Tax Issues for Investors and Immigrants from Asia

Transcription

1 Professional Development Course Tax Issues for Investors and Immigrants from Asia COPYRIGHT Institute of Chartered Accountants of BC All rights reserved. No part of this publication/course material may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means (photocopying, electronic, mechanical, recording or otherwise) without the prior written permission of the copyright holder and publisher, applications for which shall be made to the Institute of Chartered Accountants of British Columbia, Box 22, Burrard Street, Vancouver, BC V7X 1M4 DISCLAIMER This course material deals with complex matters and may not apply to particular facts and circumstances. As well, the course material and references contained therein reflect laws and practices which are subject to change. For these reasons, the course material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter. Although the course material has been carefully prepared, neither the Institute of Chartered Accountants of British Columbia, the course author and/or firm, nor any persons involved in the preparation and/or instruction of the material accepts legal responsibility for its contents or for any consequence arising from its use. October 2014

2 Tax Issues for Investors and Immigrants from Asia October 9, 2014 Bill Lau, KPMG Law LLP Jacqueline Fehr, KPMG Law LLP 1 Agenda Immigrants from Asia Case Study Tax Residence Pre-Immigration Issues/Planning Post-immigration Issues/Planning Asian Investment in Canada Taxation of Non-Residents Conducting Activities in Canada Investing in Business Investing in Real Estate Transaction Costs Q&A 2 1

3 Tax System: Residents and Non-Residents residents are taxable in Canada on their worldwide income. Non-residents of Canada are taxable in Canada only on certain types of income earned in and from Canada and on capital gains from disposition of taxable property. 3 Tax Issues and Planning for Immigrants from Asia 4 2

4 Chinese Immigrant Case Study Mr. Li and his wife and children are Chinese citizens, and they immigrated from China to Canada. Mr. Li has real estate investments and businesses in China which require his presence in China. Mr. Li s wife and children live in Canada. Mr. Li s wife owns a home in Canada. Mr. Li visits his wife and children in Canada on an occasional basis. 5 Taxation of New Immigrants Immigrants who become resident in Canada part way through a taxation year are taxed on worldwide income for the period in tax year after becoming resident. Worldwide income includes income from all sources, including employment carried on outside of Canada. 6 3

5 Tax Residence 7 Tax Residence of Individuals - Canada The principal basis for imposing income tax in Canada is residency: Sharlow JA in Garron Family Trust (Federal Court of Appeal): Canada, like many countries, has chosen residence as the principal basis for imposing income tax. The policy reason for that choice is that a person who enjoys the legal, political, and economic benefits of association with Canada should bear the appropriate costs of association. Generally, the residence of a person is a question of fact, the determination of which requires consideration of any number of factors that point to or away from economic or social link between the person and a particular country [I]n the case of an individual the relevant factors could include nationality, physical presence, location of the family home, location of business and social interests, mode of family life, and social connections through birth or marriage... Some specific legal principles for determining residence may come into play in certain circumstances, but none that eliminate the need for a full consideration of all of the relevant facts. 8 4

6 Tax Residence of Individuals Case Law Thomson, [1946] CTC 51 (SCC) Min Shan Shih, [2000] 2 CTC 2921 (TCC, [General Procedure]) Hae S. Yoon, 2005 TCC 366 (TCC, [General Procedure]) Song, 2008 CarswellNat 5843 (TCC, [Informal Procedure]); aff d 2009 F.C.A. 278 CRA Admin Positions NR73/NR74 Tax Folio S5-F1-C1, effective March 28, Impact of Shih decision; residency status dated May 16, 2001 Immigration Laws Immigrants must meet certain residency conditions to retain Permanent Resident status. Certain countries (e.g., China) do not recognize dual nationality. 9 Tax Treaty Tie-Breaker Rules Treaty tie-breaker rule resolves dual residency so only one country has primary right to tax individual as resident Article 4(2) of Canada-China Tax Treaty (in descending order): Location of permanent home Centre of vital interests Habitual abode Nationality Subsection 250(5) of ITA: a person who is otherwise -resident and is a resident of another country under a Tax Treaty between Canada and the other country is deemed to be a non-resident of Canada for all purposes of the Act. 10 5

7 Tax Treaty Tie-Breaker Rules Permanent Home Permanence of home is essential Not arranged only for short duration Available continuously, not only occasionally Centre of Vital Interests Family and social relations, occupation, political, cultural activities, place of business or property It s the depth, not necessarily the number, of interests Habitual Abode The place where person regularly, customarily or usually lives Stays of a quality that has substance 11 Immigrants from China Liability for China Tax Individuals who are domiciled in China are liable for China s Individual Income Tax (China IIT) on their worldwide income. An individual is domiciled in China if he habitually resides in China due to his household registration, family and economic interests. The term, habitually resides, is a legal criterion for determining if an individual has residence in China or not, and it does not refer to actually resides or the place where he resides for a specified period of time. Individuals who are not domiciled in China are liable for China IIT on certain income based on their period of residency. 12 6

8 China Tax - Individual Income Tax Number of days or years in China No more than 90 days (183 days for a treaty country) in a calendar year More than 90 days (183 days for treaty country) but less than one full year One full year without a record of five consecutive years in China One full year with a record of five consecutive years in China China sourced income paid by Chinese person China sourced income paid by overseas person Foreign sourced income paid by Chinese person Foreign sourced income paid by overseas person Taxable Non-taxable Non-taxable Non-taxable Taxable Taxable Non-taxable Non-taxable Taxable Taxable Taxable Non-taxable Taxable Taxable Taxable Taxable 13 China & Tax: Basis of Taxation China Tax Non-Domicile China Domicile Case A Case C Non-resident China: Non-Domicile China: Domicile Tax resident Canada: Non-Resident Case B China: Non-Domicile Canada: Resident Canada: Non-Resident Case D China: Domicile Canada: Resident 14 7

9 Pre-Immigration Issues/Planning 15 Planning for Immigration: Delayed Receipts Foreign Pension Plan Considerations Amounts earned pre-immigration and pre- resident but received after becoming a resident could be taxable in Canada. Hewitt (89 DTC 451 (TCC)) Payment received from employer s compensation plan earned while non-resident was not taxable even though amount received after becoming resident. But Hewitt was not followed in some late court decisions. Take-Away Consider when amounts are received (pre or post-immigration) and planning in respect of employment/pension income and investment income before becoming resident. 16 8

10 Planning for Immigration: Foreign Companies Foreign Accrual Property Income (FAPI) Immigrants have to include in their income FAPI in respect of any Controlled foreign affiliates. (CFA) (ITA 91(1)) CFA: Taxpayer and related persons together own 10% or more of the shares of a non-resident corporation. Active business income exception. Investments in non-resident commercial trusts. (ITA 94.2) Residency of Foreign Companies If an immigrant is a director of foreign companies, consider whether mind and management of company is affected by the immigrant s residency in Canada and where mind and management is exercised. 17 Planning for Immigration: Offshore Investments Investment in Offshore Investment Fund Property (ITA 94.1) Immigrant may be deemed to receive income at prescribed rates on offshore investment fund property. Applies if one of the main reasons for acquiring or holding the interest in such property was to derive a benefit from portfolio investments in assets and to reduce tax on income from such assets. 18 9

11 Tax Consequences on Immigration with Future Implications Reset of Cost of Property For tax, cost of most property is reset at Fair Market Value. This rule ensures pre-immigration accrued gains are not taxed for tax purposes and allows immigrants to defer actual disposition of property if that would be a taxable event in their prior jurisdiction. Though some immigrants may choose to actually dispose of a property to realize accrued losses in that jurisdiction. The share s cost base may also allow capital withdrawal from the corporation by way of repurchase/redemption of shares of non-resident corporation. 19 Tax Consequences on Immigration with Future Implications - Example An immigrant from Hong Kong owns 100 shares in public company in Hong Kong. Original cost was C$100 per share, or $10,000 for 100 shares. On date of becoming resident, fair market value (FMV) of each share was $150 per share, or $15,000 for 100 shares. Under section of the ITA, the cost of the shares are reset at their current FMV of $150 per share. Future capital gain/loss will be determined based on the reset cost of $150 per share

12 Planning for Immigration: Immigration Trusts Foreign Trustee Foreign Corporation Active Business Operation Immigrant Trust Foreign Holding Corporation Beneficiaries: Immigrant & Family Investment Portfolio Former Section 94 Five year tax holiday for Immigrant trust that is nonresident of Canada. Trust s residence based on central management and control of the trust. Income accumulated in the trust are not taxable in Canada. Income added to the capital to the trust. Capital received by beneficiaries are generally not taxable to the beneficiaries. 21 Demise of The 5 Year Immigrant Trust Foreign Trustee Immigrant Trust Foreign Holding Corporation Beneficiaries: Immigrant & Family Budget 2014 Amendment Transitional rule for 2014: immigrant trust not taxable if no additional contribution made to the trust 2015: immigrant trust is taxable. Foreign Corporation Investment Portfolio Active Business Operation 22 11

13 Post-Immigration Issues/Planning 23 Post-Immigration: Common Tax Issues for Immigrants from Asia Lack of clarity of tax residency or timing of residency. Failure to report foreign income. Failure to file information returns on foreign assets and corporations. Transfer of funds

14 Voluntary Disclosure Disclosure of unreported income, inaccurate/incomplete information, information not previously reported. Voluntary disclosure made in writing to appropriate tax centre of responsibility: 4 conditions (a) voluntary; (b) complete, (c) penalty, (d) at least 1 year past due. Named disclosure is where identity of taxpayer is stated on the disclosure. No name disclosure where taxpayer unsure whether to proceed. Preliminary discussion on no name basis to determine risk/relief available before giving full identity. Identity of taxpayer must be provided within 90 days no extensions. 25 Planning Options: Foreign Estate Freeze Immigrant Immigrant Non- Resident Family Members Immigrant holds fixed value preferred shares. 100% Preferred shares Common shares Non-resident family members holds growth common shares. Foreign Holding Corporation Investment Portfolio Foreign Holding Corporation Investment Portfolio Subsection 91(1) inclusion of foreign accrual property income (ie investment income) of controlled foreign affiliate in the income of resident based on participating percentage

15 Planning Options: Foreign Holding Corporation Pre-Immigration Post-Immigration Immigrant Canada Foreign Holding Corporation Immigrant Foreign Holding Corporation Investment Portfolio Investment Portfolio 27 Planning Options: Foreign Active Business Pre-Immigration Post-Immigration Immigrant Canada Canco Immigrant Foreign Business Corporation Active Business Foreign Business Corporation Active Business 28 14

16 Planning Options: Family Trust Trustee Family Trust Beneficiaries: Immigrant & Family Holding Corporation Foreign Corporation Investment Portfolio Active Business Operation 29 Tax Issues and Planning for the Asian Investor 30 15

17 Foreign Investors Key Issues taxation of non-residents Tax treaties and planning Non-resident conducting activities in Canada Non-resident investing in business Non-residents investing in real estate Transaction costs 31 Asian Investors: Business and Tax Objectives Business Objectives: Earning passive income and gains in Canada Provision of Services Sourcing of goods Acquisition of resources Real estate investments Tax Objectives Tax minimization Risk management 32 16

18 Taxation of Non-Residents 33 Non-Resident Investors Liability for Tax Non-residents of Canada are liable to tax in Canada with respect to: Certain passive income derived from Canada Income from carrying on office or employment in Canada Income from carrying on business in Canada Capital gains from disposition of taxable property 34 17

19 Withholding tax on income from passive investments in Canada Part XIII withholding tax of 25% applies on passive income derived from sources including: management fees, dividends, interest, rents, royalties No withholding tax applies to interest paid by arm s length persons (e.g. bank) to non-resident unless payment of participating debt interest Withholding tax may be reduced by tax treaty: e.g. A dividend paid by a corporation to non-resident is subject to 25% withholding tax. If individual is resident in China and Tax Treaty between China and Canada applies, withholding tax rate is reduced to 15%. 35 Carrying on Business in Canada There is no definition of carrying on business in the Act. Jurisprudence considers a number of factors in determining whether a person is carrying on business in Canada: Where the contract is made The place where the business profits arise Other factors: Place of or production or delivery of goods Place of payment Existence of branch or office Section 253 provides an extended definition of carrying on business to include: Solicitation of orders Offering for sale in Canada through an agent or servant Disposal of real estate inventory situated in Canada 36 18

20 Non-Resident s Disposition of Taxable Property (TCP) A non-resident must include in income for tax purposes capital gains on disposition of taxable property, subject to relief available, if any, under an applicable tax treaty between Canada and the jurisdiction in which the non-resident is resident. It is a general international tax principle that the country where real property is located should have the first right of taxation of the income or gains derived from the use or disposition of such property. Canada s tax laws and tax treaties generally adopt such principle. 37 Non-Resident s Disposition of Taxable Property (TCP) TCP includes: Real or immovable property situated in Canada Property used or held by the taxpayer in a business carried on in Canada Shares of private corporations if at any time in past 5 years their value is derived principally from real estate or resource properties Shares of public corporations if at any time in past 5 years their value is derived principally from real estate or resource properties and 25% of the shares were owned by the taxpayer or persons not dealing with the taxpayer at arm s length

21 Section 116 Clearance Certificate Section 116 is important enforcement mechanism for payment of tax by non-resident on disposition of taxable property (TCP) When a non-resident disposes of TCP, the purchaser becomes tax collector for Canada Revenue Agency i.e. purchaser generally has obligation to withhold amount from purchase price and remit to CRA Purchaser must withhold and remit 25% of the purchase price to CRA If CRA issues a section 116 clearance certificate, amount of withholding may be reduced or eliminated 39 Section 116 Clearance Certificate A purchaser acquiring treaty protected property from a non-resident vendor is not required to withhold 25% of the purchase price and remit the amount to the CRA if: The purchaser concludes after reasonable enquiry that the vendor is resident in a treaty jurisdiction; The property would be treaty protected property (gain on which is exempt under the treaty) of the non-resident person if the nonresident person were resident in the treaty jurisdiction; The purchaser provides notice to CRA of the acquisition within 30 days after the acquisition date. Purchaser must be very cautious in making the assessment whether above applies 40 20

22 Tax Treaties and Planning 41 Tax Treaties and Planning A tax treaty is an international agreement between two countries. Purposes are to prevent double taxation and fiscal evasion Intended to provide tax relief not impose additional tax liability Canada has signed treaties with over 90 countries. Scope and application outlines: Taxes covered by the treaty all income taxes but not consumption taxes (e.g., sales tax) or property taxes Persons eligible for treaty benefits only residents of a contracting state (defined in the Treaty) 42 21

23 Treaty Shopping What is Treaty Shopping? A person acts through a legal entity created in a state essentially to obtain treaty benefits that would not be available directly. Dealt with through: Beneficial owner provisions in tax treaties Limitation on Benefits (LOB) provisions in Canada-US Tax Treaty anti-avoidance rules e.g., beneficial ownership test, carve out for low-tax entities, etc. Domestic anti-treaty abuse rules e.g., GAAR, possible proposed rules? 43 Treaty: Beneficial Ownership Requirement Non-Resident Treaty Co Canco Dividend Some treaties require recipient of dividends, interest, royalties and other payments to be beneficial owner of the payments. Beneficial owner : not defined in the treaties, nor in the ITA, nor in the OECD Model Meaning of Beneficial Owner has been subject of litigation between Taxpayers and Canada Revenue Agency. Investment 44 22

24 Treaty: Beneficial Ownership Prévost Car (Tax Court of Canada): [The beneficial owner was] the person who receives the dividend for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received. The person who is the beneficial owner of the dividend is the person who enjoys and assumes all the attributes of ownership. In short, the dividend is for the owner s own benefit and this person is not accountable to anyone for how she or she deals with the dividend income. 45 OECD: Beneficial Ownership OECD Commentary: No suggestion that beneficial owner intended to be used as a broad anti-avoidance tool Intended to exclude persons acting as agents, nominees, or mere fiduciaries or administrators 46 23

25 Treaty Shopping Canada s Response 2014 Federal Budget announced an anti-treaty shopping regime. Government believed treaty-based approach would not be as effective as a domestic law rule Budget outlines the general terms of what such a domestic rule should encompass August 29, 2014, the Department of Finance announced: After engaging in consultations on a proposed anti-treaty shopping measure, the Government will instead await further work by the Organization for Economic Co-operation and Development and the Group of 20 (G-20) in relation to the Base Erosion and Profit Shifting initiative. 47 Base Erosion and Profit Shifting Report of OECD Attack on international tax avoidance behavior of multi-national companies such as Apple, Amazon, Starbucks and Google. Burger King s tax inversion relating to its acquisition of Tim Hortons and shift of operations to Canada is cited by US government as another example of inappropriate tax planning September 16, the Organization for Economic Cooperation and Development (OECD) released recommendations for a coordinated international approach to combat tax avoidance by multinational enterprises under Action Plan on Base Erosion and Profit Shifting. Recommendations published relate to: Tax challenges of the digital economy Hybrid mismatch arrangements Harmful tax practices Tax treaty abuse Transfer pricing intangibles Transfer pricing documentation and country-by-country reporting Feasibility of developing a multilateral instrument on BEPS 48 24

26 Non-Resident Conducting Activities in Canada 49 Management Fees Paid to Non-Resident Payment of management fee to non-resident by resident is subject to 25% withholding tax under Part XIII of ITA. Tax treaties business profits article may exempt management fee from taxation if non-resident does not have permanent establishment in Canada

27 Treaties - Permanent Establishment in Canada Under tax treaties, business profits are taxable in Canada only if business carried on through a permanent establishment in Canada: E.g. Dudney (FCA). An individual who was resident of the US performed services in Canada. The FCA held that the individual did not have a fixed base in Canada during the relevant period. Factors considered by FCA (a) actual use of premises; (2) what legal right did the person exercise or could have exercised control over the premises (3) degree to which the premises were objectively identified with the person s business. FCA held the premises of Panlan were not a location where Dudney carries on his business because Dudney s access was restricted to business hours and he only had access under Panlan contract. 51 Provisions of Services in Canada by Non-Resident Regulation 105 requires every person paying to a non-resident a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, to deduct or withhold 15% of such payment. Reg. 105 applies on a fee for a service (independent contractor, element of profit) Where Reg. 105 applies, the entity receiving the fee may have Reg. 102 exposure (this is where CRA is picking-up on audits) 52 26

28 Treaties Regulation 105 Waiver CRA Guidelines for Treaty-Based Waiver: 1) De minimus test (individuals only) - <$5,000 in calendar year 2) Non-recurring presence test presence will be < 180 days under current contract 3) Recurring presence test days in the period less than 240 days and days under current contract is less than 180 days Only need to meet one of the tests but note that there are exceptions: Information Circular 75-6R2 53 Treaties Regulation 102 Waiver Reg. 102 applies to remuneration for employment services Reg. 102 often confused with Reg. 105 Where tax treaty applies to an individual and it might exempt his/her income from tax, the individual can apply for a withholding tax waiver

29 Non-Resident Sourcing Goods from Canada China Co Sale of Goods Supplier Canada Tax Issues If China Co has activities and/or employees in Canada: Is China Co carrying on business in Canada? Does China Co have a permanent establishment in Canada? 55 Sourcing Goods from Canada China Co Tax Issues Services Fee Sale of Goods Canada Carrying on business in Canada Transfer pricing Canco Supplier 56 28

30 Sourcing Goods from Canada China Co Tax Issues Sale of Goods Canada Carrying on business in Canada Transfer pricing Canco Sale of Goods Supplier 57 Non-Resident Investment in Business 58 29

31 Equity Investments: Acquisition of Business Foreign Investor Canada Shareholder Target Co Business 59 Acquisition of Business: Share Deal Foreign Investor Tax Issues Shareholder Canada No step up of cost base of assets. Assets of Target co acquired at historical cost Target Co Target Co Repatriation of capital may be restricted Business Business 60 30

32 Acquisition of Business: Tax Rate China Co Taxable Income $ Corporate income tax (26%) After tax income Canada Dividend withholding tax (10%) 7.40 After tax receipt Target Co Effective tax rate Business 61 Acquisition of Business: Asset Deal Foreign Investor Shareholder Canada Target Co Canco Tax cost of assets acquired by Canco are stepped up to their fair market value Business Business 62 31

33 Treaty Co Structure Canada Interest China Co Treaty Co Canco Business Loan/Equity Income $ $ Interest expense Taxable Income Corporate income tax (26%) After tax income Part XIII Dividend withholding tax (10%) Part XIII Dividend withholding tax (5%) Part XIII Interest withholding tax (10%) After tax receipt Effective tax rate 33.40% 17.82% 63 Thin Capitalization Rule Canada Interest Foreign Investor Holding & Financing Co Canco Business Loan/Equity Subsection 18(4): Amount of Debt in Canco is limited by thin capital rule in subsection 18(4) to $1.5 debt to $1 Equity. Debt Average of greatest outstanding debts owed to specified nonresidents. Equity Average of paid up capital and contributed surplus. Retained earnings at beginning of year

34 Non-Resident Investment in Real Estate 65 Non-Resident s Investment in Real Estate Taxation of rental income from property Non-resident is subject to 25% withholding tax on gross amount of rents from real estate; or Non-resident can elect under section 216 of ITA to be taxed on a net income basis

35 Foreign Investors Real Estate Non-Resident Non-Resident Non-Resident Non-Resident Forco Trust Forco Canada Canco Real Estate Real Estate Real Estate Real Estate 1. Leverage (no thin cap) 2. Marginal tax rates 1. Leverage (thin cap rule) 2. Branch tax 1. Estate planning 2. Leverage (thin cap) rule year disposition rule 1. Leverage (thin cap rule) 2. Withholding tax on dividends 67 Transaction Costs 68 34

36 Transaction Costs Transaction costs incurred by purchaser, vendor or target entity can be very significant. Target entity may incur financing and consulting fees. Issue is tax deductibility of transaction costs. ITA 18(1)(a) - No deduction shall be made in respect of an outlay except to the extent it was made or incurred for the purpose of gaining or producing income from a business or property ITA 18(1)(b) - Amounts incurred on account of capital are not deductible except as allowed by the Act 69 Transaction Costs ITA 20(1)(e) ITA 20(1)(e): deduction of costs to obtain debt or equity financing generally over 5 year period. Issuance or sale of shares of the capital stock (or units of a unit trust or interests of a partnership or syndicate) of the taxpayer; Borrowed money used by the taxpayer for the purpose of earning income from a business or property; Incurring indebtedness but is amount payable for property acquired for purpose of gaining or producing income therefrom or purpose of producing or gaining business income; Rescheduling or restructuring such a borrowing or indebtedness

37 Transaction Costs - Case Law British Columbia Power Corp. v. MNR, 67 DTC 5758 (SCC) Cost for preserving an asset is incurred on account of capital. BJ services Canada v R TCC ruled financial and legal expenses incurred to oppose takeover bid was integral to activities of gaining and producing income and thus were current in nature and not prohibited by 18(1)(a) and 18(1(b). 71 Transaction Costs - Case Law International Colin (Tax Court of Canada) Third party was engaged to review optimal strategy to improve the business. The process led to International Colin subsequently being purchased in a share for share. The court ruled the consulting fees were incurred to increase income and were not incurred on capital account. Truck Base case (TCC) Legal fees incurred on updating a unanimous shareholder agreement were regarded as incurred to ensure income earning capacity of the company would not be interrupted by problems in managing the company s business

38 Q & A BTLAU@KPMGLAW.CA JACQUELINEFEHR@KPMGLAW.CA 73 37