TopSource Global Solutions Ltd – T/A TopSource Worldwide

Canada
Overview
Last reviewed - 01 December 2021

Canada is the largest country in the western hemisphere and one of the largest in the world. Located in the
northern part of North America, Canada extends from the Atlantic Ocean in the east to the Pacific Ocean in the
west, and northward into the Arctic Ocean. It has a stable government, a skilled workforce, and its residents enjoy
a high standard of living. The country has a well-developed transportation system and is rich in natural resources.
Canada's official languages are English and French, and Ottawa is its federal capital. A parliamentary democracy,
the country is divided into ten provinces and three territories. The official currency is the Canadian dollar (CAD).

Canada has a thriving free-market economy, with businesses ranging from small owner-managed enterprises to
multinational corporations. Canada's economic development was historically based on the export of agricultural
staples, especially grain, and on the production and export of natural resource products, such as minerals, oil and
gas, and forest products. However, secondary industry has evolved to the stage where Canada ranks as one of the
top manufacturing nations of the world. The service industry has also expanded rapidly and has transformed the
Canadian economy from one based primarily on manufacturing to one with a significant service-based sector.
Canada is among the world's major trading nations, with the United States (US) its primary trading partner.
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Despite Canada’s abundant natural resources, skilled labour force, modern capital plant, and strong banking
system, significantly lower crude oil prices in recent years have taken a considerable toll on the oil and gas sector
and the country’s overall economy. However, lower energy costs helped consumers and the non-resource based
sectors. Along with the lower Canadian dollar and an improved US economy, Canada’s manufacturing sector was
growing, with higher exports to the United States.

The ratification and entry into force of the United States-Mexico-Canada Agreement (known in Canada as the
CUSMA) has created a more stable trading environment for Canadian businesses who export into the US market.
However, Canadian exporters to the United States continue to monitor US President Biden's administration to
determine how any new policies, including its 'Buy American' policy, will affect their businesses.

The COVID-19 pandemic has caused the Canadian economy to shrink significantly. Interest rates, which had been
rising since mid-2017 and remained steady during 2019, were reduced sharply in March 2020, with the intent of
limiting the economic fallout created by the pandemic. While most provincial governments had generally been
reining in spending to balance their books, significant relief packages have been announced and implemented by
federal, provincial, and territorial governments to financially support individuals and businesses during the multiple
public health lock downs. It remains to be seen whether these relief packages are successful, as public health
measures to limit the spread of COVID-19 have been gradually eased several times to allow the economy to
reopen, but are then tightened in some provinces, territories, and regions during the second, third, and fourth
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waves of the pandemic. Given the expected long-term nature of the pandemic, it is unlikely that 'business as usual'
will be achieved in the near term, and the economic outlook is uncertain. However, Canada entered the pandemic
with high employment figures and a relatively strong economy, factors which will hopefully facilitate a quick
economic rebound post-pandemic.

Taxable period

The tax year for an individual in Canada is the calendar year.

Tax returns

In most cases, taxpayers must file tax returns by 30 April of the following year. Married taxpayers file separately;
joint returns are not allowed. The filing deadline is extended to 15 June if the individual, or the individual's spouse,
carried on an unincorporated business. There is no provision for any extension of these filing deadlines, unless they
fall on a weekend, in which case the filing deadline is usually extended to the next business day.

Residents in Canada who own foreign investment properties whose total cost exceeds CAD 100,000 must file an
information return (Form T1135) each year they own such properties. Exceptions apply to certain types of assets,
such as those held in a foreign pension plan. The filing deadline is the same as for the individual tax return. If the
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total cost of the taxpayer’s foreign property is less than CAD 250,000 throughout the taxation year, the taxpayer
can report the property using the streamlined information reporting requirements on Form T1135.

Individuals are also required to file an information report for certain assets held at the time they cease to be a
Canadian resident if the total market value of the assets exceeds CAD 25,000. This report must be filed with the
Canadian tax return for the year that they cease residency. This reporting is separate from the reporting of assets
subject to deemed disposition upon the cessation of Canadian residence.

Payment of tax

Income tax is withheld from salaries. Any balance of tax owed is due 30 April of the following year. Individuals are
required to pay quarterly instalments if their tax payable exceeds amounts withheld at source by more than CAD
3,000 (CAD 1,800 for Quebec residents) in both the current and either of the two previous years.

Tax audit process

The tax authorities are required to issue an assessment notice within a reasonable time following the filing of a tax
return. These original assessments usually are based on a limited review of the individual's income tax return with
the notice of assessment explaining any changes made to the return. The CRA may later request additional
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information or supporting documents for personal deductions claimed. Returns become statute-barred three years
after the date of the notice of assessment unless misrepresentation or gross negligence is involved.

The CRA typically does not select salaried employees for audit unless the individual is also involved in a tax shelter
or business venture. Self-employed individuals are selected randomly, after considering various factors, such as
the individual's business and the type and amount of expenses claimed. Individual shareholders of CCPCs are
selected based on the activities of and income reported from the corporation and the individual's transactions with
related entities, including trusts and partnerships. To address specific compliance concerns, the CRA is targeting
certain individuals and their families who hold interests in privately held domestic and offshore entities that have a
value exceeding CAD 50 million.

2021 federal budget proposals confirm the authority of CRA officials to require persons to answer questions in any
form specified by them, and to provide reasonable assistance for any purpose related to the administration or
enforcement of the relevant statute.

Appeals

A taxpayer who disagrees with a tax assessment or reassessment may appeal. The first step is to file a formal
notice of objection within 90 days from the date of mailing of the notice of assessment or reassessment, setting
out the reasons for the objection and other relevant information. The deadline is one year from the due date of the
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return for the taxation year in issue, if this is later, for ordinary income tax and in other specific instances. The CRA
will review the notice of objection and vacate (cancel), amend, or confirm the assessment. A taxpayer that still
disagrees has 90 days to appeal the CRA's decision to the Tax Court of Canada. Further appeals can be made to
the Federal Court of Appeal and the Supreme Court of Canada. However, the Supreme Court seldom hears income
tax appeals.

Statute of limitations

A reassessment can be issued at any time within three years of the date of mailing of the original notice of
assessment, or at any later time if the taxpayer signs a waiver of the three-year limit or if the tax authorities can
prove fraud or misrepresentation in the return. 'Misrepresentation' can include neglect or carelessness as well as
wilful default. The limit is extended a further three years in some cases (e.g. for transactions with non-arm's-length
non-residents).

The CRA can reassess tax, after the end of the normal reassessment period, on a gain from the disposition of real
or immovable property if the taxpayer does not initially report the disposition.
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Topics of focus for tax authorities

Although CRA audits generally focus on non-salaried employees, individuals may be subjected to audit with regard
to the following issues:

 Income versus capital gain issues relating to transactions involving the acquisition or disposition of investments and
real estate.
 Deductions claimed against employment income.
 Charitable donations.
 Creation of trusts in provinces with lower tax rates.
 The conversion of:
o dividends into capital gains using corporate surplus stripping arrangements, or
o ordinary income into capital gains using derivative contracts.
 Intergenerational business transfers.
 Strategies that comply with Canada's tax laws but contravene its intention.
 Taxable benefits related to employment (e.g. personal use of corporate-owned aircraft, automobiles, and dwellings).
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Failure to withhold tax for non-resident employees

Canadian tax authorities continue to focus their audit activity on employers who fail to withhold tax or apply for a
treaty waiver from Regulation 102 withholding for commuters and business travellers. Under this regulation,
employers (whether residents of Canada or not) that pay salaries or wages or other remuneration to a non-resident
of Canada in respect of employment services rendered in Canada are required to withhold personal income tax
unless a waiver has been received before commencing work physically in Canada. There are no 'de minimis'
exceptions, and this requirement applies regardless of whether the non-resident employee in question will actually
be liable for Canadian income tax on that salary pursuant to an income tax treaty that Canada has signed with
another country. Complying is time-consuming and administratively burdensome.

An amount paid by a ‘qualifying non-resident employer’ to a ‘qualifying non-resident employee’ is exempt from the
Regulation 102 withholding requirement.

Generally, a ‘qualifying non-resident employer’ must meet the following two conditions:

 Is resident in a country with which Canada has a tax treaty (‘treaty country’).
 Is at that time certified by the Minister.
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A ‘qualifying non-resident employee’ must meet the following three conditions:

 Is resident in a treaty country.

 Is exempt from Canadian income tax under a tax treaty.
 Either:
 is present in Canada for less than 90 days in any 12-month period that includes the time of payment, or
 works in Canada for less than 45 days in the calendar year that includes the time of payment.

To become certified, a non-resident employer must file Form RC473 (Application for Non-Resident Employer
Certification) with the CRA. Certification is valid for two calendar years (after which time the employer must submit
a new Form RC473), subject to revocation if the employer fails to meet certain conditions or to comply with its
Canadian tax obligations.

The conditions to maintain non-resident employer certification include:

 Track and record on a proactive basis the number of days each qualifying non-resident employee is either working in
Canada or present in Canada, and the income attributable to these days.
 Evaluate and determine whether its employees meet the conditions of a ‘qualifying non-resident employee’.
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 Obtain a Canadian Business Number.

 Complete and file the annual T4 Summary and slips, if required.
 File the applicable Canadian corporate income tax returns if the corporation is ‘carrying on business in Canada’.
 Upon request, make its books and records available to the CRA for inspection.

Tax planning using private corporations

Canada has enacted legislation to combat tax advantages for high income individuals, gained through the use of
private corporations. Income sprinkling (i.e. shifting income that would otherwise be realised by a high-tax rate
individual [e.g. through dividends or capital gains] to low or nil tax rate family members) using private corporations
has been restricted. The legislation provides some clarity on whether a family member is to be considered
significantly involved in a business, and thus potentially exempted from being taxed automatically at the highest
marginal tax rate on non-salary income or gains derived from that business. However, the legislation is also
extremely complex when applied to typical business structures. This creates uncertainty for many business
owners, without any grandfathering for current income splitting arrangements. The CRA has issued some
preliminary guidance on the potential application of the rules through a number of example scenarios.

Retaining business income in a CCPC to earn income on passive investments is discouraged by:
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 reducing the annual CAD 500,000 small business deduction limit, for a CCPC that (together with associated CCPCs)
earned more than CAD 50,000 of passive investment income in the preceding year, by CAD 5 for every CAD 1 of
investment income over CAD 50,000 (it is eliminated at CAD 150,000 of investment income), and
 entitling a CCPC to a refund of taxes paid on certain investment income only by paying ‘non-eligible’ taxable dividends,
which are subject to a higher effective tax rate when received by a shareholder that is an individual.

Tax evasion and aggressive tax avoidance

In recent years, the federal government has made significant investments to strengthen the CRA's ability to
unravel complex tax schemes and increase collaboration with international partners. Initiatives that have been
introduced include:

 Increasing the number of CRA annual examinations of high-risk wealthy taxpayers.

 Increasing 12-fold the number of transactions examined by the CRA.
 Creating a special CRA program to stop 'the organisations that create and promote tax schemes for the wealthy'.
 Hiring additional auditors and specialists with a focus on the underground economy.
 Developing robust business intelligence infrastructure and risk assessment systems to target high-risk international tax
and abusive tax avoidance cases.
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Previously implemented tax measures to help the CRA combat international tax evasion and aggressive tax
avoidance follow:

 Certain financial intermediaries are required to report to the CRA international electronic funds transfers (EFTs) of CAD
10,000 or more.
 The ‘Offshore Tax Informant Program’ compensates certain persons who provide information that leads to the
assessment or reassessment of over CAD 100,000 in federal tax.
 Failure to timely file Form T1135 (Foreign Income Verification Statement), or to report all specified foreign property
therein, will extend the normal reassessment period for this form by three years.

The CRA has maintained a steady inventory of over 1,000 offshore audits for the past four years. The government
is also aggressively pursuing those who promote tax avoidance schemes, imposing penalties on these third parties.
In addition, the CRA continues to receive calls from potential informants and written submissions under the
Offshore Tax Informant Program, which has resulted in additional taxpayers being audited by the CRA. Quebec has
also recently introduced a similar program, the 'Reward Program for Informants of Transactions Covered by the
General Anti-Avoidance Rule and Sham Transactions.'

The 2021 federal budget proposes to invest the following:

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 CAD 2.1 million over two years to assist with the implementation of a publicly accessible corporate beneficial
ownership registry by 2025. The registry will be used by law enforcement, tax, and other authorities to access accurate
and up-to-date information on the individuals who own and control corporations and to catch those who attempt to
launder money, evade taxes, or commit other financial crimes.
 An additional CAD 304.1 million over five years to further combat tax evasion and aggressive tax avoidance, allowing
the CRA to fund new initiatives and extend existing programs, including:
o Increasing GST/HST audits of large businesses with the greatest risk of non-compliance.
o Modernising the CRA's risk assessment process to prevent unwarranted and fraudulent GST/HST refund and
rebate claims and improve the ability to issue refunds to compliant businesses as quickly as possible.
o Enhancing capacity to identify tax evasion involving trusts and provide better service to executors and trustees.
 CAD 230 million over five years to improve the CRA's ability to collect outstanding tax debts in a timely way.
 CAD 330.6 million over five years in new technologies, tools, and IT infrastructure that match the growing
sophistication of cyber threats and to improve the way benefits and services are delivered to Canadians.

The CRA has also focused audit efforts on addressing non-compliance in real estate transactions, particularly in the
Vancouver and Toronto markets, by improving its tools and methods of obtaining more specific and useful
information to enhance its ability to combat tax avoidance. Over the past several years, CRA audits have identified
significant additional taxes related to the real estate sector and have assessed related penalties. Areas of specific
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focus include property flipping, pre-construction assignment sales, rental income from the real estate sharing
economy, unreported GST/HST on the sale of a new or substantially renovated property, unreported capital gains,
and unreported worldwide income. The 2019 federal budget had proposed an additional CAD 50 million over five
years to create four dedicated residential and commercial real estate audit teams in high risk regions. These teams
will ensure that tax rules relating to real estate are being followed.

Mandatory disclosure rules

To facilitate the timely receipt by the CRA of information on arrangements that involve aggressive tax planning,
the 2021 federal budget proposes to enhance Canada's mandatory disclosure rules by:

 changing the Income Tax Act’s existing reportable transaction rules

 introducing requirements to report ‘notifiable transactions’ and for specified corporations to report uncertain tax
treatments
 extending the reassessment period in certain circumstances, and
 introducing penalties for non-compliance that will apply to both taxpayers and promoters or advisers.

The proposals are subject to public consultation.

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Reportable transactions

Current rules in the Income Tax Act require the reporting of a transaction to the CRA if it is considered an
‘avoidance transaction,’ as that term is defined for the purposes of the general anti-avoidance rule (GAAR), and it
meets at least two of three defined hallmarks. Currently, this results in only limited reporting by taxpayers.

To improve the effectiveness of the reportable transactions rules and to bring them in line with international best
practices, the 2021 federal budget proposes that only one of the hallmarks be present for a transaction to be
reportable. It also proposes that the definition of ‘avoidance transaction’ for these purposes be amended, so that
the rules apply if it can reasonably be concluded that one of the main purposes of entering into the transaction is
to obtain a tax benefit. Additional amendments will be made to deal with promoters or advisers who promote these
transactions and require them to also disclose these transactions.

Notifiable transactions

The 2021 federal budget proposes to introduce a category of specific transactions to be known as ‘notifiable
transactions.’ The Minister of National Revenue, with the concurrence of the Minister of Finance, would have the
authority to designate a transaction as a notifiable transaction. Similar to the approach taken by the United States,
notifiable transactions would include both transactions that the CRA has found to be abusive and transactions
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identified as transactions of interest. The description of a notifiable transaction would set out the fact patterns or
outcomes that constitute that transaction in sufficient detail to enable taxpayers to comply with the disclosure rule.

Tax debt avoidance

Although the income tax rules contain an anti-avoidance provision that is intended to prevent taxpayers from
avoiding their tax liabilities by transferring assets to non-arm’s length persons for insufficient consideration, the
2021 federal budget proposes a new anti-avoidance rule where, for the purposes of the existing tax debt
avoidance rules, a tax debt will be deemed to have arisen before the end of the taxation year in which the transfer
of property occurs if certain conditions are met, and may, in certain cases, deem a transferor and transferee to be
dealing on a non-arm’s length basis at the time of the transfer. Finally, where the transfer of property was part of a
series of transactions or events, the overall result of the series would be considered in determining the values of
the property transferred and the consideration given for the property, instead of simply using the values at the
time of the transfer.

Joint Chiefs of Global Tax Enforcement (J5)

Senior officials from the CRA and tax enforcement authorities in Australia, the Netherlands, the United Kingdom,
and the United States are members of a joint operational group, called the J5. The J5 was formed to increase
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collaboration in the fight against international and transnational tax crime and money laundering. The group
focuses on building international enforcement capacity by sharing information and intelligence, enhancing
operational capability by piloting new approaches, and conducting joint operations.

Voluntary Disclosures Program (VDP)

In certain circumstances, penalties for non-compliance with tax reporting and payment requirements may be
waived through an application to the CRA's VDP. The taxpayer must meet five conditions to qualify for the
programme. The application must:

 be voluntary
 be complete
 involve the application or potential application of a penalty
 include information that is at least one year past due, and
 include payment of the estimated tax owing.

Key aspects of the VDP include:

 two 'tracks' of disclosures:

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o a Limited Program when there is intentional conduct to be non-compliant or for corporations with gross revenue
exceeding CAD 250 million in at least two of their last five taxation years and any related entities; requires
participants to waive their right to object and appeal in respect of the issue disclosed, and
o a General Program when the Limited Program does not apply.
 pre-disclosure discussion service
 referral of transfer pricing applications to the Transfer Pricing Review Committee (therefore no relief will be granted
under the VDP)
 specialist review of complex issues or large dollar amounts
 disclosure of the identity of an adviser who assisted the taxpayer in respect of the non-compliance, and
 cancellation of previous relief if a VDP application was incomplete due to misrepresentation.

VDP relief is not considered for applications that depend on an agreement being made at the discretion of the
Canadian competent authority under a tax treaty provision. If a VDP application does not qualify for VDP relief, a
taxpayer may still qualify for penalty and interest relief under the taxpayer relief provisions.
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Sharing information for criminal matters

The CRA can use the legal tools available under the Mutual Legal Assistance in Criminal Matters Act to facilitate the
sharing of information related to tax offences under Canada’s tax treaties, TIEAs and the Convention on Mutual
Administrative Assistance in Tax Matters; these tools include the ability for the Attorney General to obtain court
orders to gather and send information.

Tax information can be shared with Canadian mutual legal assistance partners for acts that, if committed in
Canada, would constitute terrorism, organised crime, money laundering, criminal proceeds offences, or designated
substance offences.

Quebec ‘Tax Fairness Action Plan’

Quebec's ‘Tax Fairness Action Plan’, contains actions that address tax havens, aggressive tax planning, transfer
pricing, and e-commerce with suppliers having no significant presence in Quebec, among other things. Many of the
actions rely on cooperation with federal authorities. It is an evolving plan that is modified as challenges arise. Key
actions relating to individuals include:

 Improving income tax auditing of individuals:

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o The CRA will ask foreign tax authorities for their approval to share, with Quebec and other provinces,
information about Canadian residents on financial assets held abroad (see Common Reporting Standard [CRS] in
the Other issues section for more information).
o The CRA will give the Quebec government access to information obtained from the CRA’s international EFT
program (discussed above).
 Increasing penalties in respect of general anti-avoidance rule (GAAR)-based assessments to 50% (from 25%) of the
amount of the tax benefit denied.
 Implementing a tax informant reward program that will be similar to the federal ‘Stop International Tax Evasion
Program’ (discussed above).
 Strengthening the mandatory disclosure mechanism, which requires reporting to Revenu Quebec of certain
transactions resulting in a tax benefit, and broadening the types of transactions that must be disclosed under this
mechanism.
 Requiring mandatory disclosure to Revenu Quebec of nominee agreements made as part of a transaction or series of
transactions.
 Establishing a special regime to counter tax schemes based on sham transactions by adding new penalties for
taxpayers, advisers, and promoters, and extending the standard reassessment period for an additional three years.
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 Fostering tax fairness in the sharing economy by requiring individuals operating a digital accommodation platform to
register, collect, and remit the tax on lodging.
 Increasing tax compliance in respect of transactions on financial markets by introducing a new tax slip to facilitate
reporting of financial market transactions.
 Simplifying tax compliance, tightening regulations, and increasing inspections in certain sectors with a higher risk of
tax evasion (e.g. renovation, construction, personal placement, transportation, money-services, and cryptocurrency).

Employment expenses

In computing income from employment, an individual can claim only limited, specified deductions. Taxes and
interest (except interest related to the earning of business and property income), most life insurance premiums,
and casualty losses are not deductible. Allowable deductions in computing employment income include travelling
and certain other expenses of officers or employees required as a condition of employment.
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Registered plans

A deduction is available with respect to an employee's contributions to a Registered Pension Plan (RPP), a Pooled
Registered Pension Plan (PRPP), or to a Registered Retirement Savings Plan (RRSP), within certain limits. Income
earned in these plans is taxed only on withdrawal. In certain cases, individuals can deduct their contributions to an
employer-sponsored foreign pension plan if they participated in the plan before moving to Canada.

Self-employed individuals can also make deductible contributions to RRSPs.

For both employed and self-employed individuals, the deductible contribution to an RRSP is generally 18% of the
total employment, self-employment, and rental income that was subject to Canadian tax in the preceding year, to
a maximum annual contribution amount (CAD 27,830 in 2021). The allowable contribution is further limited when
an individual is a member of an RPP, PRPP, or a foreign pension plan while working in Canada.

Pooled Registered Pension Plans (PRPPs)

The federal PRPP is a voluntary savings plan aimed at individuals who do not have access to employer-sponsored
pension plans. The tax rules for PRPPs complement the existing RPP and RRSP framework, and operate in a manner
similar to multi-employer defined contribution RPPs. The provinces and territories must introduce their own
enabling legislation to implement provincial and territorial PRPPs.
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Personal deductions

Deductible non-business expenses include alimony and maintenance payments (if taxable to the recipient), certain
child-care expenses, and eligible moving expenses for relocation within Canada (usually in connection with a
change of employment).

Alimony and child support payments

Periodic alimony payments made by a taxpayer under a divorce decree (or under the terms of a written divorce or
separation agreement) to a former or separated spouse (or for the spouse's benefit) are generally deductible,
subject to restrictions as to the precise nature of these payments. Also, certain supporting documentation usually
must be filed with the first Canadian tax return in which the taxpayer claims a deduction for alimony payments.
The payments constitute taxable income to the recipient spouse or former spouse if the individual is a resident of
Canada.

Generally, child support payments made under the terms of an agreement cannot be deducted by the payer and
need not be included in the income of the recipient spouse.

Neither alimony nor child support is subject to WHT if paid to a non-resident.

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Child-care expenses

Canada allows working parents to deduct child-care expenses if certain conditions are met. To qualify, the
expenses must be incurred by the taxpayer (or a person supporting the child) to earn employment or business
income, or to pursue training or research activities. The deduction can be claimed for a variety of child-care
services, such as babysitting, day nursery, and attendance at a boarding school or camp. To qualify, the services
must be provided in Canada and satisfy rules that govern who provides them. If more than one person is
supporting a child, the deduction generally must be taken by the supporting person with the lowest 'earned
income' (generally employment and/or self-employment income). The maximum yearly deduction is generally CAD
8,000 per child under seven years old and CAD 5,000 per child from seven to 16 years old.

Interest expense

Interest on money borrowed to acquire investment property or to invest in a business is usually deductible. Interest
on loans used for personal purposes, including mortgage interest on a loan to purchase a home for personal use, is
not deductible.
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Personal allowances

Unlike countries that permit personal exemptions and allowances in determining taxable income, Canada has
adopted a system of tax credits. See the Other tax credits and incentives section for more information.

Business deductions

Business deductions for self-employed individuals generally include all reasonable expenses that have been
incurred to earn business income. Business expenses include costs of goods sold, advertising, bad debts,
insurance, office expenses, and capital cost allowance. A self-employed individual can also deduct expenses for the
business use of a work space in the individual's home, if the home is the individual's principal place of business, or
the individual uses the work space only to earn business income and it is used on a regular and ongoing basis to
meet business clients, customers, or patients. Home expenses that may be deducted include utilities, home
insurance, property taxes, mortgage interest, and capital cost allowance.

ax returns

Both the federal and the provincial/territorial corporation tax systems operate on an essentially self-assessing
basis. All corporations must file federal income tax returns. Alberta and Quebec tax returns must also be filed by
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corporations that have PEs in those provinces, regardless of whether any tax is payable. Corporations with PEs in
other provinces that levy capital tax must also file capital tax returns. Tax returns must be filed within six months
of the corporation's tax year-end. No extensions are available.

Certain corporations with annual gross revenues exceeding CAD 1 million are required to electronically file (e-file)
their federal CIT returns via the Internet. Also, information return filers that submit more than 50 information
returns annually must e-file via the Internet. Penalties are assessed for failure to e-file.

Payment of tax

Corporate tax instalments are generally due on the last day of each month (although some CCPCs can remit
quarterly instalments if certain conditions are met). Any balance payable is generally due on the last day of the
second month following the end of the tax year.

Functional currency

The amount of income, taxable income, and taxes payable by a taxpayer is determined in Canadian dollars.
However, certain corporations resident in Canada can elect to determine their Canadian tax amounts in the
corporation's 'functional currency'.
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Tax audit process

The tax authorities are required to issue an assessment notice within a reasonable time following the filing of a tax
return. These original assessments usually are based on a limited review, if any, of the corporation's income tax
return. However, the notice of assessment will identify any changes made (e.g. correcting discrepancies on any
balances carried forward). While the tax authorities are required to review an initial return with due dispatch, there
is no requirement to accept amended filings, although administratively these are generally allowed but are not
given any priority. In general, the CRA targets its resources on high-risk taxpayers, with minimal resources spent
on lower-risk taxpayers.

Traditionally, all corporations with gross income over CAD 250 million, and their affiliates, are assigned a large
case file team and undergo an annual risk assessment. Corporations rated as high risk are generally audited
annually. Medium-sized corporations (gross income between CAD 20 million and CAD 250 million) generally are
selected based on a screening process and identified risks. Smaller corporations, which are usually CCPCs with
gross income under CAD 20 million, have been subject to compliance or restricted audits, selected based on
statistical data and a screening process. Audits of CCPCs are generally restricted to covering the current and one
previous taxation year.
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The 2021 federal budget proposes to amend the scope of authority of CRA officials to confirm that they can require
persons to answer questions in any form specified by them and to provide reasonable assistance for any purpose
related to the administration or enforcement of the relevant statute.

Statute of limitations

A reassessment of the tax payable by a corporation that is not a CCPC may be made within four years from the
date of mailing of the original notice of assessment, usually following a detailed field audit of the return and
supporting information. The limitation period is three years for CCPCs. The three-year and four-year limits are
extended a further three years in some cases (e.g. transactions with non-arm's-length non-residents). The CRA can
also reassess tax, after the end of the normal reassessment period, on a gain from the disposition of real or
immovable property if the taxpayer does not initially report the disposition. Reassessments generally are not
permitted beyond these limits unless there has been misrepresentation or fraud. Different time limits may apply
for provincial reassessments.

The reassessment period of a taxpayer is extended by:

 three years for income arising in connection with a foreign affiliate of a taxpayer, for taxation years of a taxpayer
beginning after 26 February 2018
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 a ‘stop-the-clock’ rule that applies when a requirement for information (excluding foreign-based information, for which
an existing ‘stop-the-clock’ rule already applies) or compliance order is being contested in court, for challenges
instituted after 13 December 2018; the reassessment period is extended by the amount of time during which the
requirement or compliance order is being contested, and
 three years to the extent the reassessment relates to a loss carryback previously claimed, where a reassessment is
made to the loss as a consequence of a transaction involving a taxpayer and a non-arm’s-length non-resident, for
taxation years in which a carried back loss is claimed, if that loss arises in a taxation year ending after 26 February
2018.

For the purposes of the extended reassessment period relating to transactions between a taxpayer and non-arm's-
length non-resident persons, recently enacted legislation applies the definition of 'transaction' used in the transfer
pricing rules for taxation years beginning after 18 March 2019.

Appeals

A taxpayer that disagrees with a tax assessment or reassessment may appeal. The first step is to file a formal
notice of objection within 90 days from the date of mailing of the notice of assessment or reassessment, setting
out the reasons for the objection and other relevant information. Different time limits may apply for provincial
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reassessments. Corporations that qualify as 'large corporations' must file more detailed notices of objection. The
CRA will review the notice of objection and vacate (cancel), amend, or confirm it. A taxpayer that still disagrees has
90 days to appeal the CRA's decision to the Tax Court of Canada, and, if necessary, to the Federal Court of Appeal
and the Supreme Court of Canada. However, the Supreme Court hears very few income tax appeals.

Topics of focus for tax authorities

Topics of interest to Canadian tax authorities include:

 Transfer pricing (inbound and outbound), including the quantum and deductibility of:
o royalty payments made by Canadian corporations
o goods and services
o business restructuring expenses incurred by a group of corporations located in more than one country
o interest rates and interest paid on loans if the funds derived from the loans are used offshore
o guarantee fees paid by Canadian corporations
o management fees and general and administrative expenses, and
o ‘hybrid mismatch’ financial instruments (the CRA has been challenging a Canadian interest deduction by
recharacterising debt as equity when the recipient of the interest is not taxable in their home country).
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 Whether non-residents have a PE in Canada.

 Treaty shopping to reduce Canadian WHT and capital gains tax.
 Manipulation of tax attributes, including:
o surplus stripping to reduce Canadian WHT by increasing a Canadian corporation's paid-up capital and
subsequently distributing the surplus as a return of capital
o arrangements that manipulate the adjusted cost base of capital assets, and
o the acquisition of tax losses realised by arm’s-length entities.
 The requirement to withhold tax on certain payments made to a non-resident that relate to fees, commissions, or other
amounts in respect of services rendered in Canada.
 Transaction costs, including professional fees, related to business restructuring.
 Deductibility of reserves (contingent or unsupported amounts).
 Foreign exchange gains and losses (current or capital).
 Cash pooling arrangements.

Canadian tax authorities also continue to focus their audit activity on employers who fail to withhold tax or apply
for a treaty waiver of Regulation 102 withholding for commuters and business travellers (see Withholding tax for
non-resident employees in the Other Taxes section for more details). The CRA also conducts ‘Employer compliance
audits’ that focus on two main questions:
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 Who is the primary beneficiary of an employee benefit?

 What is the value of benefits provided to employees?

When the employer is the primary beneficiary of the benefit, there would be no taxable benefit to the employee(s).
The value of the benefit is generally the fair market value of the benefit, not the cost to the employer.

General Anti-Avoidance Rule (GAAR)

The GAAR was first introduced in 1988 and was designed to challenge transactions or series of transactions that
would directly or indirectly result in a tax benefit when:

 a taxpayer relies on specific provisions of the Income Tax Act to achieve an outcome that those provisions seek to
prevent
 a transaction defeats the underlying rationale of the provisions that are relied upon, or
 an arrangement circumvents the application of certain provisions, such as specific anti-avoidance rules, in a manner
that frustrates or defeats the object, spirit, or purpose of those provisions.
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If GAAR applies, the CRA may deny any deduction, exemption, or exclusion in computing taxable income or the
nature of any payment or other amount may be recharacterised to deny the tax benefit that would result from an
avoidance transaction.

Foreign reporting

Reporting requirements apply to taxpayers with offshore investments. The rules impose a significant compliance
burden for taxpayers with foreign affiliates. Failure to comply can result in substantial penalties.

The filing due date of T1134 information returns for foreign affiliates is, for taxation years of a taxpayer beginning:

 Before 2020: 15 months after year-end.

 In 2020: 12 months after year-end.
 After 2020: 10 months after year-end.
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Tax evasion and aggressive tax avoidance

In recent years, the federal government has made significant investments to strengthen the CRA's ability to
unravel complex tax schemes and increase collaboration with international partners. Initiatives that have been
introduced include:

 hiring 100 additional auditors to investigate high-risk multinational corporations

 increasing the number of CRA annual examinations of high-risk wealthy taxpayers
 increasing twelve-fold the number of transactions examined by the CRA
 creating a special CRA programme to stop 'the organisations that create and promote tax schemes for the wealthy'
 hiring additional auditors and specialists with a focus on the underground economy
 developing robust business intelligence infrastructure and risk assessment systems to target high-risk international tax
and abusive tax avoidance cases, and
 extending the reassessment period by three years in respect of income arising in connection with a foreign affiliate.

Previously implemented tax measures to help the CRA combat international tax evasion and aggressive tax
avoidance follow:
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 Certain financial intermediaries are required to report to the CRA international electronic funds transfers of CAD 10,000
or more.
 The ‘Offshore Tax Informant Program’ compensates certain persons who provide information that leads to the
assessment or reassessment of over CAD 100,000 in federal tax (Quebec has a similar program, the 'Reward Program
for Informants of Transaction Covered by the General Anti-Avoidance Rule and Sham Transactions').
 Failure to timely file Form T1135 (Foreign Income Verification Statement), or to report all specified foreign property
therein, will extend the normal assessment period for this form by three years.
 The timeline to file Form T1134 (Information Return Relating to Controlled and Non-controlled Foreign Affiliates) has
been reduced (see Foreign reporting above).

There are now over 1,100 offshore audits and more than 50 criminal investigations with links to offshore
transactions underway. The government is also aggressively pursuing those who promote tax avoidance schemes,
imposing penalties on these third parties.

The federal government has made investments to improve the CRA's information technology systems, including
replacing legacy systems, so that the infrastructure used to fight tax evasion and aggressive tax avoidance
continues to evolve.
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The 2021 federal budget proposes to invest the following:

 CAD 2.1 million over two years to assist with the implementation of a publicly accessible corporate beneficial
ownership registry by 2025. The registry will be used by law enforcement, tax, and other authorities to access accurate
and up-to-date information on the individuals who own and control corporations and to catch those who attempt to
launder money, evade taxes, or commit other financial crimes.
 An additional CAD 304.1 million over five years to further combat tax evasion and aggressive tax avoidance, allowing
the CRA to fund new initiatives and extend existing programs, including:
o Increasing GST/HST audits of large businesses with the greatest risk of non-compliance.
o Modernising the CRA’s risk assessment process to prevent unwarranted and fraudulent GST/HST refund and
rebate claims and improve the ability to issue refunds to compliant businesses as quickly as possible.
o Enhancing capacity to identify tax evasion involving trusts and provide better service to executors and trustees.

 CAD 230 million over five years to improve the CRA's ability to collect outstanding tax debts in a timely way.
 CAD 330.6 million over five years in new technologies, tools, and IT infrastructure that match the growing
sophistication of cyber threats and to improve the way benefits and services are delivered to Canadians.
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Mandatory disclosure rules

To facilitate the timely receipt by the CRA of information on arrangements that involve aggressive tax planning,
the 2021 federal budget proposes to enhance Canada’s mandatory disclosure rules by:

 changing the Income Tax Act’s existing reportable transaction rules

 introducing requirements to report ‘notifiable transactions’ and for specified corporations to report uncertain tax
treatments
 extending the reassessment period in certain circumstances, and
 introducing penalties for non-compliance that will apply to both taxpayers and promoters or advisers.

The proposals are subject to public consultation.

Reportable transactions

Current rules in the Income Tax Act require the reporting of a transaction to the CRA if it is considered an
‘avoidance transaction,’ as that term is defined for the purposes of the general anti-avoidance rule (GAAR), and it
meets at least two of three defined hallmarks. Currently, this results in only limited reporting by taxpayers.
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To improve the effectiveness of the reportable transactions rules and to bring them in line with international best
practices, the 2021 federal budget proposes that only one of the hallmarks be present for a transaction to be
reportable. It also proposes that the definition of ‘avoidance transaction’ for these purposes be amended so that
the rules apply if it can reasonably be concluded that one of the main purposes of entering into the transaction is
to obtain a tax benefit. Additional amendments will be made to deal with promoters or advisers who promote these
transactions and require them to also disclose these transactions.

Notifiable transactions

The 2021 federal budget proposes to introduce a category of specific transactions to be known as ‘notifiable
transactions.’ The Minister of National Revenue, with the concurrence of the Minister of Finance, would have the
authority to designate a transaction as a notifiable transaction. Similar to the approach taken by the United States,
notifiable transactions would include both transactions that the CRA has found to be abusive and transactions
identified as transactions of interest. The description of a notifiable transaction would set out the fact patterns or
outcomes that constitute that transaction in sufficient detail to enable taxpayers to comply with the disclosure rule.

Uncertain tax treatments

The 2021 federal budget proposes to require specified corporate taxpayers to report particular uncertain tax
treatments to the CRA (similar to the reporting regime in the United States) when the following conditions are met:
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 the corporation is required to file a Canadian return for the taxation year
 the corporation has at least CAD 50 million in assets at the end of the financial year that coincides with the taxation
year
 the corporation or related corporation has audited financial statements prepared in accordance with IFRS or other
country-specific GAAP relevant for domestic public companies, and
 there is an uncertain tax position related to the corporation’s Canadian income tax reflected in the audited financial
statements.

The requirement to report particular uncertain tax treatments would also apply to a private corporation that meets
the asset threshold if it, or a related corporation, has audited financial statements prepared in accordance with
IFRS.

For each reportable uncertain tax treatment of a corporation, it is proposed that the corporation would be required
to provide prescribed information, such as the quantum of taxes at issue, a concise description of the relevant
facts, the tax treatment taken, and whether the uncertainty relates to a permanent or temporary difference in tax.
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Audit File Resolution Committee (AFRC)

The AFRC was established as a pilot project pursuant to the recommendations of the Offshore Compliance Advisory
Committee. The AFRC includes senior representatives from the International, Large Business and Investigations,
Domestic Compliance Programs, the CRA's Legislative Policy and Regulatory Affairs branches, as well as the
Department of Justice. CRA auditors must refer files to the AFRC when the amounts are material, the issue is novel,
or the file has implications in resolving other cases (i.e. when there are common issues present in a number of
audit files that should be resolved in a consistent fashion). The AFRC’s mandate is to consider audit agreement
proposals to ensure fairness and consistency as well as, when possible, to identify options that promote timely and
efficient resolution of files at the audit stage.

Audit agreements may be beneficial in that they could reduce the overall tax liability, provide an acceptable
resolution to an audit, and avoid additional costs if the issue were to be litigated. An audit agreement may also
provide certainty in subsequent taxation years. However, entering into an audit agreement generally requires a
waiver of objection and appeal rights in respect of the issues covered by the audit agreement.
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Voluntary Disclosures Program (VDP)

In certain circumstances, penalties for non-compliance with tax reporting and payment requirements may be
waived through an application to the CRA's VDP. The taxpayer must meet five conditions to qualify for the
programme. The application must:

 be voluntary
 be complete
 involve the application or potential application of a penalty
 include information that is at least one year past due, and
 include payment of the estimated tax owing.

Key aspects of the VDP include:

 two 'tracks' of disclosures:

o a Limited Program when there is intentional conduct to be non-compliant or for corporations with gross revenue
exceeding CAD 250 million in at least two of their last five taxation years and any related entities; requires
participants to waive their right to object and appeal in respect of the issue disclosed, and
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o a General Program when the Limited Program does not apply

 a pre-disclosure discussion service
 referral of transfer pricing applications to the Transfer Pricing Review Committee (and therefore, no relief will be
granted under the VDP)
 specialist review of complex issues or large dollar amounts
 disclosure of the identity of an adviser who assisted the taxpayer in respect of the non-compliance, and
 cancellation of previous relief if a VDP application was incomplete due to misrepresentation.

VDP relief is not considered for applications that depend on an agreement being made at the discretion of the
Canadian competent authority under a tax treaty provision. If a VDP application does not qualify for VDP relief, a
taxpayer may still qualify for penalty and interest relief under the taxpayer relief provisions.

Sharing information for criminal matters

The CRA can use the legal tools available under the Mutual Legal Assistance Criminal Matters Act to facilitate the
sharing of information related to tax offences under Canada’s tax treaties, TIEAs, and the Convention on Mutual
Administrative Assistance in Tax Matters. These tools include the ability for the Attorney General to obtain court
orders to gather and send information. Tax information can be shared with Canadian mutual legal assistance
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partners for acts that, if committed in Canada, would constitute terrorism, organised crime, money laundering,
criminal proceeds offences, or designated substance offences.

Base erosion and profit shifting (BEPS)

Canada has been an active participant in the BEPS Action Plan, a project of the OECD and the G20. BEPS refers to
tax planning strategies that exploit gaps and mismatches in national tax laws to shift profits to low- or no-tax
locations. The government will act on the recommendations from the BEPS Action Plan (final report issued 5
October 2015) relating to:

 CbC reporting (see Country-by-country [CbC] reporting in the Group taxation section for more information)
 transfer pricing guidance (see Transfer pricing in the Group taxation section for more information)
 treaty abuse (see Treaty shopping below)
 minimum standards under the MLI, which includes the principle purpose test, an amended treaty preamble, and a
modified dispute resolution procedure, including potential binding arbitration
 the OECD's two-pillar approach to address tax challenges arising from the digitalisation of the economy (see Global
minimum tax and the new international tax framework and Digital services tax [DST] in the Other taxes section for
more information)
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 interest deductibility limits (see Interest deductibility limits in the Group taxation section for more information)
 hybrid mismatch arrangements (see Hybrid mismatch arrangements in the Group taxation section for more
information), and
 the spontaneous exchange of tax rulings.

In its 2021 federal budget, the government reconfirmed its commitment to safeguard Canada’s tax system and
continue to be an active participant in the OECD/G20’s BEPS initiative. The government continues to work with its
international partners to improve and update the international tax system and to ensure a coherent response to
fight cross-border tax avoidance. In addition, the government is proposing consultations on enhancements to
Canada's transfer pricing and mandatory disclosure rules (see Mandatory disclosure rules above for more
information).

Spontaneous exchange of tax rulings

The CRA shares select Canadian tax rulings with certain countries, in accordance with BEPS Action 5. The types of
tax rulings shared include cross-border rulings related to ‘preferential regimes’, transfer pricing legislation, and
those providing a downward adjustment not directly reflected in the taxpayer’s accounts, as well as PE rulings and
related-party conduit rulings. Canada will share a summary of the applicable ruling with the countries of residence
of the immediate parent company, the ultimate parent company, and certain other parties.
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Treaty shopping

The government is committed to addressing treaty abuse in accordance with the minimum standard contained in
the final OECD and the G20 BEPS report on treaty shopping (Action 6). The minimum standard requires countries
to include in their tax treaties an express statement that their common intention is to eliminate double taxation
without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including
through treaty shopping arrangements. The minimum standard also requires the adoption of one of two
approaches in addressing treaty abuse, either the limitation-on-benefits approach or the limited principal purpose
test.

On 29 August 2019, Canada completed the process to ratify the OECD's Multilateral Convention to Implement Tax
Treaty Related Measures to prevent Base Erosion and Profit Shifting (also known as the Multilateral Instrument
[MLI]). The MLI covers the minimum standards, and various other recommendations, of Action 6 (treaty abuse) and
Action 14 (dispute resolution), among other things. Canada has chosen to have the MLI apply to 75 of its 93 tax
treaties (the Covered Tax Agreements).

With respect to treaty abuse, Canada adopted, as an interim measure, a principal purpose test for the Covered Tax
Agreements, but intends to adopt a limitation on benefits provision, in addition to or in replacement of the principal
purpose test, through bilateral negotiations. To meet the minimum standards for dispute resolution, Canada has
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agreed to implement mutual agreement procedure and binding arbitration. The MLI entered into force for Canada
on 1 December 2019. If the MLI is also in force for a counterparty (i.e. a jurisdiction that has signed the MLI) to a
covered tax convention, the MLI applies for that covered tax convention for:

 WHTs on 1 January 2020, and

 other taxes for tax years beginning on or after 1 June 2020.

Quebec ‘Tax Fairness Action Plan’

Quebec's ‘Tax Fairness Action Plan’ contains actions that address tax havens, aggressive tax planning, transfer
pricing, and e-commerce with suppliers having no significant presence in Quebec, among other things. Many of the
actions rely on cooperation with federal authorities. It is an evolving plan that is modified as challenges arise. Key
actions relating to corporations include:

 Improving income tax auditing of CIT. The CRA:

o will give the Quebec government CbC reports and ask other jurisdictions to give Quebec access to similar
reports concerning those jurisdictions
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o should obtain permission from tax authorities of foreign governments with which Canada has tax treaties to
transfer to Quebec information obtained under these treaties, and
o will give Quebec certain foreign reporting information.
 Collecting sales taxes on supplies of incorporeal moveable property and services to ‘specified Quebec consumers’ by
requiring foreign suppliers with no significant presence in Canada, in addition to suppliers in other provinces and
territories that supply goods and services in Quebec, to register for QST (see Provincial retail sales tax in the Other
taxes section for more information).
 Increasing penalties in respect of GAAR-based assessments to 50% (from 25%) of the amount of the tax benefit
denied.
 Strengthening the mandatory disclosure mechanism, which requires reporting to Revenu Quebec of certain
transactions resulting in a tax benefit, and broadening the types of transactions that must be disclosed under this
mechanism.
 Requiring mandatory disclosure to Revenu Quebec of nominee agreements made as part of a transaction of series of
transactions.
 Blocking access to public contracts for businesses and promoters that have used abusive tax avoidance strategies.
 Establishing a special regime to counter tax schemes based on sham transactions, by adding new penalties for
taxpayers, advisers, and promoters, and extending the standard reassessment period for an additional three years.
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 Strengthening corporate transparency by requiring that information on beneficial owners be declared to the Registraire
des entreprises du Quebec (REQ) and scaling up the REQ’s oversight, compliance, quality inspection, and investigation
functions and implementing technology to facilitate REQ information sharing.
 Simplifying tax compliance, tightening regulations, and increasing inspections in certain sectors with a higher risk of
tax evasion (e.g. renovation, construction, personal placement, transportation, money-services, and cryptocurrency).