Published by the Tax Group
McCarthy Tétrault FRANÇAIS VOL.5,
Tax Update (Volume 5, Issue 3)

Canadian Back-to-Back Loan Proposals
The 2014 federal budget included measures intended to eliminate the use of back-to-back loans to avoid the thin capitalization rules and/or withholding tax on interest paid to non-arm’s length non-residents so as to protect the Canadian tax base from erosion by limiting the extent to which foreign investors may take profits out of their Canadian affiliates without incurring Canadian tax.

Fourth Protocol to Canada-UK Treaty Eliminates Withholding Tax on Arm’s Length Interest, but Preserves Tax Exemption for Gains on Disposition of Shares and Interests Deriving Value from Canadian Real Property
On July 21, 2014, the governments of Canada and the United Kingdom signed the fourth protocol (Protocol) amending the Convention between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (Canada-UK Treaty). The Protocol amends fifteen articles of the Canada-UK Treaty and includes provisions eliminating withholding tax on cross-border interest paid to a person with whom the payer deals at arm’s length and imposing deadlines for certain transfer pricing adjustments. An Interpretive Protocol provides guidance on the application of the Canada-UK Treaty to UK limited liability partnerships and defines certain other terms. Many provisions of the Protocol are consistent with those included in other treaties recently negotiated by the Canadian government. However, as discussed below, it is noteworthy that Article 13 (Capital Gains) was not amended to permit a Contracting State to impose tax on a gain realized on the disposition of a partnership interest, interest in a trust or unlisted share that derives its value, or the greater part of its value, directly or indirectly from immoveable property situated in that State in which a business is carried on by the partnership, trust or company.

BEPS 2014 Deliverables – OECD Releases First Set of Recommendations
Canada and other members of the Organisation for Economic Co-operation and Development (OECD) and the G-20 are engaged in a project to address “base erosion and profit shifting” (BEPS) strategies used by multinational enterprises (MNEs) and are working to achieve the goals set out in the OECD’s Action Plan on Base Erosion and Profit Shifting (Action Plan), which was first announced in July 2013. The Action Plan includes 15 items to address BEPS in a coordinated and comprehensive manner. In the 2014 Canadian federal budget, the federal government reiterated its commitment to continue to improve the integrity of Canada’s international tax rules and that it is actively involved in the work of the OECD and the G-20 in this regard. For additional and more detailed comments on Budget 2014, see Economic Action Plan 2014 – International Tax Planning Under Continued Assault.