Exploring The Tax Implications Of Offshore Financing In Canada

According to a 2008 paper issued by a Department of Finance advisory panel on Canada’s System of International Taxation, Canada has seen a “sharp increase” in outbound and inbound cross-border investments since the early nineties. This trend has continued over the years, with Canada joining its peers in an increasingly global marketplace. The global marketplace offers numerous opportunities, and Canadian multinationals should strive to understand the tax implications of offshore financing so their businesses can benefit from innovation and funding sources from around the world. A discussion with a tax lawyer may help business owners assess the most appropriate tax planning strategies as they take full advantage of offshore financing opportunities. Consider calling an experienced Canadian tax lawyer with Jeremy Scott Law at (902) 403-7201 to begin this important discussion.

Does Canada Tax Offshore Income?

The Canada Revenue Agency (CRA) may tax income earned by an offshore (Canadian-controlled) corporation in certain situations. In addition, a Canadian parent corporation that earns foreign income pays tax on that income in Canada by default. However, there are many exemptions to these general rules, and they are worth considering. Perhaps the most notable exemptions involve the “distance” the Canadian company maintains between its foreign affiliates and shareholders. If foreign shareholders remain “at arm’s length,” they may draw funds from a Canadian corporation while mitigating taxes. Conversely, tax on offshore income remitted back to the Canadian parent company may be mitigated by keeping foreign management contained within the jurisdiction of the affiliate.

What Is Conduit Financing?

Conduit financing is a popular strategy for many Canadian corporations, and it has the potential to allow numerous tax deductions for the same expense. The strategy involves financing structures in tax-friendly nations, and these intermediary companies are generally unrelated enterprises and can potentially create tax-free dividends remitted to the parent corporation in Canada. The first step is to choose an appropriate offshore nation. Next, the parent company typically creates an international business corporation (IBC) subject to a very low tax rate in this offshore jurisdiction. This company then provides financing to a third company in a third jurisdiction, which results in an initial tax deduction. As the IBC receives interest on the loan, it remits this income back to the Canadian parent company in the form of a tax-free dividend.

Finally, the Canadian company takes out a loan in Canada and receives a second tax deduction for its investment in the third company in the third jurisdiction. The CRA generally views dividends from an IBC as “active business income,” and this classification is exempt from corporate income tax. A Canadian tax lawyer at Jeremy Scott Law may be able to help corporations explore the implications and benefits of conduit financing in more detail.

How Are Offshore Trusts Taxed in Canada?

Offshore trusts are not taxed at all in Canada if the trustee is not a resident of Canada. By establishing or using a foreign financial institution as a trustee, a Canadian company can pay trust-related taxes in the jurisdiction of the offshore trust. If the Canadian corporation chooses a tax-friendly nation in which to establish an offshore trust, the resulting tax rate may be zero.

What Is the 183-Day Rule in Canada?

According to the CRA, an individual becomes a “deemed” Canadian resident for tax purposes if the individual remains in Canada for a total of 183 days. This is also known as the 183-day rule. However, this rule may not apply if the individual is also a resident of another country that has a tax treaty with Canada. To learn more about the implications of this rule in the context of shareholder loans and related strategies, speak with a Canadian tax lawyer.

How Are Foreign Investments Taxed in Canada?

Numerous tax rules in Canada disincentivize Canadian corporations from making foreign investments without reporting or paying taxes on the resulting income to the CRA. Generally speaking, the CRA taxes Canadian corporations on all global income regardless of its source. Foreign investments require additional tax planning processes, and Canadian parent companies may need to file a range of additional tax forms when declaring foreign income. This includes foreign investment income earned by affiliates or subsidiaries controlled by the Canadian parent company. The tax implications of these foreign investments depend on numerous factors, including the potential existence of tax treaties between nations.

Although Canada has made changes that eliminate certain deferral advantages associated with foreign investments, it may still be beneficial to use Canadian corporate funds to invest in foreign affiliates. This may be particularly true in the context of foreign accrual property income (FAPI). This type of investment income includes dividend earnings, interest on debt financing, and rental income.

Shareholder Loan Agreements and Intra-Group Debt

When it comes to offshore financing and related subjects, intra-group debt represents a common strategy—especially among the largest Canadian multinational corporations. As with conduit financing, this strategy begins when a Canadian corporation establishes a subsidiary in a tax-friendly jurisdiction. These different corporations then provide offshore financing to one another, usually taking full advantage of tax treaties in a way that reduces taxable income for the parent company in Canada. These loans may also increase deductible expenses in the form of debts and fees.

Generally speaking, loan-related strategies can allow shareholders to extract funds from a Canadian corporation in a way that minimizes taxes. Although the CRA is aware of these shareholder loan strategies and seeks to mitigate them with the Canadian Income Tax Act, an experienced Canadian tax lawyer can help to execute them effectively. For example, the debt financing provided to non-Canadian residents may be subject to a withholding tax, but certain international tax treaties can reduce or even eliminate this tax. When combined with offshore financing strategies, shareholder loans have the potential to be particularly beneficial from a tax planning perspective.

Contact a Canadian Tax Lawyer To Handle Your Offshore Financing Today

Offshore financing often seems complex for both new startups and established multinational corporations, but there is no need to approach this subject alone. A Canadian tax lawyer can answer important questions and offer targeted guidance based on the unique needs of each company. This targeted advice goes far beyond the benefits of an online article. If you wish to take the next step in offshore financing, consider contacting a knowledgeable tax lawyer with Jeremy Scott Law today by calling (902) 403-7201 to book a consultation.