Published by the Tax Group
McCarthy Tétrault FRANÇAIS VOL.4,
Tax Update (Volume 4, Issue 4)

Canadian "Thin Capitalization" Rules: Further Broadening
Canada, like many developed countries, restricts the amount of interest a corporation resident in Canada (CRIC) may deduct on loans made by non-residents who are the CRIC’s significant shareholders or their affiliates. The aim of these rules is to protect the Canadian tax base from erosion by limiting the extent to which foreign investors may take profits out of their Canadian subsidiaries in the form of tax-deductible interest, rather than after-tax dividends. These rules are commonly referred to as "thin capitalization" rules.

International Aggressive Tax Avoidance and Tax Evasion
Canada’s 2013 federal budget released on March 21, 2013 introduces a number of measures to strengthen the ability of the Canada Revenue Agency to address international aggressive tax avoidance and to combat international tax evasion so as to maintain and protect Canada’s tax base. These measures reflect the trend in other countries such as the United Kingdom, where the March 20, 2013 budget announced significant new measures on tax avoidance and tax evasion (including "name and shame") to increase tax compliance. These measures arrive at a time of increased social activism, media attention and political interest in one’s "fair share" of taxes being paid internationally. Further, revising deficits and falling tax revenues may be a reason for the recent focus by tax administrations on tax abuse. The Forum on Tax Administration, which actively shares information among G20, OECD and non-OECD countries, has identified compliance with tax laws as a key challenge facing tax administrations in the 21st century.

Budget 2013: A Response to Sommerer
As noted in Tax Update September 2012, the Federal Court of Appeal determined in Sommerer that subsection 75(2) of the Income Tax Act (Canada) (ITA) did not apply to a fair market value sale of property to a trust. As a consequence, capital gains and other income of a non-resident trust could escape taxation in Canada even where a resident of Canada was a beneficiary of the trust and was the person from whom the trust had acquired the property that gave rise to the gain or other income.

In Budget 2013, the government stated that the decision in Sommerer "was not in accordance with intended tax policy". Accordingly, Budget 2013 proposes to amend the provisions of the ITA dealing with non-resident trusts to ensure that such gains and income would be subject to taxation in Canada.