Competent Authority Assistance under Canada’s Tax Conventions
Date: June 1, 2021
This version is only available electronically.
This circular replaces and cancels Information Circular 71-17R5 dated January 1, 2005.
1. The Canada Revenue Agency (CRA) provides competent authority assistance pursuant to Canada's tax conventions (also referred to as “tax treaties”, “tax agreements”, or “tax arrangememts”). There is no fee for this service. A list of countries with which Canada has concluded a tax convention is available on the Department of Finance's website at: Tax treaties - Notices of developments.
2. The purpose of this information circular (circular) is to provide guidance on obtaining assistance from the Canadian competent authority to persons that fall within the scope of a tax convention that Canada has concluded with another country. This assistance is provided to taxpayers in order to try to resolve situations where taxpayers are subject to taxation not in accordance with the provisions of the relevant tax convention, including situations of double taxation. This circular does not modify, restrict or expand any rights or obligations contained in any provision in Canada's tax conventions.
3. The primary purpose of Canada’s tax conventions is to eliminate double taxation and to prevent tax avoidance and fiscal evasion. A tax convention will also serve, in effect, to allocate taxing rights and tax revenues on transactions taking place between residents of the signatory countries. To these ends, a tax convention may provide rules determining:
- the country in which a taxpayer is resident;
- the types of income or capital that each country may tax;
- the treatment given to specific types of income;
- the allowable rates of withholding tax on specific types of cross-border payments; and
- the manner in which issues of taxation not in accordance with the tax convention are to be resolved.
4. Assistance by the Canadian competent authority is generally provided under the Mutual Agreement Procedure (MAP) article contained in Canada's tax conventions. In certain situations other articles may apply to allow for competent authority assistance.
How to contact the Canadian competent authority
5. Canada's tax conventions define the Canadian competent authority as the Minister of National Revenue or the Minister's authorized representative. Administratively, the Canadian competent authority function is split between the International and Large Business Directorate and the Legislative Policy Directorate of the CRA.
The Director, Competent Authority Services Division (CASD), International and Large Business Directorate serves as the Canadian competent authority for resolving cases, such as the examples listed in paragraph 11, related to specific taxpayers. Requests for competent authority assistance in respect of specific cases and related enquiries should be sent to CASD. We strongly encourage you to submit your requests through CRAs E-Services. The CRA has three portals through which taxpayers can access information and communicate with the CRA:
- My Account (MyA): allows an individual taxpayer to access their own personal information.
- My Business Account (MyBA): allows owners, including partners, Directors and Officers of corporations, to access tax information.
- Represent a Client (RAC): allows any taxpayer, owner or registrant to authorize others to access their tax information.
More information can also be obtained from the link: E-Services.
Requests can also be mailed to the following address:
International and Large Business Directorate
Competent Authority Services Division
344 Slater Street
18th Floor, Canada Building
Ottawa ON K1A 0L5
Current contact information for CASD along with a fax number and list of CASD phone numbers may be obtained from the link: Who we are and how to contact us - Canada.ca.
The Director General, Legislative Policy Directorate, is the Canadian competent authority for issues involving general interpretation, non-discrimination, treaty shopping, double non-taxation issues, and general issues concerning the application of tax conventions where specific taxpayers are not involved. Requests for competent authority assistance in respect of these non-specific case issues should be addressed to the Director General, Legislative Policy Directorate, Competent Authority Treaty and Advisory Section, Canada Revenue Agency. A current mailing address for the Legislative Policy Directorate may also be obtained from the link: Who we are and how to contact us - Canada.ca
This circular deals with requests for assistance to Canada's competent authority responsible for specific cases, i.e., to the Director, CASD.
The commitment of the Canadian competent authority
6. The Canadian competent authority is committed to ensuring a good faith application of Canada's tax conventions. The Canadian competent authority endeavours to resolve competent authority requests in an equitable manner in accordance with the Income Tax Act of Canada (the Act; Income Tax Act), the Income Tax Conventions Interpretation Act (Income Tax Conventions Interpretation Act), Canadian case law, the applicable tax convention, the Organisation for Economic Co-operation and Development's (OECD) Model Tax Convention on Income and on Capital (OECD Model Convention; Model Tax Convention-OECD) and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Transfer Pricing Guidelines; Guidelines). To fully carry out this obligation, every effort is made to reach a satisfactory resolution of the issues involved.
7. The Canadian competent authority negotiates with other competent authorities in a principled, fair and objective manner. Each case is decided on its own merits. The Canadian competent authority will endeavour to resolve cases in a timely manner and will keep the taxpayer informed of the status of the request on an on-going basis. Once a decision has been made on a case, the taxpayer will be advised of the decision in writing.
8. All information obtained or generated during the MAP process is protected by the confidentiality provisions of the Act and the provisions of the applicable tax convention. In particular, the confidentiality provisions in the Act limit the rights and powers of the CRA to use and disclose information submitted in connection with a competent authority request. In addition, the Canadian competent authority ensures that all measures are taken to protect taxpayers’ information.
Typical requests for assistance from the Canadian competent authority
9. Where a person considers that the actions of one or both governments result or will result in taxation not in accordance with a tax convention, the person may request competent authority assistance under the MAP article of a Canadian tax convention. Generally, taxpayers must approach the competent authority of their country of residence to request relief under a tax convention.
10. When an adjustment is made that affects a Canadian resident and a related party in a treaty country, both parties should request assistance from the competent authority of their country of residence in order to ensure that treaty-based relief is obtained for both parties. This could be accomplished by the parties filing their own requests, or by one party, duly authorized to act for the other, filing requests with both competent authorities to satisfy the administrative requirements of both jurisdictions. Where a competent authority request is filed only in the foreign jurisdiction and that jurisdiction has advised the Canadian competent authority of the request, the Canadian competent authority will consider a case involving related party transactions with a Canadian taxpayer where the other requirements of the relevant MAP article are met.
The Canadian taxpayer still has to make a formal request in accordance with this circular before the Canadian competent authority would actively work on the case. However, for example, where the non resident’s request in the other jurisdiction was made in accordance with a MAP article, if the Canadian taxpayer agrees to file a request, its request will also be considered timely. Refer to paragraph 79 below for MAP procedures specific to the Canada-United States Income Tax Convention.
11. Examples of taxation not in accordance with a tax convention that may warrant a request for assistance to the Canadian competent authority include:
- A Canadian resident taxpayer is also considered to be a resident of a treaty country under that country's domestic law, and each country asserts that the taxpayer is a resident of its jurisdiction for purposes of the tax convention. If unresolved, the taxpayer could be subject to tax on the same income in both countries. A request to the Canadian or the other competent authority will be necessary to initiate negotiations between the competent authorities regarding the proper application of the tie breaker rules contained in the residency article of the convention. The taxpayer should approach the competent authority of the country in which the taxpayer asserts residency.
- A taxpayer in a treaty country is subject to additional tax because of an adjustment in respect of a transaction with a related party in Canada. The Canadian taxpayer may request that the Canadian competent authority allow a corresponding deduction in Canada to prevent double taxation.
- A branch of a Canadian resident taxpayer operating in a treaty country is subject to additional tax because of an adjustment by the treaty country of the income allocated to the branch. The taxpayer may request that the Canadian competent authority allow an increased foreign tax credit in Canada to prevent double taxation.
- A Canadian taxpayer subject to tax in Canada on world income, including income from carrying on a business in a treaty country, is taxed in the treaty country on the business income earned in the treaty country despite not having a permanent establishment in that country under the tax convention. The taxpayer may request the Canadian competent authority to address the issue of taxation not in accordance with the tax convention with the other competent authority.
- Tax is withheld by a treaty country on a payment to a Canadian resident at a rate in excess of the rate stated in the tax convention. The taxpayer may request the Canadian competent authority to address the taxation not in accordance with the tax convention with the other competent authority.
- Where there is uncertainty whether the treaty covers an item of income arising in the other jurisdiction, the taxpayer may approach the Canadian competent authority for clarification.
Most of the examples above deal with foreign-initiated adjustments. However, a Canadian resident may also seek assistance from the Canadian competent authority if the resident believes that a Canadian-initiated adjustment results in taxation not in accordance with the tax convention. For example, a taxpayer in Canada who is subject to additional tax because of a CRA adjustment in respect of a transaction with a related party in a treaty country, may request the Canadian competent authority to ask the other competent authority to allow a corresponding adjustment for the related party in the treaty country in order to prevent double taxation.
12. Where a request is made to the Canadian competent authority under the MAP article of a tax convention, the Canadian competent authority will first, if the request appears to be justified and can be accepted by the Canadian competent authority, attempt to resolve the matter unilaterally. For example, if the Canadian competent authority considers that the request for relief is warranted and the relief requested is entirely within the scope of Canada's tax laws, it could provide the relief without consulting the other competent authority. If the Canadian competent authority is not itself able to arrive at a satisfactory solution, it will endeavour to resolve the matter by mutual agreement with the other competent authority.
13. While most MAP requests are bilateral, there may be a situation where a MAP request is made involving more than two jurisdictions, and depending on the facts of the particular case and the treaty partners involved, it may be possible to initiate a multilateral MAP. The taxpayer must formally request a multilateral process in all jurisdictions and provide authorizations with respect to the exchange of information among all competent authorities involved before the Canadian competent authority will explore the possibility of a multilateral request.
14. Canada’s tax conventions contain an article which is similar to Article 9 of the OECD Model Convention, which addresses transfer pricing adjustments. Article 9 or its equivalent is not worded in the same way in all of Canada’s tax conventions, and may not be consistent with the OECD Model Convention wording, which requires a MAP dicussion where contracting states cannot agree on an adjustment to which Article 9 applies. However, despite differences in wording, the Canadian competent authority considers that all of Canada’s tax conventions allow for the possibility of a MAP in connection with an Article 9 or equivalent issue.
Making a request
15. Where a taxpayer considers that an action by Canada or one of its treaty partners results or will result in taxation not in accordance with the relevant treaty, a taxpayer may initiate a request for competent authority assistance by submitting a written application to the Canadian competent authority.
16. A request for assistance must be made within the relevant time limit (if any) specified in the relevant treaty and will only be considered complete upon the receipt of the information outlined in paragraph 17 below. For Canadian-initiated cases, a request will be considered complete only when an adjustment is confirmed by a reassessment, and the information requested in paragraph 17 is provided. Taxpayers should be aware that the Canadian competent authority does not have any authority over cases where an audit is pending or in process (with the exception of an Accelerated Competent Authority Procedure; see paragraph 21). The Canadian competent authority will only commence work once a complete request for assistance is received.
17. While there is no prescribed form for requesting Canadian competent authority assistance, the Canadian taxpayer must provide the following relevant information:
- the name, address, and social insurance number, and/or corporation business number;
- the name of the foreign tax administration involved, and the applicable tax convention article(s);
- the name, address, and the taxpayer identification number (TIN) of any related foreign taxpayer involved;
- the relationship between the Canadian taxpayer and any related foreign taxpayers involved. The Canadian competent authority must be informed of any changes in these relationships that occur after the request has been filed;
- the taxation years or periods involved;
- the CRA Tax Services Office (TSO) or Taxation Centre (TC) that has made or has proposed to make the adjustment, if applicable;
- a summary of the facts and an analysis of the issues for which competent authority assistance is requested, including an explanation of how taxation not in accordance with the treaty has arisen and any specific issues raised by the foreign tax administration or CRA affecting the Canadian taxpayer with the related amounts (in both Canadian and foreign currency), each supported by calculations;
- for transfer pricing cases, contemporaneous documentation as described in subsection 247(4) of the Act;
- for transfer pricing cases, specify if assistance is required to address any Part XIII tax implications, and indicate what the implications are (i.e. Part XIII tax remitted on payments denied a deduction as part of a primary adjustment, a Part XIII tax assessment on a deemed dividend as a secondary adjustment, or both).
- a copy of the competent authority request and all the relevant documents filed, or to be filed, with the relevant foreign competent authority, including copies of any correspondence from the other tax administration, and copies of any briefs, objections, etc., submitted in response to the action or proposed action of the other tax administration (if such copies are in a foreign language, an English or French translation must be supplied);
- a statement indicating whether the taxpayer or a predecessor has made a prior request to the Canadian competent authority on the same or a related issue;
- for each taxpayer involved in the request, a schedule of the statute-barred dates in each jurisdiction (domestic time limits) in respect of all years for which relief is sought along with waivers as needed (see paragraph 32 below);
- a statement indicating whether the taxpayer has filed a notice of objection or a notice of appeal in Canada and the status of the objection or appeal, and notification of any change in status;
- where the request for competent authority assistance involves issues that are currently or were previously considered as part of an advance pricing arrangement in Canada or similar arrangement in the foreign country, a statement to that effect;
- where there is a representative, a signed statement that the representative is authorized to act for the taxpayer in making the request;
- a copy of any settlement or agreement reached with the other jurisdiction which may affect the MAP process; and
- any other relevant facts.
18. The request should be signed by the taxpayer, or by an authorized person on behalf of the taxpayer, confirming the accuracy and completeness of the facts and information presented in the request. The taxpayer is responsible for the completeness and accuracy of the information included in the request. The Canadian competent authority may deny any request where the taxpayer has failed to provide complete and accurate information or has made any misrepresentation to CRA.
19. Where more information is required before a request is considered complete, the taxpayer will be advised in writing within a reasonable time of receipt of the request.
20. For cases accepted in MAP under the Canada-United States Income Tax Convention, but which require more information before being considered complete, refer to paragraph 4 of the Memorandum of Understanding Between The Competent Authorities of Canada and The United States of America.
Accelerated competent authority procedure (ACAP)
21. In addition to a request for competent authority assistance in respect of a specific (re)assessment, a taxpayer may request an ACAP. An ACAP allows the competent authorities to apply a MAP settlement to taxation years that are in the process of a risk assessment or in the preliminary stages of an audit, or which may be considered for audit review, without requiring a (re)assessment and another formal competent authority request. In order to be considered, an ACAP request must be either included with a MAP request or made at any time before the conclusion of the competent authority negotiations under the MAP process. Sufficient details on the potential adjustments in the ACAP years must be provided so that the competent authorities can decide if the request for ACAP should be considered. The objective of an ACAP is to streamline the MAP process. It is not intended to be a carryforward of a MAP settlement to subsequent years. Acceptance of an ACAP is required by both competent authorities before being considered as included in the MAP. Please refer to transfer pricing memorandum, TPM-12 Accelerated Competent Authority Procedure, TPM-12 – Canada.ca, for the criteria and procedures to be followed when requesting an ACAP.
22. The request or acceptance of an ACAP will not preclude or diminish the CRA’s right to examine the books and records, or issues addressed (or being addressed) by the ACAP.
Acceptability of requests
23. The Canadian competent authority will accept a request for assistance if:
- the issue or transaction relates to a foreign country with which Canada has a tax convention;
- it is evident that the actions of one or both countries have resulted or will result in taxation not in accordance with the tax convention;
- the request is submitted within the time limits specified in the applicable tax convention. If the applicable tax convention does not specify a time limit for submitting a request, the request must be received within the time allowed to make an adjustment under the Act if the relief is to be provided by Canada, or within the time allowed to make an adjustment under the law of the treaty country if the relief is to be provided by the other country; and
- the issue is not one that the Canadian and/or the foreign competent authority have indicated in their MAP guidance that they will not consider.
24. The CRA will notify the taxpayer in writing whether the Canadian competent authority has accepted or declined the request for competent authority assistance normally within thirty days of receiving a complete request. The taxpayer will be provided with the reasons for the decision where a request is declined.
Specific situations not accepted for Canadian competent authority negotiation consideration
25. There are certain issues that the Canadian competent authority will not consider for negotiation, including but not limited to the following examples:
- Notional expenses – Canada will not give correlative relief in the form of a notional expense for a notional income adjustment raised by a treaty partner, and
- Thin Capitalization- Canada retains its right to limit the deductibility of interest under subsection 18(4) of the Act.
In such cases, where a taxpayer makes a MAP request, the Canadian competent authority will limit its role to providing an explanation to the other tax authority.
Downward transfer pricing adjustments and foreign tax credits
26. Taxpayers should not make claims for corresponding transfer pricing adjustments or foreign tax credits for foreign tax administration adjustments either when filing their current tax returns or by filing amended tax returns, without first seeking assistance from the Canadian competent authority. Where tax returns have been filed, and a taxpayer makes a request for a downward transfer pricing adjustment (downward adjustment- refer to the transfer pricing memorandum TPM-03, Downward Transfer Pricing Adjustments under Subsection 247(2), TPM-03 - Canada.ca) or requests increased foreign tax credits from a local TSO or TC due to a foreign initiated adjustment, such cases will be referred to the Competent Authority Services Division in Ottawa if they concern a country with which Canada has a tax treaty (refer to paragraph 27). Taxpayers who attempt to bypass the competent authority process either when filing or after filing their tax returns through a “self-help” solution may be subjected to double taxation.
27. The Canadian competent authority will accept a case under the MAP that involves a request for a downward adjustment in the following circumstances:
- The upward adjustment has been accepted for consideration by the other tax authority;
- The other competent authority takes steps to resolve the case under the MAP by reviewing the case, providing the Canadian competent authority with a detailed analysis as to why the other tax authority agrees with the adjustment and agrees to negotiate the case;
- The request for competent authority assistance is made within the time limits of the applicable treaty; and
- The issue is not one that the Canadian competent authority has decided, as a matter of policy, not to consider.
Cases involving a request for an increase to a foreign tax credit will also be accepted where the other competent authority agrees to a MAP and all other MAP criteria have been met.
If the above requirements are not met, the Canadian competent authority will advise the taxpayer that their MAP case will be closed.
28. Downward adjustment requests involving non‑treaty countries should also be referred to the Director, Competent Authority Services Division, International and Large Business Directorate, International, Large Business, and Investigations Branch. These requests will be reviewed in accordance with the requirements of the transfer pricing memorandum TPM-03.
Taxpayer responsibilities and participation
29. Once a competent authority request has been accepted, the taxpayer is responsible for supplying the Canadian competent authority with complete and accurate information required to resolve the case. The onus is on the taxpayer to keep the Canadian competent authority informed of all material changes in the information or documentation previously submitted as part of or in connection with the request, as well as new information or documentation relevant to the issues under consideration. Without proper information and documentation, competent authorities may be unable to resolve disputes expeditiously and the risk of unrelieved double taxation increases. Where a request also involves a related foreign taxpayer making a request to the other competent authority, the taxpayers should ensure that the same information is provided to both competent authorities at the same time.
30. Tax conventions usually provide time limits in the MAP article for the taxpayer to present a case to the competent authority, and the taxpayer is responsible for making timely MAP requests. In most of Canada's tax conventions this time limit is two years from the first time that the taxpayer is notified of the action by a revenue authority that results in taxation not in accordance with the convention. From a Canadian perspective this generally means two or three years from the date of the notice of (re)assessment depending on the particular tax convention. Some Canadian treaties do not stipulate a time limit for presenting a case. Generally, those treaties also do not have rules that override domestic time limits to provide relief (see paragraph 31). In those situations, a case should be presented to the Canadian competent authority well before the expiry of time limits for relief under the Act (see paragraph 32). Taxpayers should protect their treaty rights by making sure they are aware of the time limit specified in the MAP article of the treaty for which a request is being made. Taxpayers should also be aware that the coming into force of the Multilateral Convention toImplement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) may affect MAP time limits and other provisions in Canada’s treaties (refer to paragraph 120).
31. Even though the Canadian competent authority may have been presented with a case on a timely basis, it is restricted in providing relief to the taxpayer to the time period allowed under the Act for making reassessments of a taxpayer's return and for making a refund of tax (including Part XIII tax refunds), unless the applicable convention has a provision which overrides Canada’s domestic statute barred rules. (Refer to paragraph 79 below for specific issues under the Canada-United States tax convention).
32. Taxpayers are responsible for taking steps to prevent taxation years affected by the request from becoming statute-barred under the Act. Doing so will allow the Canadian competent authority to provide the requested relief despite the expiration of the normal reassessment period. A Canadian taxpayer can keep years open for this purpose by filing waivers in a prescribed form pursuant to subsection 152(4) of the Act. Form T2029, Waiver in Respect of the Normal Reassessment Period, is available for this purpose and must be filed within the time limits specified for filing waivers. The filing of a protective Notice of Objection with CRA Appeals Branch (Appeals) or Notice of Appeal with the Tax Court of Canada will also keep taxation years open and allow for the implementation of a MAP agreement.
33. Valid waivers permit the CRA to reassess a return to provide relief or otherwise amend a Canadian (re)assessment as a result of competent authority negotiations for years that would otherwise be legally barred from being (re)assessed. In order to be considered, a request must follow the steps noted in “Making a Request” above. Taxpayers are also responsible for keeping their relevant provincial income tax returns open. (See paragraphs 74 to 77.)
34. Related foreign taxpayers involved in the request should also take such timely action as may be necessary with the foreign tax administration. The Canadian competent authority will not rescind a Canadian-initiated adjustment solely because the taxation year of the related foreign taxpayer is beyond the statute-barred date in the foreign jurisdiction.
35. MAP discussions between the Canadian competent authority and the other competent authority are a government-to-government process in which there is generally no direct taxpayer involvement. Therefore, taxpayer involvement in the MAP is limited to presenting the taxpayer's views and assisting in the fact-finding without participating in the negotiation process. However, taxpayers may be invited to make a presentation before the competent authorities, where appropriate, to ensure a common understanding of the facts of a particular case.
36. Taxpayers are expected to co-operate fully with the Canadian competent authority by providing information and assistance. A taxpayer's failure to co-operate with the Canadian competent authority during any part of the competent authority process may have direct consequences on whether relief can be provided under the MAP. Specifically, the Canadian competent authority may request additional information beyond that which was requested during an audit, and may also request information that was requested but not provided during an audit. It is to the taxpayer's benefit to be fully co-operative and transparent to ensure an efficient competent authority process. The timely provision of requested information is essential to enable the competent authorities to reach an equitable and expeditious conclusion. Where the failure to provide the requested information within a reasonable time hinders the Canadian competent authority's ability to perform its duties in an efficient and effective manner, it may lead to a denial of competent authority assistance or the Canadian competent authority being unable to reach a mutual agreement with the other competent authority. Ultimately, this may result in double taxation or taxation not in accordance with the tax convention.
Timelines for a MAP
37. Once a MAP request has been accepted, for a CRA initiated adjustment (where the issue cannot be resolved unilaterally or without negotiation) the Canadian competent authority will proceed to prepare a position paper to be forwarded to the other competent authority. The position paper explains and supports the rationale for the CRA adjustment and formally seeks correlative double tax relief.
38. The Canadian competent authority will attempt to have a position paper finalized and sent to the other competent authority for consideration within six months from the date that all necessary information required to work the case has been received.
39 The Canadian competent authority targets a maximum of 24 months for the completion of the MAP process, including the preparation of a position paper and negotiations, from the date that complete information required to work the case has been received. However, this timeline depends on the co-operation of taxpayers, their representatives, and the other tax authority.
40. Where the adjustment is foreign initiated and CRA requires an explanation before deciding if relief is appropriate, the Canadian competent authority will seek a written position paper from the competent authority of the adjusting country so that an informed decision on relief may be made. The Canadian competent authority may also consult with and seek additional information from the other competent authority, the Canadian taxpayer, and the TSO responsible for reviewing the taxpayer’s tax returns.
41.The Canadian competent authority targets the same timeline to complete a MAP request that is foreign initiated; that is, 24 months from the date that the complete information required to work the case has been received.
42.Cases with treaties containing a binding arbitration clause will be subject to the arbitration timelines of the applicable treaty if arbitration is invoked.
43. The Canadian competent authority will not negotiate cases where the (re)assessment relies on any anti-avoidance provisions of the Act (e.g. section 245, paragraph 247(2)(b)) including the Income Tax Act Regulations. This means that the Canadian competent authority will, as in all MAPs, apply the criteria of paragraph 23 when considering requests for assistance for avoidance cases, but will generally limit itself to forwarding the case to the other competent authority for any relief that the other competent authority may provide at the latter's discretion.
44. The Canadian competent authority will also apply the criteria of paragraph 23 to MAPs involving CRA (re)assessments based on treaty anti-avoidance rules, but, in addition to forwarding the case to the other competent authority, may also negotiate these MAPs with a view to reaching consensus on the application or non-application of the treaty anti-avoidance rules.
45. In a situation where an anti-avoidance provision is cited in a (re)assessment, and the taxpayer succeeds in getting that portion of the (re)assessment vacated, either through the Appeals Division or a Canadian court, so that avoidance is no longer an issue, the taxpayer may then request the Canadian competent authority assistance if taxation not in accordance with the tax convention is still an issue.
Appeals and court decisions
46. In order to protect their right of objection, a taxpayer may file a Notice of Objection against a (re)assessment and request that Appeals hold the Notice of Objection in abeyance, pending resolution of the issues by the competent authorities. This protects the taxpayer’s right of objection to Appeals and the right of appeal to the Tax Court of Canada in the event that the competent authorities do not resolve the issues, or the taxpayer decides to reject a competent authority agreement.
47. Waivers of objection or appeal rights provided in settlement of an audit action or Appeals decision do not affect a taxpayer's right to make a request to the Canadian competent authority for relief from taxation not in accordance with a tax convention.
48. If a taxpayer proceeds with either a Notice of Objection or an appeal to the Tax Court of Canada on a matter that is under competent authority consideration, and does not request that the objection or appeal be held in abeyance, the competent authority process will be suspended and the other competent authority will be notified. However, a taxpayer may make a competent authority request regarding one issue of a (re)assessment, and independently pursue another issue with Appeals or the Tax Court of Canada.
49. If a taxpayer believes that taxation not in accordance with a tax convention remains following a decision by Appeals or a Canadian court, the taxpayer can request a resumption of the previously suspended competent authority procedure. The Canadian competent authority’s ability to resolve a MAP will be subject to the criteria outlined in paragraph 51 or 52.
50. If a taxpayer has not previously submitted a competent authority request and believes that taxation not in accordance with a tax convention remains following a decision by Appeals or a Canadian court, the taxpayer can submit the issue for competent authority consideration subject to the time limitations of the respective convention. The Canadian competent authority’s ability to resolve an issue under a tax convention will be subject to criteria outlined in paragraphs 51 or 52.
51. Where a taxpayer first seeks an Appeals decision, Appeals may confirm the CRA adjustment without taxpayer concurrence; vary and reassess the CRA adjustment without taxpayer concurrence; vacate the CRA adjustment in total, or reach a settlement with the taxpayer. Following the Appeals process, if double taxation remains, and the taxpayer restarts or initiates a MAP, with an Appeals decision (other than an Appeals settlement- see paragraph 54), the Canadian competent authority may vary the decision, but will give due consideration to the findings made by Appeals.
52. In cases where a Canadian court decision has been rendered, and double taxation remains, the Canadian competent authority will provide the other competent authority with the details of, and rationale for, the outcome of the court decision. However, the Canadian competent authority cannot alter a Canadian court decision. Any relief from double taxation or taxation not in accordance with the tax convention will only be possible in the other country at the discretion of its competent authority. The Canadian competent authority will not undertake any action that would undermine a Canadian court decision or a case before the courts.
53. In order for the Canadian competent authority to consider a mutual agreement which may vary an Appeals decision, the year must be open for reassessment in Canada. As already noted, where a taxpayer files a competent authority request, in the absence of a clause in the applicable convention which overrides Canadian domestic statute barred rules taxpayers are responsible for keeping years open to allow the implementation of a competent authority agreement. Where Appeals has varied a CRA adjustment and issued a new reassessment, the taxpayer may have to file and hold in abeyance either a Notice of Objection or an appeal to the Tax Court of Canada, and/or have in place a valid waiver.
54. An Appeals settlement is a resolution of a taxation issue between Appeals and the taxpayer that the taxpayer concurs with in writing, and which generally requires that the taxpayer waive any further rights to appeal. Where a taxpayer reaches a settlement with Appeals and double taxation has not been eliminated, the Canadian competent authority will present the case to the other competent authority for their consideration of correlative relief, but will not vary the Canadian settlement position. Taxpayers should also be aware that, where the Canada-United States Income Tax Convention is applicable, any settlements reached with Appeals would not be eligible for arbitration (refer to clause 3.1.1 of the Memorandum of Understanding Between the Competent Authorities of Canada and the United States of America with respect to arbitration).
55. For more detailed information about the objections and appeals process, refer to pamphlet P148 Resolving your dispute: Objection and appeal rights under the Income Tax Act.
56. The Canadian competent authority is not bound by a decision given by a foreign court or a foreign administrative appeals settlement. The granting of any relief to the Canadian taxpayer by the Canadian competent authority in such situations will depend on the merits of each case and whether the year in question is still open for adjustment in Canada.
57. The Canadian competent authority operates independently from CRA’s Collections Directorate, and acceptance of a MAP case is not contingent on the taxpayer first complying with CRA’s collection policies. The Canadian competent authority will accept and work a MAP case without regard to any outstanding collections issues that the taxpayer may have or be subject to.
58. The liability for tax in Canada is confirmed by a (re)assessment. An application for competent authority assistance does not suspend the requirement to pay the tax liability or interest thereon, or collection action by the CRA. The Canadian competent authority has not entered into any agreements with other competent authorities to defer any assessing action, or to stop or defer collection of income tax on cases that are the subject of a request for competent authority assistance.
59. In general, the CRA may not commence collection action until 90 days after the date of a taxpayer's (re)assessment. If a taxpayer files a Notice of Objection the CRA must further defer collection until 90 days after the Minister has either confirmed or varied the (re)assessment. If the taxpayer then files an appeal with the Tax Court of Canada, the CRA must defer collection action until the Tax Court of Canada renders a decision. However, these collection restrictions on (re)assessed amounts that are the subject of a Notice of Objection or Tax Court of Canada appeal do not apply to (re)assessments issued to “large corporations”, as defined under subsection 225.1(8) of the Act. Large corporations are required to pay one-half of the (re)assessed amount within 90 days of the date of (re)assessment. If the large corporation does not file a protective notice of objection or appeal, the remaining balance of 50% must be paid. The collection restrictions also do not apply to tax, interest and penalties assessed on payments made to non-residents that are subject to withholding under Part XIII of the Act.
60. Notwithstanding paragraphs 58 and 59 above, subsection 220(4) of the Act provides in general terms that the CRA may in certain circumstances accept security for payment of a disputed amount that is or may become payable under the Act. Agreement to accept security is at the discretion of CRA’s Collections Directorate.
61. Taxpayers requiring assistance on collection matters and CRA’s collections policies should refer to Information Circular 98-1R7, Tax Collections Policies.
Interest and penalties
62. The scope of Canada's tax conventions does not extend to cover domestic interest or penalties levied as a result of an adjustment relating to an international transaction. This prevents the Canadian competent authority from waiving or negotiating any portion of interest or penalties resulting from (re)assessments or adjustments that are the subject of a request for competent authority assistance.
63. For example, the application of the Canadian transfer pricing penalty is a compliance issue that is not covered by the MAP of a tax convention. Accordingly, the Canadian competent authority will not negotiate the amount or applicability of a transfer pricing penalty with a foreign tax administration. However, where the CRA has proposed to (re)assess or has (re)assessed a transfer pricing penalty and the competent authorities negotiate a change to the amount of the transfer pricing income or capital adjustments, the CRA will adjust the amount of the Canadian transfer pricing penalty accordingly.
64. Notwithstanding paragraph 62, a taxpayer may ask in eligible circumstances to have a portion of the interest that accrues on a reassessment waived or cancelled. As these requests are not administered by the Canadian competent authority, taxpayers should refer to IC07-1R1, Taxpayer Relief Provisions - Canada.ca, on the CRA website for information on how and where to apply for interest relief.
Competent authority agreements
65. Competent authority agreements are not considered precedents for either the taxpayer or the CRA when considering (re)assessments or filing positions relating to subsequent years or for competent authority negotiations on the same issues. This is because the competent authorities have negotiated an agreement that takes into account the facts of the particular taxpayer, as well as differences in the provisions of the tax law in each country and effects of the economic indicators on the particular transactions at the relevant time. (Re)assessments of subsequent years should be based on the particular circumstances, facts, legislation and documentary evidence existing for those years.
66. A taxpayer cannot accept the terms of an agreement for only some issues or some taxation years, since the original request by the taxpayer would have asked for assistance in respect of all issues and taxation years involved, including ACAP years, and the competent authorities would have considered all issues and years in the negotiations.
67. If a taxpayer is not satisfied with the agreement negotiated by the competent authorities, the taxpayer may reject it. If this occurs, the competent authorities will consider the case closed and advise the taxpayer accordingly. Assuming a valid notice of objection or an appeal has been filed, the taxpayer will still have the right to proceed through the Appeals process and/or to the Tax Court of Canada for Canadian (re)assessments. If Appeals or the Canadian courts do not reverse the adjustment in its entirety, double taxation may remain. The Canadian competent authority will accept another request by the same taxpayer on the issue but will only present it to the other competent authority and will not negotiate the issue a second time.
68. Where a taxpayer accepts a competent authority agreement, notwithstanding the taxpayer’s signed concurrence, the CRA will not reassess tax returns to implement a competent authority settlement unless the taxpayer waives all further domestic appeal rights, as applicable, for each year filed.
Part XIII tax, repatriation of transfer pricing adjustments, and audit settlements
69. The amount of a transfer pricing adjustment made under section 247 of the Act may also be subject to withholding tax under Part XIII of the Act as a deemed dividend paid to a non-resident (i.e. a secondary adjustment). However, where the non-resident agrees to repatriation in whole or in part, the taxpayer may be granted the appropriate relief for the Part XIII tax. (Refer to the transfer pricing memorandum, TPM-02 Repatriation of funds by non residents- Part XIII, TPM-02-Canada.ca)
70. A mutual agreement between the competent authorities of Canada and a treaty partner in respect of a transfer pricing adjustment normally includes agreed terms for repatriation, and are distinct from the domestic repatriation requirements of TPM-02. These terms are specific to the particular settlement between the two governments, but generally allow for the repatriation of funds either by a direct reimbursement or through an offset of inter-company accounts. Typically, the terms also provide that where a taxpayer repatriates within a specified time period, any withholding taxes applicable to the secondary adjustment are waived or refunded. The repatriation may be subject to audit verification or the CRA may ask for proof of repatriation before waiving or issuing a Part XIII refund.
71. Depending on the particular agreement reached with the treaty partner, imputed interest income in accordance with the Act on the intercompany accounts receivable arising from the primary adjustment may also be waived.
72. A repatriation agreement reached at the audit stage will not preclude a request by the taxpayer for competent authority assistance. Where a taxpayer proceeds to request competent authority assistance after concluding a repatriation agreement, the Canadian competent authority will amend the repatriation agreement for any change made to the amount of the transfer pricing adjustment as a result of the MAP process. Where a taxpayer proceeds to request competent authority assistance without having concluded a repatriation agreement at the audit stage, the Canadian competent authority may agree on terms of repatriation with the competent authority of the treaty country.
73. A taxpayer may reach an audit settlement and agree with a TSO’s transfer pricing audit adjustment which may require that the taxpayer waive their rights to any further domestic appeal. Any audit settlement reached with a TSO does not affect a taxpayer's right to seek relief from the Canadian competent authority for taxation not in accordance with a tax convention, or prevent the Canadian competent authority from varying the settlement. However, a taxpayer’s stated intention to pursue MAP relief or not may be taken into consideration by the TSO when deciding whether to enter into an audit settlement or not.
Provincial income tax considerations
74. The provinces and territories are not bound by Canadian tax conventions. However, any competent authority settlements will apply automatically for the “agreeing provinces and territories” because those provinces use the same taxable income as is used for federal tax purposes. The “agreeing provinces and territories” are Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Ontario, Manitoba, Saskatchewan, British Columbia, and the Yukon, Northwest, and Nunavut Territories for individuals and corporations, and Alberta for individuals.
75. In the case of “non-agreeing provinces,” that is Quebec for individual taxpayers, and Quebec and Alberta for corporations, Canada's tax conventions are formally recognized to varying degrees in their tax legislation. These provincial tax administrations have also historically accepted competent authority settlements, although there is no obligation for them to do so.
76. If the applicable reassessment period under the Act is about to expire, the taxpayer may wish to waive that limitations period. A federal waiver is required under subsection 152(4) of the Act to keep the taxation year open for reassessment. In conjunction with the relevant provincial legislation, in the case of Alberta and Quebec, a separate provincial waiver should also be filed. If a provincial waiver is not filed, the laws in these two non-agreeing provinces automatically keep returns open for twelve months following the date of federal (re)assessment for the purposes of processing any consequential provincial adjustments. In this situation, any provincial reassessment may only include amounts that reasonably relate to the federal adjustment(s) made and the effect of those adjustments on the calculation of provincial tax and credits.
77. The comments in this circular reflect provincial legislation in force at the time of publication. Due to the possibility of future changes, taxpayers are advised to consult with the respective provincial tax administrations for current information.
Advance pricing arrangements (APAs)
78. CASD is responsible for APA requests. Under the MAP article of a tax convention(s), a taxpayer may request that the CRA negotiate a bilateral or a multilateral APA with another tax jurisdiction(s) with respect to the taxpayer’s specified international covered transactions with its related party(ies). The CRA's APA program provides the taxpayer with the opportunity to reach an APA with the CRA covering the taxpayer’s international transfer pricing, the determination of business profits allocable to a permanent establishment, and/or the arm’s length value of other international transactions with a related party(ies) for future years. Moreover, the APA results may possibly apply to “rollback” or filed years. Once an APA agreement is reached, the taxpayer will obtain a level of tax certainty with respect to the covered transactions, thereby lessening the likelihood of double taxation in all participating jurisdictions. For more details about the APA program refer to the most current version of Information Circular 94-4R, Advance Pricing Arrangement.
Specific issues under the Canada–United States Tax Convention (1980) (the Convention)
Notification pursuant to Article IX (Related Persons) and Article XXVI (MAP)
79. Most of Canada’s treaties have a time limit for presenting a case under the MAP article or for raising an adjustment under the related persons article. The Convention (Canada-United States tax convention) does not have time limits for Articles XXVI and IX, but unlike all of Canada’s other treaties, the Convention does have a notification provision for both Articles XXVI and IX.
80. The term “notification” is discussed in the Technical Explanation to the Convention. For adjustments under Article IX that are “made or to be made”, the Contracting State that is asked to provide relief must be given a written notice of the adjustment, which contains sufficient information to apprise the Contracting State of the nature of the adjustment, within six years from the taxation year to which the adjustment relates. Where timely notification is made, the Contracting State that is asked to provide relief, if it agrees with the adjustment, will make a corresponding adjustment notwithstanding any time or procedural limitations in its domestic law. Notification is the responsibility of the taxpayer, but may be provided by the other Contracting State which made or is about to make the adjustment, or any of the related persons involved.
81. Under Article XXVI, notification of the existence of a case must be in writing, and although not specifically addressed in the Technical Explanation, similar to Article IX, the Canadian competent authority requires sufficient details of the issues of the case to be presented. Also, similar to Article IX, notice of the existence of a case must be provided to the competent authority of the Contracting State asked to provide relief within six years from the end of the taxation year to which the case relates. Where timely notification is provided, any agreement reached under Article XXVI will be implemented notwithstanding any time or procedural limitations in the domestic law of the Contracting States. Notification, again, is the responsibility of the taxpayer, but may be provided by the competent authority to whom the case was presented, the taxpayer who requested the competent authority take action, or a person related to the taxpayer.
82. For both Article IX and XXVI, in order for the Canadian competent authority to consider a notice to be valid, sufficient information should be supplied that will inform the Canadian competent authority of the issue including the full legal identities, addresses, tax identifiers or CRA business numbers of all parties, the taxation years involved, the nature of the adjustment or issue, and the amounts at stake at the time of the action or proposed action of a Contracting State. Where a Contracting State finalizes an action, and the nature of the issue or the amounts vary significantly from information provided in a notice, the Canadian competent authority may consider that a valid notice was not received.
83. As mentioned, timely notification will protect a taxpayers rights under the Convention, allowing for implementation of a resolution of an issue under either Article IX, or XXVI. However, where notification is not timely, Article IX provides that the competent authorities may agree to consider cases as long as a taxation year is not domestically statute barred in the Contracting State asked to provide relief. In practice, the Canadian competent authority will agree to accept a case and not deny relief where a corresponding adjustment is warranted, as long as the taxation year in Canada is not statute barred. Although not specifically addressed in Article XXVI, the Canadian competent authority may agree to accept a case and implement a MAP settlement, notwithstanding that timely notification has not been received, where the applicable taxation years in Canada are not statute barred.
84. Information provided in a timely notification under Article IX or XXVI does not necessarily mean the notification will qualify as a case under Article XXVI if a MAP negotiation is required. A notification protects a taxpayer’s treaty rights by allowing for double tax relief even though an adjustment or issue of taxation contrary to the Convention may not be finalized within the six year notification period. An adjustment however does not qualify as a case until the adjusting country has completed their action and made a determination. It may be necessary for a taxpayer to amend the information contained in a notice once an adjustment has been completed to cover all information required in accordance with paragraph 17 before the Canadian competent authority will consider it a qualifying case.
85 As mentioned in paragraph 79, the Convention does not contain time limits which prevent a Contracting State from raising an adjustment. This may result in circumstances where notification of an adjustment or a case to the other competent authority within six years from the end of the taxation year is not possible. For example the CRA generally has seven years domestically from the date of original assessment to raise a transfer pricing adjustment under section 247 of the Act, and may do so beyond the six year treaty notification limit. Taxpayers should be aware that if this happens, there is no requirement for a Contracting State to withdraw its adjustment. Taxpayers should take steps to keep years open in both jurisdictions if they are aware of a pending adjustment which may surpass the six year notification limit.
86. Where there is a transfer pricing case between one party resident in the United States and its related party resident in Canada, the Canadian competent authority will not commence work on a request for a case submitted under Articles IX and XXVI of the Convention from a taxpayer unless the taxpayer’s related party has also submitted a request to the United States competent authority, and the Canadian competent authority can confirm it has been accepted by the United States. Unnecessary delays in making a request to either competent authority will not only lengthen the time the issue remains unresolved, but also delay the date a case becomes eligible for arbitration.
87. Under Article XXVI of the Convention, a United States resident must approach the United States competent authority for assistance. However, administratively Canada will also allow a United States resident to directly approach the Canadian competent authority where an application for the refund of Part XIII tax withheld by Canada on interest, dividends or royalties is submitted beyond the two year domestic time limit set out in subsection 227(6) of the Act. The United States resident requesting such relief from the Canadian competent authority must do so within the six-year period specified in the Convention. (If within the two-year limit, a taxpayer should submit a form NR7-R, Application for Refund Part XIII Tax Withheld to the CRA office specified on the application). Since the two-year time limit in subsection 227(6) cannot be domestically extended, requests for withholding tax refunds submitted beyond the six year notification time limit cannot be considered for relief.
Article IV (Residence, LLCs)
88. Article IV of the Convention addresses the issue of treaty entitlements for entities such as United States limited liability corporations (LLCs). LLCs can be considered fiscally transparent for United States tax purposes. According to the Convention’s Technical Explanation, fiscally transparent entities are defined generally as “entities the income of which is taxed at the beneficiary, member, or participant level” and would include United States LLCs and Canadian and United States partnerships among other entities. Notwithstanding the United States treatment, an LLC is treated as a taxable corporation for Canadian tax purposes.
89. LLCs treated as fiscally transparent under United States law are not recognised by the CRA as a resident of a contracting state for purposes of the Convention and consequently not eligible for treaty benefits, but Article IV(6) of the Convention now provides treaty benefits indirectly to United States resident LLC members. Where a person resident in the United States derives Canadian income, profit, or gain through an LLC, treaty benefits otherwise attributable to the person if derived directly will be extended to the LLC by Canada. This benefit is subject to the requirement that the tax treatment applied by the United States to the amount derived through the LLC be the same as it would be had the amount been derived directly by the United States resident LLC member.
Refer to Income Tax- Technical News Nos. 38, 41, and 44 (ITTN - Canada.ca) for some examples of the application of Article IV(6) to LLCs. CRA Form NR303 may be used to assist United States residents when claiming treaty benefits with respect to Canadian income, profit or gain derived through an LLC.
Article VII (Business Profits)
90. Both countries have agreed that the OECD Transfer Pricing Guidelines will be used by analogy to determine the business profits attributable to a permanent establishment. This is referred to as the authorised OECD approach (AOA), as revised in 2010. Refer to Annex B of the diplomatic notes to the 5th protocol (Annex B),and the competent authority agreement outlining the common understanding and interpretation reached on the application of Article VII (Agreement on Business Profits).
Article XXVI (MAP, Arbitration)
91. The 5th protocol of the Convention amended paragraph 6 of Article XXVI to include binding arbitration for cases where the competent authorities have endeavoured but have not been able to reach a complete agreement. Arbitration is applicable to both MAP cases and MAP cases involving an APA (referred to as a “MAP APA”).
92. MAP cases with filed tax returns in at least one of the contracting states may be eligible for arbitration, subject to the criteria established in Annex A of the 5th protocol (Annex A), and the Memorandum of Understanding Between The Competent Authorities of Canada and The United States of America - Canada.ca(Memorandum) regarding the application of the arbitration procedure under paragraphs 6 and 7 of Article XXVI. A filed tax return for Canadian tax purposes is a tax return that has been filed to the CRA and (re)assessed.
93. Generally, arbitration proceedings for a MAP case (including years accepted as an ACAP) will begin on the later of the date that is two years after the commencement date as defined in the Memorandum of that case (unless, prior to the date arbitration proceedings begin, the competent authorities have agreed to a different date) and the earliest date upon which the nondisclosure agreements of each Concerned Person (as defined in the Convention) and their representatives or agents have been received by both competent authorities. Arbitration proceedings for MAP APAs follow the criteria and definitions set out in paragraphs 5 and 19 of the Memorandum.
94. Arbitration is not applicable to all Convention articles, and the competent authorities may agree certain cases are not suitable for arbitration, or agree on an ad hoc basis to use binding arbitration for any other matter for which Article XXVI applies. Taxpayers may obtain complete information on arbitration by referring to the Convention, Annex A, the Memorandum, and also the Arbitration Board Operating Guidelines - Canada - United States, the Nondisclosure Statement of Taxpayer and the Nondisclosure Statement of Taxpayer's Authorized Representative. This information is available on the Canada.ca website.
Specific agreements with the Canadian competent authority to relieve double taxation without involving a MAP
Deferred recognition of profit, gain or income pursuant to Paragraph 8 of Article XIII (Gains)
95. A United States resident may enter into corporate or other reorganizations, amalgamations, divisions or similar transactions that result in the recognition of profit, gain or income in Canada under the Act in respect of dispositions or deemed dispositions of Canadian subsidiaries, assets or business operations of the United States resident. In many instances, the Convention will maintain Canada’s right to tax such profit, gain or income at the time of these transactions.
96. The recognition of the profit, gain or income from a corporate or other reorganization or other transaction may be deferred in the United States in accordance with the provisions of the Internal Revenue Code. If the disposition is not recognized for tax purposes in the United States in the same taxation year as it is in Canada, a timing mismatch on the application of foreign tax credits may occur, potentially giving rise to double taxation.
97. Paragraph 8 of Article XIII of the Convention (Article XIII(8)) applies to corporate or other organizations, reorganizations, amalgamations, divisions or similar transactions and allows for a deferral of recognition of the profit, gain or income resulting from the disposition of property for Canadian income tax purposes. If requested by the acquirer of the property, the Canadian competent authority may enter into an agreement with the acquirer and the vendor to defer the recognition of the profit, gain or income in accordance with Article XIII(8) of the Convention and section 115.1 of the Act.
98. Deferral provisions similar to those in Article XIII(8) of the Convention may be included in other tax treaties concluded by Canada. The guidance below is equally applicable to requests made pursuant to the deferral provisions in these other tax treaties. Since the intent of these provisions is to avoid double taxation, a request under a deferral provision will be considered by the Canadian competent authority only to the extent it furthers the policy objective of avoiding potential double taxation, even if this objective is not explicitly stated in the provisions of the applicable tax treaty. In this regard, the Canadian competent authority will require evidence that the profit, gain or income for which a deferral is being sought in Canada is equally deferred and not exempted or excluded from taxation under the domestic laws of the country where the vendor resides.
99. Generally, the acquirer may make a request for an agreement provided that the vendor is not exempt from taxation in Canada in respect of the disposition.
100. The Canadian competent authority will consider agreeing to a deferral where the following conditions are met:
- there is evidence that the reorganization is undertaken in the context of an active commercial endeavour. The Canadian competent authority will not agree to a deferral in respect of the reorganization of passive investments in property (for example, personal-use property) or a reorganization motivated by estate planning objectives. A reorganization primarily undertaken to achieve tax efficiencies will not be considered ineligible for that reason alone; however, the Canadian competent authority will not agree to a deferral in any case where the reorganization is undertaken to achieve Canadian tax planning or in a manner that may give rise to undue tax benefits;
- a deferral is required to avoid potential double taxation. In this regard, the Canadian competent authority will only consider entering into a deferral agreement where it is satisfied that there is an actual taxable event for Canadian tax purposes. The taxpayer must therefore indicate on what basis an actual disposition will take or has taken place (e.g. a change in beneficial ownership). The Canadian competent authority will not enter into a deferral agreement when the country where the vendor resides does not tax the profit, gain or income, or that country allows relief from double taxation notwithstanding timing mismatches;
- a deferral would be available if the acquirer and vendor were residents of Canada, i.e., there is a similar deferral provision in the Act that would be applicable to the particular type of reorganization if it involved only residents of Canada;
- there is no applicable deferral provision in the Act that may be used;
- the transaction for which a deferral is sought is not specifically prohibited or precluded for non-residents on a deferred basis under the Act. These agreements are intended to apply to non-residents for whom Canadian deferral rules are not available. However, where Canadian deferral rules would be available to non-residents but the Act specifically prohibits a deferral, an agreement will not be considered. For example, paragraph 85(1.1)(a) of the Act precludes a non-resident from utilizing subsection 85(1) to roll over capital property that is real property to a taxable Canadian corporation;
- the reorganization does not include a transaction or event that could be considered to result in, or effectively result in, an actual economic realization of proceeds of disposition, i.e. cash, or property easily convertible to cash, is exchanged;
- the non-resident vendor of the Canadian property maintains its interest in the property after the reorganization. The deferral provisions in Canada’s tax treaties are intended to apply when a non-resident person changes the structure through which it holds Canadian property, and not when the person seeks to divest itself of that property;
- Canadian tax claims after the reorganization are not placed at a greater risk than before the reorganization;
- the agreement is not being used to provide certainty as to the tax consequences in Canada of certain transactions as that certainty should be obtained otherwise from the CRA (For example the Advance Income Tax Rulings process);
- in the opinion of the Canadian competent authority, no component of the reorganization or other transaction constitutes an avoidance transaction as defined in subsection 245(3) of the Act; and
- the Canadian competent authority can reasonably administer the agreement. If a particular agreement requires numerous conditions and reporting requirements to ensure proper tracing of a subsequent disposition, the Canadian competent authority may consider the prospective agreement to be incapable of being reasonably administered and may choose not to enter into an agreement.
The above list is not intended to be exhaustive. There may be other conditions, depending upon the details of the transactions.
101. The terms “profit”, “gain” and “income” refer to the profit, gain or income, respectively, realized net of losses for all properties disposed of, computed in accordance with the Act. The transaction must otherwise result in a net profit, gain or income in Canada for the vendor from the disposition of the property in order for a request for deferral to be considered.
102. A submission may be made by the acquirer to the Canadian competent authority requesting a deferral with respect to a reorganization that is either proposed or is in the process of being completed. An informal opinion from the Canadian competent authority may also be sought by a vendor to determine whether or not a proposed transaction would be considered acceptable for a deferral. However, an agreement cannot be concluded in respect of a contingent or hypothetical situation.
103. Whether the Canadian competent authority accepts or denies a request for deferral under Article XIII(8) of the Convention or a similar deferral provision of another tax treaty is discretionary. Where a request for deferral is accepted, the Canadian competent authority will only provide a deferral to the extent necessary to avoid double taxation. A decision by the Canadian competent authority not to enter into an agreement is not subject to appeal under the Act or the applicable income tax treaty.
Information to be Included in a Request for Deferral
104. A request to the Canadian competent authority for consideration under Article XIII(8) of the Convention or a similar deferral provision of another tax treaty should be made in writing and should include the following facts and analyses:
- the names and identifying information, including a tax identification number, of all corporations or other organizations involved in the reorganization, and a description of the relationship between them;
- a description of the transactions concerned and an explanation of the purpose and extent of the reorganization, including transactions that do not require deferral under the deferral provision of the applicable tax treaty;
- a full organization chart before and after all transactions;
- the cost amount of the property disposed of;
- the estimated fair market value of the property disposed of with supporting documentation;
- a schedule listing all property disposed of, along with a calculation estimating the profit, gain or income that would otherwise be recognized from the disposition;
- a detailed analysis of the Canadian income tax provisions which apply to the transactions;
- a detailed analysis of the tax consequences under the domestic law of the country where the vendor resides and the application of its non-recognition provisions, including any rulings or opinions received from the tax authorities of that country. (Since the granting of a deferral is not a bilateral process involving the competent authority of the vendor’s country of residence, the Canadian competent authority will neither enter into negotiations with that competent authority, nor seek its confirmation of the tax consequences in that country arising as a result of the reorganization. Consequently, any agreement entered into will be conditional on the accuracy of the description provided by the taxpayer);
- a copy of any previous competent authority agreement that the acquirer has entered into under a deferral provision in a tax treaty with respect to the property; and
- if consent has not already been provided for a person to act as an authorized representative, a signed statement that the representative is authorized to act for the taxpayer in making the request.
The above list is not intended to be exhaustive. The Canadian competent authority may seek additional information or clarification if necessary.
105. Agreements concluded by the Canadian competent authority will be subject to a number of conditions depending on the particular facts and circumstances of each case. A deferral may be terminated at the discretion of the Canadian competent authority upon the occurrence of certain transactions or events (triggering events) during a specified period. Examples of such triggering events may include:
- an arm’s length disposition, whether directly or indirectly, of the consideration received by the vendor (e.g. shares) for the transfer of the property for which a deferral is allowed in Canada;
- any transaction or event that may reduce or eliminate the profit, gain or income that the Canadian competent authority initially agreed to defer. For example, where the reorganization involves the transfer of shares of a Canadian corporation, dividends paid by the Canadian corporation in excess of income earned or realized after the reorganization;
- any transaction or event that results in property for which a deferral is sought becoming treaty-protected property, as defined in section 248 of the Act. For example, where the reorganization involves the transfer of shares of a Canadian corporation, when the shares cease to derive their value principally from immovable property situated in Canada, or any equivalent threshold in the applicable tax treaty preventing Canadian taxation;
- any transaction or event that may reduce or eliminate the potential for double taxation of the profit, gain or income that the Canadian competent authority initially agreed to defer. For example, if the acquirer is permitted under the domestic tax law of its country of residence to step-up the cost basis of the property acquired as part of the reorganization;
- any change to the applicable income tax treaty or income tax laws of either country that would negatively impact the subsequent taxation of the deferred profit, gain or income, or eliminate any potential double taxation;
- the acquirer ceases to be a resident of the other Contracting State under the applicable tax treaty, or otherwise ceases to qualify for benefits under that treaty;
- the date of death when the vendor is an individual.
106. Generally, an agreement will require the parties to monitor triggering events, as defined in the agreement, during a given period of time, currently set at seven years. If a triggering event occurs during that period, the profit, gain or income initially deferred will be recognized at that time and subject to taxation in Canada in the hands of the vendor for the year in which the triggering event occurs.
107. If for any reason the deferral portions of the agreement are determined to be null and void or the terms and conditions of the agreement are not complied with, the profit, gain or income will be subject to taxation in Canada in the year in which the property was initially disposed of by the vendor. Any certificate of compliance issued pursuant to section 116 of the Act in respect of the initial disposition will be cancelled and the Minister will apply section 116 to determine the acquirer’s liability as if no certificate had been issued.
108. Once the Canadian competent authority is satisfied that a deferral of the profit, gain or income from the transaction should be allowed, an agreement will be drafted and forwarded to the vendor and the acquirer for signature. When the signed agreement is received from the parties, it will be forwarded to the TSO responsible for administering it.
109. The vendor of taxable Canadian property must file the appropriate form(s) with the CRA to report the disposition, including any compliance with the requirements of section 116 of the Act, even if a request is made to the Canadian competent authority for a deferral of any resulting profit, gain or income. A copy of the request made to the Canadian competent authority can be attached to the section 116 form(s). The requirement for payment or security on account of tax may be waived when the Canadian competent authority accepts the vendor's request for deferral. For more information, refer to the current version of IC72-17R6, Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada - Section 116. A Certificate of Compliance (Form T2064, Certificate – Proposed Disposition of Property by a Non-Resident of Canada, for proposed dispositions or Form T2068, Certificate – The Disposition of Property by a Non-Resident of Canada, for actual dispositions) will not be issued until such time as an agreement signed by all parties is received by the Canadian competent authority.
110. An agreement is solely for the purpose of avoiding potential double taxation due to timing mismatches. The terms and conditions of an agreement between the Canadian competent authority and the taxpayers involved in the transaction are binding on the parties, and will be implemented in accordance with section 115.1 of the Act.
Treatment of United States S corporation income pursuant to paragraph 5 of Article XXIX (Miscellaneous Rules)
111 A United States corporation that makes a valid election (Subchapter S Election) under the Internal Revenue Code becomes fiscally transparent for United States income tax purposes such that a Canadian resident that is a shareholder of a United States S corporation is subject to United States tax on its share of the corporate income when it is earned by the S corporation. Since an S corporation is not fiscally transparent for Canadian tax purposes, the income is taxable in Canada only when distributed by the S corporation to the shareholder. The differences in the tax treatment of the S corporation and its shareholders by Canada and the United States can result in a timing mismatch that may result in double taxation if foreign tax credit relief in Canada for the US taxes paid by the shareholder is not available.
112. The shareholder may request assistance pursuant to paragraph 5 of Article XXIX of the Convention. Under this provision, the Canadian competent authority may, subject to terms and conditions, agree to allow the taxpayer to treat its share of the S corporation income as foreign accrual property income (FAPI) that is taxable in the shareholder's hands in the year earned by the S corporation. The shareholder may then claim a foreign tax deduction or credit in Canada for the United States tax paid on its share of the S corporation's income, thereby eliminating the timing mismatch.
Under the agreement made with the Canadian competent authority, the adjusted cost base of the shares of the S corporation owned by the shareholder will be increased by amounts included in the shareholder's income as FAPI. When a dividend is paid to the shareholder, it will be excluded from the shareholder's income in Canada to the extent of the cumulative amounts of S corporation income reported as FAPI, and reduce the adjusted cost base of the shares. However, any amount of dividend in excess of the cumulative FAPI inclusions will remain taxable in Canada and must be included as foreign dividend income in computing the shareholder’s income. The amount of excess dividend will not reduce the adjusted cost base of the shares.
S corporation losses allocated to a shareholder are not deductible against other income reported in Canada. An S corporation loss is treated as foreign accrual property loss and may be deducted only against income of the same S corporation within the time limits set out in the Income Tax Regulations. The adjusted cost base of the shares is not reduced by the amount of the foreign accrual property loss.
113. An agreement made pursuant to Article XXIX(5) of the Convention is solely for the purpose of eliminating the timing mismatch. As a general rule, a request for an agreement will be considered on a prospective basis. The request should be made well in advance of the filing-due date for the first taxation year in which the agreement is intended to come into effect and include the information and documents listed in Appendix I. The Canadian competent authority may refuse to provide an agreement if the shareholder is seeking to revise his or her Canadian tax reporting for previous taxation years. The terms and conditions of an agreement between the Canadian competent authority and the taxpayer are binding on the parties, and will be implemented in accordance with section 115.1 of the Act.
Deferral of Canadian tax at death pursuant to paragraph 5 of Article XXIX B (Taxes Imposed by Reason of Death)
114. Under the Act, immediately before death, a taxpayer (including a non-resident taxpayer) is deemed to have disposed of each capital property owned at that time and to have received proceeds of disposition equal to the fair market value of each such property at that time. However, subsection 70(6) of the Act allows for a deferral of the deemed disposition of capital property owned by the taxpayer where the property was transferred to the taxpayer’s Canadian resident spouse or common-law partner, or to a Canadian resident testamentary trust for the spouse or common-law partner, provided that the trust meets certain conditions.
115. Under paragraph 5 of Article XXIX B of the Convention, a taxpayer who was a resident of the United States immediately before death, shall be deemed for purposes of subsections 70(5.2) and (6), along with his or her spouse, to have been resident in Canada immediately before the taxpayer's death. As deemed residents of Canada, the taxpayer and his or her spouse or common-law partner are entitled to the rollover provided under subsection 70(6) of the Act.
116. Paragraph 5 of Article XXIX B of the Convention also allows the trustees of a United States trust of a nature similar to trusts described in subsection 70(6) of the Act to request that the Canadian competent authority treat the United States trust as a resident of Canada for the purposes of the Act. Subject to the terms and conditions of the agreement between the Canadian competent authority and the trustee, treatment of the trust as a resident of Canada will entitle the trust to a subsection 70(6) rollover. The terms and conditions of an agreement between the Canadian competent authority and the trustee are binding on the parties, and will be implemented in accordance with section 115.1 of the Act. The information and documents listed in Appendix II should be included in the request for an agreement.
117. An agreement will not provide any treaty benefits to the taxpayer other than the deferral of Canadian taxation.
Canada, BEPS, and the Multilateral Instrument
118. Base erosion and profit shifting (BEPS), as defined by the OECD, (BEPS - OECD) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low tax or no-tax jurisdictions.
119. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument, or MLI; MLI) is a global initiative. Its objective is to modify existing tax treaties in a coordinated manner in order to swiftly implement treaty-related measures developed during the BEPS project. These measures include provisions to counter abuse of tax treaties and to improve dispute resolution, as well as a number of other treaty provisions.
120. On August 29, 2019, Canada ratified the MLI with an entry into force date of December 1, 2019. The MLI modifies many of Canada's tax treaties. However, for the modification to apply to a tax treaty listed by Canada as a covered tax agreement, Canada's treaty partner must also ratify the MLI and list its tax treaty with Canada. Taxpayers should refer to the OECD website (MLI Positions) for the current status of Canada’s official notifications, reservations, and list of potentially modified tax treaties. As of November 17, 2020, 30 signatories to the MLI, including Canada, have elected for its arbitration provisions to apply. Of those signatories, 21 have tax treaties with Canada that are covered, or expected to be covered, by the MLI. Further information on the application of the MLI and its impact on Canada’s tax treaties will be posted on the Department of Finance webpage for tax treaties (Government of Canada website). Taxpayers may also find the OECD MLI Matching Database helpful in identifying which of Canada’s tax treaties are covered by the MLI and the provisions of the MLI that apply to those treaties (MLI Matching Database).
Appendix I - Information Required for an Agreement under Article XXIX(5) of the Convention
A request to the Canadian competent authority for consideration under paragraph 5 of Article XXIX of the Convention should be made in writing and include the following information and documents:
- The shareholder’s name and address;
- A statement confirming whether the shareholder is a citizen of the United States ;
- The date on which the shareholder became a resident of Canada for purposes of the Convention;
- The shareholder’s United States social security number and Canadian social insurance number (if a social insurance number has not been attributed to the shareholder, the shareholder’s temporary tax number and/or date of birth should be provided instead);
- The S corporation’s name and address;
- The S corporation’s United States employer identification number;
- A copy of the Internal Revenue Service Notice of Acceptance as an S Corporation
- A statement by an authorized officer confirming whether the Subchapter S election made by the S corporation has been revoked, rescinded or otherwise terminated;
- A description of the activities carried on by the S corporation (i.e., What are the S corporation’s sources of income? Does it earn passive income? Does the S corporation have any Canadian-sourced income?);
- The date on which the shareholder acquired/will acquire the shares of the S corporation;
- The number of shares the shareholder owns/will own on the effective date of the agreement and the adjusted cost base of the shares on that date;
- The date on which the shareholder would like the agreement to become effective;
- A statement confirming whether the shareholder has claimed a deduction under subsection 20(12) of the Act for United States income taxes paid in respect of the S corporation’s income earned before the shareholder became a resident of Canada; and
- A completed Form AUT-01, Authorize a Representative for Access by Phone and Mail, signed by the shareholder.
Where the request is for an agreement to apply to previous taxation years, the shareholder should provide the information described below for all years to which the agreement would apply, unless otherwise specified:
- A summary of the amounts of S corporation income or losses attributed to the shareholder, United States taxes paid on that income, and foreign tax credits or deductions claimed for those United States taxes for all years (including the foreign exchange rates used for conversions);
- Copies of the Schedule K-1 received by the shareholder from the S corporation for all years;
- Details (dates and amounts) of dividends/distributions received from the S corporation (including other items affecting the shareholder’s United States cost basis of the shares of the S corporation) for all years after the shareholder became (or was) a resident of Canada (including the foreign exchange rates used for conversions);
- A reconciliation to explain how the S corporation income/losses and dividends/distributions from the Schedule K-1 were reported on the Canadian tax returns for all years;
- Copies of the S corporation’s United States income tax returns (including all schedules and statements) for all years;
- Copies of the shareholder’s United States income tax returns (including all schedules and statements) for all years;
- Copies of the shareholder’s Canadian income tax returns (including all schedules and statements) for all years;
- A schedule of statute barred dates for all taxation years; and
- A statement indicating whether the shareholder has filed a notice of objection or appeal in Canada in respect of the tax treatment of the S corporation income/losses or dividends/distributions from the S corporation for all years.
The above list is not intended to be exhaustive. The Canadian competent authority may request additional information or clarification if necessary.
Appendix II - Information Required for an Agreement under Article XXIX-B(5) of the Convention
A request to the Canadian competent authority for consideration under paragraph 5 of Article XXIX-B of the Convention should be made in writing and include the following information and documents:
- The name of the deceased individual (Deceased);
- The Deceased’s social insurance number or non-resident tax identification number;
- The Trust tax account number;
- A statement confirming whether the Deceased was a resident of the United States immediately before the date of death;
- Detailed description of the taxable Canadian property that was transferred as a consequence of death, and the fair market value and adjusted cost base of the taxable Canadian property as of the Deceased’s date of death (including the foreign exchange rates used for conversions);
- An explanation of how the transfer of property would meet the conditions in subsection 70(6) of the Act, if the Deceased and Trust were residents of Canada;
- Death Certificate for the Deceased;
- Last Will and Testament (Will) of the Deceased;
- All trust agreement documents, if they are separate from the Will, including identification of trustees and their residence status; and
- A completed AUT-01, Authorize a Representative for Access by Phone and Mail (completed and signed by the trustee).
The above list is not intended to be exhaustive. The Canadian competent authority may request additional information or clarification if necessary.
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