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Companies Must be Aware of Obsolete Tax Provisions
Tax is constantly evolving, and sometimes obsolete provisions need to be reduced. While the Federal government regularly amends the Income Tax Act (Canada) in an effort to preserve the tax base and curb abuse of the Act by taxpayers, impetus for changing or abolishing provisions of the Act may come from taxpayers and their tax advisors who perceive such provisions to be obsolete, outdated or unfair. Taxand Canada considers this in the context of transfer pricing and other anti-avoidance rules.
Paragraph 212(1)(a) generally imposes Part XIII withholding tax at a rate of 25% of the gross amount of "management or administration fee or charge" paid or credited by a Canadian resident to a non-resident. Subsection 212(4) excludes certain payments for services performed by an arm's length service provider.
The arm's length carve-out in subsection 212(4) excludes from "management or administration fee or charge", for purposes of paragraph 212(1)(a), amounts paid to a non-resident for services performed in the ordinary course of a business so long as the parties were dealing with each other at arm's length and the amount was reasonable in the circumstances.
Canadian Tax Regimes that Protect the Canadian Tax Base
Canada's current transfer pricing regime provides significant deterrence to multinational corporations by way of severe penalties in the event that the transfer pricing provisions of the Act are not respected. Thus, deterring the abuse of shifting profits to related companies by excessive inter-company charges is now provided for adequately in the Act.
TIEAs and Canada-US Anti-Hybrid Rules
As a consequence of TIEAs and the new anti-hybrid rules in the Canada-US treaty, the impact of paragraph 212(1)(a) is only going to get worse. TIEAs are bilateral agreements used to promote international co-operation in tax matters through the exchange of information.
Taxand Canada sets out the perils of an obsolete Tax provision in the full article
There is ample, overwhelming evidence that paragraph 212(1)(a) must either be repealed or the judiciary or Parliament must place brakes on CRA's ability to designate legitimate, market priced services between related parties as "management or administration fees or charges" for purposes of 212(1)(a). Fundamentally, profits in accordance with the arm's length principle arising from services performed outside Canada by non-residents of Canada should not be subject to Canadian tax.
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