Thursday, July 22, 2010

New Update to Model Tax Convention

The OECD approved the update to the Model Tax Convention with respect to transfer pricing and attributions to permanent establishments.

This has been underway for a large number of years and reflects much negotiation and research.

For more information, see their press release here.

Tuesday, July 20, 2010

Where does a trust reside?

In Canada a trust normally resides where the trustee is located.  However, if the mind and management of the trust is not with the trustee then the courts have said that a trust resides where the mind and management of the trust is located.  If the trust is considered resident in Canada it must pay taxes on its worldwide income in Canada.

In the US, a trust is a domestic US trust of one or more US persons have authority to control the decisions of the trust.  Don't forget that US persons includes US citizens, whether or not they reside in the US.   If a trust is resident in the US it must pay taxes on its worldwide income in the US.

So if a US citizen, resident in Canada is a trustee of a trust and making the decisions, the trust will be resident in both the US and in Canada under the individual country tax rules.  But the trust shouldn't have to pay full taxes in both countries, that's one of the reasons for the treaty - to eliminate double tax.  

Unfortunately, the treaty does not treat the residency of trusts automatically.  If a trust is resident in both Canada and the US for tax purposes, you must apply to the competent authorities of each country and they, not you, will make the decision on the residence of the trust.

Tuesday, July 13, 2010

PATA Documentation Package

When you have a company doing business in both Canada and another country you will run into an issue of transfer pricing.  

At its most basic, transfer pricing requires you to accomplish any cross-border transactions between non-arm's length persons the same way as you would if you are dealing with a person at arm's length.  So, if your normally charge $5 for a widget, you cannot charge $20 or $1 to your subsidiary across the border but should charge $5.  As each company is trying to keep the correct tax base, this has become a bigger and bigger issue in recent years.


Easier said than done when you often don't have that easy arm's-lenth comparable.

A large part of substantiating how you determined that arm's-length transaction is keeping the Transfer Pricing Documentation.  As each different country can have different requirements for keeping documentation the process can get cumbersome and expensive for the smaller business owner.  Particularly since penalties for not keeping the documentation can be high.

The Pacific Association of Tax Administrators (PATA) have tried to reduce some of that burden by creating a PATA documentation package.  That means that Australia, Canada, Japan and the United States will all accept documentation that conforms with the PATA package.

Only one set of rules - has to be a good thing.

The PATA Documentation Package through the CRA can be found here and the same thing through the IRS can be found here.

Remember that transfer pricing documentation is contemporaneous documentation  which means that it should be done "at the same time" as you are setting those prices (not two years later when you are asked how you developed them).

Monday, July 5, 2010

Control for FAPI purposes

Control in the case of a foreign affiliate has rules all of its own.

FAPI must be reported if you have a Controlled Foreign Affiliate (CFA).  To have a CFA, first you must have a Foreign Affiliate (FA).

To have an FA is a fairly easy calculation.  If you own at least 1% of the the foreign corporation and you plus related persons own at least 10% of that corporation then you have an FA.

So when does an FA become a CFA?

There are four different situations that will result in a CFA.

1.  The first is easy - if you control the corporation you have a CFA.
2.  If you combine your shares and the shares belonging to persons related to you and get control, then you have a CFA. 
3.  If you combine your shares, the shares belonging to persons related to you and all the shares of four other Canadian residents and you get control, then you have a CFA.
4.  If you combine your shares, the shares belonging to persons related to you, the shares of four other Canadian residents and all the shares of people related to them and you get control, then you have a CFA.

All of the situations above are flow-through calculations (if you own the shares of the company that owns the shares, you are deemed to own those shares).  Also remember that persons and Canadian residents can be corporations.

So, you can see that "control" for FAPI purposes catches a much wider net that control under the Income Tax Act for other situations.