My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, February 1, 2016

CRA Audit Update for Individuals and Corporations

There is probably no five letter word that strikes more fear into your heart and pocketbook than the word "AUDIT". We are anxious receiving any letter from the CRA, in case it is the dreaded "you have been selected for audit" letter. So today, I thought I would provide you with a mini update on some interesting wording the CRA is now using in audit adjustment proposal letters. For those of you that own small or mid-sized companies, I provide some information on audit selection criteria and what is happening in the small and medium-sized enterprises ("SME") audit area.

Audit Proposal Letters


Gross negligence penalties under subsection 163(2) of the Income Tax Act can be imposed when the CRA can show that a taxpayer knowingly, or under circumstances amounting to gross negligence, makes a false statement or omission in a tax return. The penalty for doing such is equal to the greater of $100 and 50% of the tax due to the false statement or omission.

This subsection has been applied sparingly by the CRA in the past. However, lately I have seen reference to this subsection in a number of audit adjustment proposal letters where the CRA states it is considering imposing penalties. It appears this wording may have become common or standard wording in audit proposal letters, likely to provide the CRA greater leeway to levy the penalty if the facts of the situation later lend themselves to a negligence penalty. This type of language can be scary to clients who receive the audit proposal letter, but have not done anything untoward, and would not be anywhere close to being subject to the gross negligence provision.

Thus, if you receive such a letter, do not "freak-out" if the letter has the gross negligence paragraph, it is not necessarily directed at you.

SME Audits


One of the audit initiatives the CRA has is the SME sector. No one knows for sure how a SME is selected for audit, but it is thought that the CRA uses a risk-assessment system to select businesses for an audit based on various factors. Some of these factors may include:

1. Random Selection - You hit the reverse jackpot and your company is just randomly selected.

2. Audit Tips - This is the worst possible way to be selected. This usually involves a disgruntled spouse, employee or ex-partner. They can be vindictive with knowledge they actually have or think they have that may not even be factual.

3. Past Errors or Non-compliance - This would include revised and amended returns, late filing of corporate and HST returns.

4. Comparative Information -Corporate tax returns must include General Indexed Financial Information known as "GIFI". This information provides a comparative year to year summary of income and expenses. It is suspected by many accountants that the CRA uses this information to review year to year expense and income variances of the filing corporation and to also compare corporations within a similar industry sector to identify those outside the standard ratios.

5. Cash Transaction Industry - If your company is in an industry in which the CRA has seen other companies involved in cash transactions, you are at a high risk for an audit, even if you are compliant. In addition, even if your industry is not known as a "cash industry", if several companies in your space have had audit issues, the entire sector comes under scrutiny.

Record Keeping and Personal Records


The CRA perceives many SME's to have less than stellar record keeping. They also find that many small business owners tend to mix their personal and business expenses (so when your accountant tells you to get a separate credit card for your business, please listen to them).

As result of the above, the CRA may now request personal records such as your personal bank statements, mortgage documents and personal credit card statements to support the SME's expenses. This is something new and upsetting to clients. As per this CRA link to business audits, the CRA states:
  • Your personal records and the personal or business records of other individuals or entities are legally considered to be part of the items that relate, or may relate, to the business being audited.
  • An auditor can examine the records of family members.
  • An auditor may ask questions of the employees who do your accounting entries or know about the operations of your business.
You should speak to your accountant if you get such a request; however, the reality is the CRA feels they are legally entitled to these records and while some disagree, until there is a court case to  the contrary, you will probably be stuck having to provide these records.

Working Backwards


It appears that the CRA is now auditing parallel tracks (business and personal). They audit your actual corporation, while at the same time they are reviewing your net worth and sources of personal funds to support your corporate income and expenses. This new audit tack requires significant time and energy to provide such information (which is often not easily accessible), let alone significant stress. In addition, you may now need to document legitimate non-taxable sources of funds, such as gifts and inheritances, in order to support that they are not subject to tax.

I assume reading this post is not the way you wanted to start your Monday morning. But I figured you rather know what is happening on the audit front than not. Or maybe not :)

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, January 18, 2016

How Not to Plan Your Estate!

Over the years, I have been involved with or been asked to assist with some "messed up" estates.  I often ponder how anyone who loved their spouse and/or children could ever leave their estate in such disarray?

So what is a "messed up" estate? Typically it involves:
  • an outdated will
  • transfers of family property in contradiction of the terms of the deceased's will
  • terrible recording keeping
  • investments in the wrong name
  • missing tax information
  • family members or second spouses, either threatening litigation or already having commenced such
Since so many people seem to ignore estate planning advice, I thought I would take a different tact and write an article on How Not to Plan Your Estate. My hope being, that if you read about the financial and emotional stress you can place upon your loved ones, you may take action.

I wrote this article during the Christmas holidays. I then asked Roma Luciw, The Globe and Mail's personal finance web editor, if she had any interest in this topic. She did and on January 15th, the article was published in The Globe and Mail business section under my byline.

If you did not read The Globe and Mail on Friday, here is the link to the article (The Globe changes the title for the online version if you were wondering). Thank you Roma for your editorial assistance and help in getting the article published in the paper.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, January 11, 2016

The Top 1% are not Happy Campers

A large percentage of my client base is made up of Canada’s “top 1%” of wage earners. They have been vociferous is expressing their unhappiness with the announced marginal tax rate increases for high income earners. They are also very concerned a second shoe will drop, that being the possibility the government will eliminate the small business deduction for many of their corporations.

So who are the “top 1%”? According to a 2013 report by Statistics Canada, Canada's top 1% earned an average income of $454,800. To be considered in the top 1% of income earners in Canada for 2013, a tax-filer would need to have a minimum total income of $222,000.

The 50% Psychological Barrier


On December 7, 2015, Finance Minister Bill Morneau confirmed that for Canadians with incomes over $200,000, their marginal tax rates will increase from 29% to 33%. If you live in Ontario and make more than $220,000, this means you will be paying 53.53% on any dollar earned over the $220,000. I am not a psychologist, but it is very clear to anyone who deals with high-net-worth individuals, that once marginal rates go beyond 50%, they break an invisible psychological barrier that impacts taxpayers thinking, if not their actions. Simply put, you are now paying more money to the government than you keep.

Potential Restriction on Claiming the Small Business Deduction


Currently, small business owners that carry on an active business pay corporate tax at a rate of 15.5% on the first $500,000 of taxable income (subject to various restrictions and sharing of the limit with related corporations). If a corporation is not eligible to claim the small business deduction ("SBD"), they would be subject to a 26.5% tax rate, an 11% increase. [Note: To be clear. This 11% increase is only an increase in the taxes you would pay at the corporate level. So instead of deferring say 38% when you leave money in your corporation (53.5%-15.5%), you would now only be deferring 27%. The absolute income tax increase to you when you when you flow your corporate money to yourself as a dividend or a salary is very small].

As discussed below, the Liberals have floated placing restrictions on the use of the SBD. This has many small business owners anxious that they may have to pay the higher 26.5% tax rate.

In a prior blog post, I noted the following comments made by Prime Minister Justin Trudeau in this article  by the National Post. The Prime Minister stated “that several studies have shown that more than half of small business owners are high-net-worth individuals who incorporate…to avoid paying as high taxes as they otherwise would”. The Post noted that “in that group are doctors and lawyers, groups that may find themselves squeezed by the policy Trudeau loosely outlined this week”.

Mr. Trudeau went on to say that “We want to focus on helping small business owners who are working hard, who are creating jobs for members of their community and serving their community. We are committed to evidence-based policies and I will make no apologies for that.”

Some tax pundits suggest that the Liberals will implement legislation similar to Quebec. In general, Quebec’s legislation says the following corporations would be eligible to claim the small business deduction: 

1. any corporation that employs more than three full-time employees in its business throughout the year or that would usually have used the services of more than three full-time employees had financial, administrative, maintenance, management or other similar services not been provided to the corporation in the year by a corporation associated with it; and

2. any corporation in the primary or manufacturing sector.

My Observations and Experience


I personally cannot ever recall my clients being so vocal over a tax increase and concerned about the possible changes to the small business deduction. I have had several voice their displeasure about these measures. I asked a couple of them if I could discuss their situations in general and they agreed.

One client is a serial entrepreneur in northern Ontario. At a very young age, she built up a hi-tech company and sold a division of the business to a major corporation. At that time she had over 75 employees. She subsequently rebuilt her original company with a new product and incorporated a very successful second company. Following the announcement of the increase in tax to almost 54%, she has started implementing a departure plan, with the intention to set-up offshore and leave Canada within the next ten years. There are several reasons why she wishes to leave Canada, many being philosophical in nature (I would like to list them, as they are very sound and interesting objections, however, we agreed to limit my discussion to her general situation), but the tax increase was the straw that broke the Camel’s back so to speak.

Most people would probably agree, this is not the type of person you wish to chase from Canada.

A second client is a professional nearing retirement age. He basically said to me that why should he continue to work when he does not need the money. He says he is now planning to retire early. He also told me, he had recently attended two Christmas parties and all the room was talking about was the personal tax increase and the possibility many professionals will lose their access to the small business deduction.

The above is an example of tax law changing behaviour in a non-productive way. 

What the Youth of the World have to Say


During a recent dinner, the tax issue was brought up by a guest (not by me, I have enough of this issue at the office). My children who are young adults had this to say:

1. Are individuals who want to leave Canada being selfish? They make a lot of money, so why do they mind paying income tax?

2. If individuals could tell the government what buckets to put their tax dollars towards, would that make it more palatable?

I found both of these comments very insightful, although said through the prism of youth.

Are you selfish if you are willing to leave a country because you do not wish to pay high levels of income tax? Since this discussion would be a book on its own, I will only say the following. I think that every person has and is entitled to, their own marginal income tax “breaking point”. In addition, as noted above, I would trivialize the discussion by saying income tax increase alone may cause some people to leave Canada. While that may be the case for some, I would suggest for most others, while income tax increases maybe a trigger for them considering leaving Canada, it is only one of several considerations.

I loved the tax bucket idea and would suggest many individuals who would consider leaving a country because of taxes would possibly reconsider if they could actually allocate their tax dollars to where they think would be the most useful. However, since this is a fanciful notion and would essentially eliminate the need for government, it is a bit of a non-starter.

The issue of high marginal tax rates is very contentious. This short blog post cannot do the topic any justice. However, it is clear that taxing the wealthy can lead to splits among socioeconomic status, political leanings and philosophical differences on taxation and the common good. What I can tell you is: there is significant unhappiness amongst the top 1%, and probably the top 20%, and if and when legislation comes in restricting the small business deduction, I think it may manifest itself further. Here’s hoping sound business decisions do not become clouded by tax considerations.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, January 4, 2016

The T1135 Form – Yet Again! & Hiring The Blunt Bean Counter

This will be the fifth time I am writing about the T1135 Foreign Income Verification Statement since September, 2013. Today I am discussing the implementation of the April, 2015 Federal budget proposal in which the Conservatives promised to simplify the reporting requirements where your cost of foreign property is less than $250,000.

This proposal has now been implemented and a new T1135 has been released. Here is a link to the new form.

Qualifying for the Simplified Method


The basic requirement to file a T1135 form is still in place. That being, if you own specified foreign property with a cost of more than $100,000 at any time in the year, you must file the form. However, now where you own specified foreign property with an adjusted cost base of more than $100,000 and less than $250,000 throughout the year, you can file using the simplified method (or you can still use the detailed reporting method if you wish, but why you would is beyond me). Note, if your cost exceeds $250k at any time during the year, you cannot use the simplified method.

The simplified method is reported on Part A of the form. While this method is less onerous than the detailed reporting requirement, you will now be required to report the top three countries based on cost during the year under the simplified method. This determination will require some work if your broker does not provide such, or you are a do-it-yourself investor. 

Filing Online and Reassessments


It should be noted you can now file the T1135 online for 2014 and subsequent years. The CRA has also re-iterated that the period for reassessing your return is extended by three years if you have failed to report income from a specified foreign property on your return and Form T1135 was not filed, was not filed on time, or was filed inaccurately.

While the simplified reporting method is better than nothing, I would suggest that most accountants and taxpayers still don’t understand why the T1135 form is required at all, where all you are only reporting is foreign holdings held with your Canadian institution(s).

Hiring The Blunt Bean Counter


I am often asked by readers if they can engage me for various income tax, accounting and wealth management services. Although I rarely if ever, self-promote on the blog, today, I am going to make an exception. Below I’ve listed the various services my national accounting firm and I can provide to you.

Corporate Income Tax Planning


To help you minimize your corporate income taxes, we provide tax planning services including but not limited to: corporate reorganizations, estate freezes, purifications for the capital gains exemption, assistance with indirect taxes such as HST, in-bound and out-bound foreign tax planning, R&D claims, transfer pricing and valuations.

Corporate Financial Statements


To ensure all your corporate compliance needs are met, we typically provide the following services to owner-managed businesses: financial statement preparation, corporate tax return preparation, corporate and personal income tax and estate planning and personal tax return preparation for the business owner.

Estate Planning and T3 Estate Tax Returns


Many people are concerned about ensuring they minimize their taxes upon death and/or leave a legacy to their family. To assist you, we provide estate planning, which typically involves determining your estate tax liability and then trying to minimize and/or manage this liability through tax planning and will planning (with your lawyer). In addition, where you have had a family member pass away or are named executor to an estate, we can assist you in filing the required estate tax filings (which are often very complicated in the year of death, especially if the assets do not pass to a surviving spouse, due to the deemed disposition rules).

Wealth Management and Financial Planning


Most people are concerned with ensuring they have enough money for retirement. I am involved with quarterbacking my client’s wealth and retirement planning, typically starting with a financial check-up and financial plan. As financial quarterback, I try to ensure your investment advisor, lawyer, insurance agent, banker, business consultant integrate their advice into one efficient, optimum, coordinated plan, taking into account your investment, retirement, income tax and successions needs.
 
If you do not have an investment advisor or are looking for a new advisor, we recommend you meet several to find a fit from both an investment perspective and also from a personal relationship perspective.

Accountants cannot provide investment advice. We do however; work closely with several highly respected investment advisors whom we can introduce you to. The advisors typically require a minimum of $1,000,000 of investable assets (yes, I am aware, this is a large issue for people who are looking for a good investment advisor, but do not meet the minimum asset requirements). 

Personal Tax Planning


To help you reduce or minimize your personal taxes, my firm has several excellent tax people who can assist you with personal tax planning and tax return preparation. Unfortunately, because income tax season has essentially become condensed into one month (since the T3, T5013 slips do not arrive until early April at best) I now only prepare personal tax returns for my corporate or wealth clients.

If you would like to engage me or my firm for any of the above noted services, or want to discuss your specific situation and obtain a quote for services, feel free to email me at bluntbeancounter@gmail.com or click the hire The Blunt Bean Counter at the top right of the page.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, December 21, 2015

Year-End Financial Clean-up - 2015 Version

In 2016, would you like to improve your money management, minimize taxes and ensure your loved ones have a financial road map?

Then this holiday season, in between your family gatherings and trying to watch 2016 IIHF World Junior Championship games from Finland, consider undertaking a financial cleanup.

So what is a financial cleanup? In the Blunt Bean Counter’s household it entails the following (Note: For full disclosure, this post is just an update of my 2015 year-end Financial Clean-up).

Yearly Spending Summary


I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog!

But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and amongst other uses provides a starting point for determining your cash requirements in retirement.

Portfolio Review


The holidays or early in the New Year is a great time to review your investment portfolio and annual rates of return; although this year, this may be a very gloomy exercise, especially if your portfolio is Canadian based. I like to compare my returns to some large standard indexes and to the yearly returns on the Canadian Couch Potato’s low cost ETF model portfolios. The Couch Potato typically provides the data for the prior year’s returns on his model portfolio’s in the first week or two of January. I also have the advantage of reviewing my returns to those of the various investment managers my clients engage.

January is also a great time to review your asset allocation, and to re-balance to your desired allocation and risk tolerance.

Tax Items


As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations and medical receipts (acts as checklist of the receipts I should have or will receive) and summaries of expenses that may be deductible for tax purposes such as auto expenses. If you use your home office for business or employment purposes (remember you need a T2200 from your employer), you should print out a summary of your home related expenses.

Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year. This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car (since, if you are like most people, you probably do not keep a detailed log as the CRA requires).

Medical/Dental Insurance Claims


As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and also assists in claiming my medical expenses on my income tax return. You can do this for physiotherapy, massage, chiropractors, orthodontists, and even some drug stores provide yearly prescription summaries.

Stress-Test Checklist


If you are a regular reader, you know I have seemingly written a hundred times about stress-testing your finances and writing your financial story (in case you pass away). The holidays or early January is a great time to update your financial story or checklist for any changes that occurred in the prior year. Such things as new brokerage accounts, online passwords, changes in insurance, etc. need to be updated. If you have not yet got around to stress-testing your finances and writing your financial story, there is no better time to start than early in the year.

Speaking of the year-end, this is my last post for 2015 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. See you in January.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, December 14, 2015

Getting Your Financial Affairs in Order

I was recently interviewed about my book Let's Get Blunt About Your Financial Affairs, by Promod Sharma, a Toronto based actuary, for his Tea at Taxevity series. The interview ended up being as much about my opinions on the importance of getting your financial affairs in order as about the specifics of my book. If I do say so myself, I think the interview is interesting and informative (especially considering you have an accountant being interviewed by an actuary; who would have imagined :).

I thought today, instead of writing, I would link to this interview, so you can actually hear my views on the topic. By the way, and you can believe it or not, that empty space from the bottom of my forehead to the top of my head once was full of flowing locks - big sigh.

Enough about being “follicly-challenged". Here is the interview, I hope that it spurs you to take action and you get your financial affairs in order.





This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, December 7, 2015

Inbound and Outbound International Taxation Issues for Corporations Doing Business in Canada

In today’s economy, businesses look outside their borders for expansion and growth. There are many factors to consider when expanding internationally. In my experience, the income tax considerations are typically an afterthought. Often the people ‘steering the ship’ on the expansion project are not well versed or frankly don't give enough thought to the income tax aspects of any expansion project. However, if international taxation matters are not dealt with proactively or upfront, they can result in significant tax assessments and issues down the road.

Today, my guest poster, Harry Chana an International Tax Expert with BDO Canada LLP will review some high-level issues that need to be proactively considered when investing into Canada or when Canadian companies are looking to expand outside of Canada or dealing with their foreign parents.

As Harry says "I’m a firm believer that tax should not drive the business decisions but it is a critical input that should be considered part and parcel with any international expansion".

Inbound and Outbound International Taxation Issues for Corporations Doing Business in Canada 

By Harry Chana


Inbound Investment to Canada - Welcome to Canada


So you decided to expand your business into Canada. First of all welcome to Canada! Canada is a very good place to do business. However, as a non-resident coming to Canada, you may surprised by some of the tax rules around doing business in Canada. Here are some issues you should consider:

Trips and Traps Where You Have Canadian Customers


A couple of questions you should ask yourself if you are a non-resident of Canada and have Canadian customers:

1. How did you acquire that customer? For example, did you have a sales agent in Canada soliciting customers, did you send your employees to Canada to solicit, or did your employees attend a trade show or conference in Canada which resulted in a sale?

2. Are you required to be in Canada to service, support etc. that Canadian customer? For example, are you doing a supply and installation contract, onsite maintenance or warranty repairs, or customer site visits?

The above list is not exhaustive, but if any of the above apply, YOU, YOUR EMPLOYEES and YOUR COMPANY could be liable for Canadian tax and required to file Canadian tax returns.

You may be surprised to know that if you are sending your employees to Canada to work (such as on an installation contract, project management and /or client visitations), your non-Canadian employees are subject to Canadian source deductions. There is currently no de minimis number of days that exempt one from these deductions. Consequently, even if your non-resident employees are in Canada for only 1 day, they could be liable for Canadian tax. There is legislation that is proposed in the 2015 Federal budget to reduce this compliance requirement, where non-resident employees do not spend significant amounts of time in Canada.

In addition, there are penalties where a non-resident corporation fails to file a required Canadian income tax return. Luckily, if the non-resident is resident in a treaty jurisdiction (such as the U.S.), with proper planning, there are ways to possibly reduce or eliminate any Canadian tax that may arise.

Thin Capitalization Rules


The Thin Capitalization rules (also known as the Thin Cap rules) were brought in to prevent the erosion of the Canadian tax base by having foreign companies capitalize a Canadian company with nominal equity and large related party debt, to obtain an interest deduction in Canada and repatriate money outside of Canada. The rules around thin cap have expanded in scope greatly over the past couple of years and there are additional punitive measures if the rules are not respected. Canadian companies can be capitalized with debt, however certain related party debt-to-equity must not be exceeded (1:5:1). If this ratio is exceeded, a portion of the interest expense will be denied permanently and deemed to be a dividend back to the foreign parent, thereby attracting a withholding tax liability.

Outbound Tax Issues


Loans are used in tax planning quite often to finance operations outside of Canada. For example a foreign parent can loan money to its Canadian subsidiary and charge interest as a way to finance the Canadian subsidiary and repatriate money outside of Canada. Or vice versa, a Canadian company can lend money and charge interest to its foreign subsidiary as a way to finance it and repatriate money back to Canada. Of course, since we are talking tax, nothing is ever that simple and straightforward. A couple of things need to be considered with loans:

1) Shareholder Loans to foreign parent - Rather than declaring a dividend to a foreign parent (with withholding tax implications), you might think to just loan the money directly from the Canadian entity. However there are Canadian rules that if the loan remains outstanding for a certain period of time, the company is deemed to have paid a dividend to the foreign parent (and therefore is subject to withholding tax). This effectively puts the Canadian company in the same position as if it had paid a dividend in the first place. If you have a loan receivable from your foreign parent, you most likely need to consider these rules. However, there are some new planning strategies available to possibly reduce the withholding tax exposure.

2) Loans to foreign subsidiary - Similar to the comment above on loans to a foreign parent, there are tax implications if the Canadian company makes a loan(s) to a foreign subsidiary and doesn’t charge sufficient interest on the loan. There may be a deemed interest income pick-up on the loan which will result in additional income to the Canadian entity. There are exceptions to this rule, and sometimes the deemed income inclusion can be avoided.

Withholding taxes


I have mentioned withholding taxes a couple of times. They apply anytime interest, dividends and royalties are paid by a Canadian to a non-resident. The general withholding tax rate is 25%. There are some exceptions to this rate. For example certain interest paid to arms-length parties are not subject to withholding tax. Withholding tax can be reduced if there is a tax treaty between the two countries (ie. Canada and the foreign country). For example, under the Canada-US Tax Treaty withholding tax can be reduced to 0% if certain criteria are met. However a word of caution, a Canadian corporation paying interest, dividends or royalties to a US corporation is not automatically subject to reduced treaty rates, certain criteria must first be met. These tests are known as the Limitation of Benefit provisions.

The rules around international tax can be complex when dealing with foreign companies expanding into Canada or Canada companies with foreign subsidiaries. There are numerous pitfalls and traps for the unwary; the above are just a small glimpse into the tax implications that can result without proper planning. As I mentioned in the beginning, tax shouldn’t drive the business, but it is a critical input that you need to consider to avoid an unintended tax bill.

A final caveat. There are many other issues I have not touched on in this blog post. When dealing with international tax laws, a tax specialist is always required.

Harry Chana is a Partner in International Tax Services with BDO Canada LLP. He can be reached at 905-946-5457 or by email at hchana@bdo.ca

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.