from withholding, such as a simpler and more streamlined waiver process and the possibility of blanket waivers for services provided by related non-residents. In that regard, the Advisory Panel has recommended that the Canadian revenue authorities consult with business groups on how the existing reporting requirements could be made simpler to ease the compliance and administrative burdens on both taxpayers and the government.

Building the Canadian Services Sector

While Canada has a broadly worded statutory test deeming a non resident to carry on business in Canada in certain circumstances, a significant exemption is provided for non residents who engage Canadian resident service providers to carry out designated investment services. It is difficult to reconcile this type of exemptive relief intended to stimulate growth in the Canadian services sector, and other measures designed to attract new managerial and technological talent to Canada, with the expansion of the PE concept described above. Submissions made to the Advisory Panel called for more support for the development of Canadian “centres of excellence”, where Canadian expertise and knowledge can be provided to foreign enterprises without potentially subjecting those enterprises to Canadian tax. In its report, the Advisory Panel suggested that the Canadian government undertake consultation to assess whether further relief should be provided in this area. Earlier in 2008, the Province of Ontario proposed a 10 year income tax exemption for new corporations that commercialize intellectual property in Ontario developed by qualifying Canadian universities, colleges or research institutes. Ontario called upon the federal government to match this exemption.

Calculating Branch Business Profits (Losses)

The Fifth Protocol also provides guidance on the calculation of business profits attributable to a PE, and clarifies that the OECD Transfer Pricing Guidelines will apply. The new guidance reflects recommendations in the OECD’s Report on the Attribution of Profits to PEs. The US Technical Explanation’s commentary regarding internal dealings and enterprise expenses may lead to more attention (and potentially more tax litigation) centering on the question of what notional enterprise expenses may be deducted in determining the attribution of profits to a PE.

Withholding Tax Exemption for Interest

In a move intended to provide Canadian borrowers with greater access to international capital markets, effective January 1, 2008, Canadian non resident withholding tax on interest paid to arm’s length foreign lenders was eliminated. The withholding tax exemption applies to debt of all maturities and related financing costs, and benefits all foreign lenders regardless of whether their home jurisdictions provide reciprocal relief to Canadian lenders. The exemption does not apply to participating debt interest linked to factors such as revenues, profits, commodity prices or dividends, which continues to be subject to Canada’s 25% domestic rate of withholding tax.

However, as US and Canadian businesses focus more attention on developing tax-efficient ways to redeploy earnings within a corporate group, the Fifth Protocol’s phasing out of withholding tax on cross-border interest payments between related parties over a three-year period (from 2008-2010)may be of more significance. The phased-in exemption may encourage planning to defer the payment or crediting of interest between US lenders and their Canadian affiliates to later years, to permit interest to benefit from lower tax rates.

The Fifth Protocol proposed no broad changes to the existing reduced rates of withholding tax on dividends - currently 15%, and 5% for dividends paid to corporate shareholders holding 10% or more of a corporation’s voting shares—despite the introduction in several other recent protocols to US bilateral tax treaties of withholding tax exemptions for certain dividends within controlled groups, and long established participation exemptions in EU countries. To date, none of Canada’s tax treaties exempts dividends from withholding tax, placing Canada at a distinct competitive disadvantage in attracting foreign investment and accessing foreign capital.

The Advisory Panel has expressed the view that further reductions in withholding taxes, especially on direct dividends, would benefit Canada economically. It has recommended that Canada continue to reduce or eliminate withholding taxes in future tax treaties and protocols, taking into account the government’s currently planned reductions in the federal corporate tax rate (which are widely preferred among businesses over withholding tax reductions) and global trends.

Potential Changes to Interest Deductibility and Foreign Affiliate Rules

An explicit priority of the Advisory Panel was the review of Canada’s thin capitalization rules as they impact interest deductibility in the context of inbound direct investment. In Canada, reasonable interest is generally deductible in a taxation year if the borrowed funds or the obligation on which the interest is payable is used for one of several eligible uses, which includes generally the payment of dividends (within certain limits), the return of capital to shareholders, the provision of working capital, and the acquisition of assets for use in a business. Where the lender is a foreign related party, thin capitalization rules impose restrictions on the deduction of interest by a Canadian resident corporation. The deduction of interest on foreign inbound related party debt in excess of a 2:1 debt to equity ratio is denied permanently but is not recharacterized as a dividend for withholding tax purposes.

The Advisory Panel received numerous submissions in connection with the possible amendment of these rules and considered several alternatives to the existing rules, including the use of a U.K. type “arm’s length” principle, the adoption of a broad thin capitalization rule applicable to all debt, or the adoption of a US style “earnings stripping” rule. Due in part to concerns about the complexity and difficulty of administering these alternatives, the Panel concluded that Canada’s current thin capitalization regime should be maintained as it is effective, transparent and relatively simple to administer and comply with. In addition, the Panel has recommended that Canada’s thin capitalization rules not be broadened at this time to include third-party and guaranteed debt.

However, the Advisory Panel proposed several modifications aimed at ensuring that the system continues to be effective in protecting Canada’s tax base. First, the Panel has recommended that the debt-to-equity ratio be changed from 2:1 to 1.5:1 to more closely reflect actual Canadian industry practices. Second, the Panel has recommended that the Canadian government follow up on the 2000 federal budget initiative and hold consultations on how best to extend the scope of the thin capitalization rules to partnerships, trusts and Canadian branches of non-resident corporations. Third, the Panel recommended that the Canadian government review whether disallowed interest expense should be recharacterized to ensure that non-resident investors do not inappropriately reduce their Canadian withholding tax obligations. Fourth, the Panel encouraged the government to consider widening the scope of the back-to-back loan rule in the thin capitalization regime while ensuring that any changes do not affect bona fide business arrangements

The Advisory Panel also recommended that the government restrict tax-motivated debt-dumping transactions within related corporate groups through the use of a narrowly targeted specific anti-avoidance rule. The type of arrangement the Panel considers abusive is one involving the direct or indirect acquisition by a foreign-controlled Canadian company of an equity interest in a related foreign corporation in circumstances where the reorganization’s purpose is to shift deductible expenses into Canada, thereby eroding the Canadian tax base while generating no new economic activity, revenue or benefit in Canada.

In the outbound context, the Advisory Panel has recommended moving to a broader exemption system which would include dividends from all foreign active business income earned by foreign affiliates. Canada currently has a partial exemption and partial credit regime for such dividends, dependent on whether or not they are derived from active business income earned by a foreign affiliate resident in a designated treaty country (or, beginning in 2009, a country which has in force a comprehensive tax information exchange agreement (TIEA) with Canada) from a business carried on in that country. Such a move would likely have little impact on tax revenues, as non exempt foreign affiliate earnings are generally redeployed outside Canada rather than repatriated. It would also ease significantly taxpayers’ compliance and administrative burdens by eliminating complicated tracking and calculation of exempt and taxable surplus accounts. The Panel also advocated extending the exemption system to capital gains and losses realized on the disposition of foreign affiliate shares where the shares derive all or substantially all of their value from active business assets, to keep step with most other countries with exemption systems and to further simplify the foreign affiliate system for businesses and the government.

Last but not least, recently enacted double dip financing rules, which will take effect in 2012, have been the subject of much criticism, most recently in Advisory Panel recommendations suggesting their repeal. The report of Canada’s Competition Policy Review Panel specifically notes that these rules, which restrict the deductibility of interest on double dip transactions, “will not enhance Canadian tax revenues but will disadvantage Canadian companies seeking to become global players”. Although the Advisory Panel, when constituted, was not expected to revisit these rules, it reviewed interest deductibility generally in the context of outbound financing arrangements and recommended that the double-dip financing rules be repealed. In order to enhance the competitiveness of Canadian companies expanding their business outside Canada, the Panel has also recommended that no additional rules be introduced to restrict Canadian companies’ deduction of interest expense on borrowed funds used to invest in foreign affiliates.

Foreign Exchange

Another significant concern in the current economic environment has been the tax treatment of foreign exchange gains and losses on foreign currency denominated transactions and also on transactions intended to hedge against fluctuations in the Canadian dollar relative to foreign currency denominated borrowings or trade accounts receivable. In Canada, gains and losses generally assume the tax characterization on income or capital account of the underlying assets. Gains or losses on borrowed funds and on related hedging transactions will generally be on capital account. As capital losses can only be used to offset capital gains, not ordinary income, taxpayers are unable to use such losses except against capital gains, which may not occur for several years or at all.

An illustration of the issue is provided by the recent case of Saskferco Products Inc. v. The Queen. The taxpayer had adopted hedge accounting for income tax purposes in relation to foreign exchange fluctuations on the principal of US dollar denominated notes issued by it to finance the construction of a plant, as well as on a portion of its US sales revenues. Under this method, foreign exchange losses occurring on the repayment of the notes were eliminated and sales revenues were reduced by an equivalent amount. The Minister reassessed the taxpayer to increase its US sales revenues by translating all US dollar revenues at exchange rates in effect when the revenues were earned, and to treat the foreign exchange losses on repayment of the debt as capital losses.

The reassessment was upheld by the Tax Court of Canada. While the court recognized the harsh tax consequences of the mismatch as between capital treatment for the foreign exchange loss on the debt and income treatment for the foreign exchange component of the sales revenues, it held that this was a matter for legislators to address. The Tax Court’s decision was subsequently affirmed on appeal.

In March 2008, however, the Canadian government announced a legislative proposal to extend the current corporate acquisition of control rule, which requires the recognition for tax purposes of accrued losses (with an opportunity to elect to trigger any accrued capital gains on other property to offset those gains) where control of a corporation is considered to be acquired for tax purposes. The proposal will extend the rule to capital gains and losses resulting from foreign currency fluctuations on a corporation’s debt liabilities. On November 28, 2008, the Canadian government released draft legislation which includes provisions to implement this proposal. The new rules generally apply to acquisitions of control occurring after March 7, 2008, and corporations are able to elect to have the new rules apply to acquisitions of control occurring after 2005.

Income Trusts Conversions

Tax changes will also take effect in 2011 for grandfathered Canadian income funds which were publicly traded on October 31, 2006 and continue to comply with “normal growth guidelines” issued by the Canadian government. Currently a preferred investment vehicle for foreign investors because of their flowthrough tax treatment, in 2011 these income funds will come within the ambit of the specified investment flow through trust (“SIFT”) rules. At that point, they will be subject to entity level tax in much the same way as corporations.

After these SIFT rules were enacted in 2007, management of most Canadian income funds began to look at possible scenarios to address the expected changes. One alternative was to convert SIFTs to corporations. The government promised legislation to facilitate such conversions and, on July 14, 2008, released draft legislation which addressed the different ownership structures used by SIFTs and provided for two possible tax deferred conversion methods: (i) an exchange of units of a publicly traded SIFT for shares of a newly incorporated and publicly traded taxable Canadian corporation, followed by a liquidation of the underlying subsidiary trust and other subject entities; or (ii) a redemption or cancellation of SIFT units, followed by a redemption payment to SIFT holders consisting of shares of a taxable Canadian corporation. Revised draft legislation was released on November 28, 2008.

The principal benefit of the proposed conversion rules is that, in addition to tax deferral and some carry over of tax accounts and attributes, they will minimize the administrative burden to taxpayers involved in such conversions by providing an automatic rather than an elective rollover. Both alternatives require careful planning to ensure that the conversion can be completed within a mandatory 60 day timeframe.

Many SIFTs will likely choose to convert to a corporate structure before the SIFT rules take effect in 2011, some as apart of a going-private, merger or acquisition transaction. A SIFT generally will prefer to defer conversion as long as possible to avoid paying entity level tax, if it has sufficient tax attributes to shelter otherwise taxable income. Funds with significant income from foreign subsidiaries, or which make substantial non taxable returns of capital to unitholders, will likely also retain their existing structure as long as possible. However, an earlier conversion may be beneficial where a SIFT is unable to comply with the government’s normal growth guidelines or where restrictions on Canadian ownership are a consideration. Early conversion may also be influenced by considerations such as gaining broader access to debt and equity capital markets, more certainty in regard to governance issues and more flexibility in management of cash flows to assure future growth.

Funds which are natural acquisition targets for pension funds and private equity funds will consider retaining a conduit structure to attract those types of investors. While current market conditions and the introduction of the SIFT rules have reduced the values of most Canadian income funds that are SIFTs, many own businesses that may be attractive targets for foreign strategic acquisitions. However, a foreign investor interested in acquiring all or an interest in a business operated by a Canadian SIFT, should understand the tax-driven nature of the existing SIFT structure, and that tax considerations and opportunities will be key to getting the deal done and to the post acquisition process of rationalizing the ownership structure. In the first instance, the structure may influence the level at which and the manner in which the acquisition occurs. Normally, the acquisition will be structured so that the foreign investor, through a Canadian acquisition vehicle, acquires either publicly traded units of the SIFT or the shares and debt of a corporation or the units of a partnership. The structure will also impact the steps which are taken to collapse the ownership chain once the acquisition has occurred. If the acquisition price of interests in the SIFT exceeds the underlying corporation’s or partnership’s tax basis in the operating assets, generally the foreign buyer will not be able to write up the tax basis of such assets, other than for non depreciable property. However, in certain circumstances, where a partnership owns the operating assets, a buyer acquiring partnership units may be able to gain access to full unamortized pools of tax depreciation.

Tax Reporting For Foreign Vendors

Foreign vendors are often surprised to learn that they must satisfy Canadian tax certification procedures under section 116 of the Canadian taxing legislation before they sell “taxable Canadian property” that has, or is deemed to have, a source in, or a connection with, Canada. Such property includes shares of private Canadian corporations, units in trusts and partnerships and, in certain cases, public company shares and mutual fund trust units. There are two limited circumstances in which a foreign vendor is exempted from the section 116 reporting requirement. The first is where the property is on a list of “excluded property”, and the second is where the purchaser has made a “reasonable inquiry” and believes that the vendor is a Canadian resident. If a section 116 certificate is required but not obtained, then the purchaser is required to withhold and remit a portion of the sale proceeds. In addition, the foreign vendor is required to file a Canadian tax return to report the sale, even where the sale proceeds are exempt from Canadian taxation.

New tax filing procedures enacted in 2008 are intended to simplify reporting for dispositions of taxable Canadian property occurring after December 31, 2008. A foreign vendor will be exempted from section 116 reporting where a tax treaty between Canada and the vendor’s country of residence exempts the disposition of property from Canadian tax. Where the property is sold to a related person, the purchaser will be required to notify and provide specified information to the Canadian tax authorities within 30 days after the disposition. A foreign vendor will also be exempted from filing a Canadian tax return if it has no Canadian tax payable for the taxation year, no outstanding Canadian tax liability for a previous year, and either the property sold is excluded property or a section 116 certificate has been issued for the property.

The key difficulty with the new rules is that the purchaser will be exempt from the tax withholding requirement only where it satisfies certain tests, which include being able to conclude, after reasonable inquiry, that the vendor is resident in a country that has entered into a tax treaty with Canada. This may be difficult or impossible for the purchaser to determine in the context of an arm’s length sale, and the rules do not provide purchasers with a due diligence defence if their determination is incorrect. Many purchasers will therefore be unwilling to accept any liability for withholding tax except if purchasing property from a related person where the risk remains within the related group. Accordingly, the new rules may not have practical effect for arm’s length sales.

The Advisory Panel recommended that the sale of all publicly traded Canadian securities be exempted from the certification and withholding requirements under section 116, and that the withholding requirement be eliminated where a non-resident certifies that a capital gain arising on the disposition of taxable Canadian property is exempt from Canadian tax because of a tax treaty with Canada.


The importance of reviewing Canada’s international tax system in conjunction with other legislative policies affecting foreign investment in Canada is heightened not only by the current economic downturn, but also by sobering statistics just released in a report by the C.D. Howe Institute. According to its sources, Canada has ranked only 25th out of 98 countries with respect to openness to world markets (as determined by cross-border investment flows as a percentage of gross domestic product) for the period 2001-2007, which represents a seven place drop from Canada’s ranking during the period 1994-2000. Statistics included in the Advisory Panel’s report to the Canadian government also indicate that Canada’s share of the total world stock of inbound and outbound foreign direct investment decreased from nearly 10 percent in the early 1980s to 3.6 percent in 2006.

The C.D. Howe Institute recommends that Canada “dismantle barriers to both inbound and outbound foreign investment to increase business exposure to global competition”. It also sums up Canada’s current position: “While foreign direct investment has been a controversial issue in Canada, the reality is that Canada’s openness to world capital flows, both inbound and outbound, is not impressive by world standards. This lack-lustre performance is problematic…Allowing international investments into Canada…has a positive effect on the Canadian economy. Foreign companies bring in technological advancements from international R&D markets, increasing human capital and productivity and leading to higher wages. These technologies and innovations spill over to domestic firms, increasing their productivity.”

Overall, the Advisory Panel’s review of Canada’s international tax system is timely. It is hoped that any legislative changes stemming from the Panel’s recommendations to improve the current system’s competitiveness, efficiency and fairness can be developed quickly, in consultation with the tax and business community, and will enhance the ability of Canadian businesses to compete more effectively in global markets.