(Reblog) Finding Resolution to Double Taxation in Canada: the Mutual Agreement ProcedureBy Robert Robillard - 2 December 2014
This blogpost originally appeared on rbrt.ca.
RBRT Transfer Pricing’s Technical Note
(originally released on May 19, 2014)
Since 1997, Canada’s transfer pricing rules have been included in section 247 of the Canadian Income Tax Act (ITA).
The Canadian transfer pricing rules are managed by the Canada Revenue Agency (CRA). In the province of Quebec, the Agence du revenu du Quebec also does transfer pricing compliance audit.
Subsection 247(2) ITA allows the adjustment by the CRA of the terms or conditions made or imposed between the participants in a controlled transaction when they differ from those that would have been made between persons dealing at arm’s length.
The transfer pricing adjustments made by the CRA under subsection 247(2) ITA are unilateral in nature although they relate to international transactions between a Canadian taxpayer and a counterparty which is located in another country.
As such, they usually create double taxation on a specific amount of taxable income or capital as the case may be.
Double taxation issues can also arise from numerous other situations where a specific law or regulation applies including in Canada:
• The goods and services tax (GST as per the Excise Tax Act);
• Provincial sales tax (PST as per An Act Respecting the Québec Sales Tax in Quebec);
• Customs tariffs, duties or levies (as per the Customs Act); or
• Other provisions in the Canadian Income Tax Act.
In every case in order to eliminate double taxation, countries all around the world conclude bilateral tax treaties.
Bilateral tax treaties are usually modelled on the OECD Model Tax Convention on Income and on Capital. Some bilateral tax treaties involving developing countries are modelled after the United Nations Model Double Taxation Convention between Developed and Developing Countries.
In Canada, bilateral tax treaties are shaped on the OECD Model Tax Convention on Income and on Capital. Canadian tax treaties take precedence on the Canadian Income Tax Act by application of specific laws.
In the case of the United States, the Convention between Canada and the United States of America takes precedence on the Canadian Income Tax Act as per section 3 of the Canada–United States Tax Convention Act which indicates:
“3(1) The Convention is approved and declared to have the force of law in Canada during such period as, by its terms, the Convention is in force.
(2) In the event of any inconsistency between the provisions of this Act, or the Convention, and the provisions of any other law, the provisions of this Act and the Convention prevail to the extent of the inconsistency.
2.1) In the event of any inconsistency between the provisions of the Income Tax Conventions Interpretation Act and the provisions of the Convention, the provisions of that Act prevail to the extent of the inconsistency.
(3) The Minister of National Revenue may make such regulations as are necessary for the purpose of carrying out the Convention or for giving effect to any of the provisions thereof.”
For greater certainty in the case of non-residents, section 115.1 ITA states that “notwithstanding any other provision of this Act, where the Minister [CRA] and another person have, under a provision contained in a tax convention or agreement with another country that has the force of law in Canada, entered into an agreement with respect to the taxation of the other person, all determinations made in accordance with the terms and conditions of the agreement shall be deemed to be in accordance with this Act.”
Tax treaties are used by the Canadian Competent Authority to allow relief in double taxation cases.
The assistance of the Canadian Competent Authority to a taxpayer is usually provided through the mutual agreement procedure (MAP) article included in bilateral tax treaties. The MAP article is typically modelled after article 25 of the OECD Model Tax Convention on Income and on Capital.
In some cases, article 23A [exemption method] and article 23B [credit method] of the OECD Model Tax Convention on Income and on Capital may also be useful to eliminate double taxation.
In Canada, the CRA has issued Information Circular IC71-17R5 Guidance on Competent Authority Assistance Under Canada’s Tax Conventions which offers guidance on the mutual agreement procedure (MAP) and how to obtain assistance from the Canadian Competent Authority.
From a Canadian perspective, a request for Competent Authority assistance may result from a tax adjustment initiated by a foreign country or from a tax adjustment initiated by the CRA. Both types of cases would likely require the elimination of double taxation on the same amount of taxable income or capital as the case may be.
Paragraph 12 of Information Circular IC71-17R5 indicates that the Canadian Competent Authority will aim first to unilaterally resolve double taxation. In such cases, double taxation relief would be provided to the Canadian taxpayer only in accordance with the applicable Canadian laws and regulations.
However in most of the double taxation cases, the Canadian Competent Authority will require the involvement of a foreign-based Competent Authority in which case the mutual agreement procedure (MAP) process will thoroughly apply.
Requests for Competent Authority assistance are highly procedural in nature. Canadian taxpayers cannot resolve double taxation by themselves. Competent Authority assistance must be requested.
Paragraph 36 of Information Circular IC71-17R5 indicates that “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.”
The taxpayer must first notify the Canadian Competent Authority in writing that there may be taxation not in accordance with the applicable tax treaty which results in double taxation. Thereafter, a complete application has to be submitted.
Special attention should be paid to the applicable time limit included in the applicable tax treaty for timely notification to the Canadian Competent Authority.
Paragraph 32 of Information Circular IC71-17R5 suggests that “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 years from the date of the notice of (re)assessment.” However, this time limit may vary depending on the applicable tax treaty.
With regard to the content of a complete application for Canadian Competent Authority assistance, paragraph 19 of Information Circular IC71-17R5 explains:
“There is no prescribed form for requesting Canadian Competent Authority assistance. However, the taxpayer must provide the following relevant information:
a) the name, address, and social insurance number, or corporation identification and business number, of the Canadian taxpayer;
b) the name of the foreign tax administration involved, the tax convention article(s) which the taxpayer asserts is not being correctly applied by Canada or the other country, and the taxpayer’s interpretation of the application of the article;
c) the name, address and, if possible, the identification number of any related foreign taxpayer involved;
d) the relationship between the Canadian taxpayer and any related foreign taxpayers involved. (Applicants should also keep the Canadian Competent Authority informed of any changes in these relationships that occur after the request has been filed.);
e) the taxation years or periods involved;
f) the Tax Services Office or Taxation Centre that has made or is proposing to make the adjustment, if applicable;
g) a summary of the facts and an analysis of the issues for which competent authority assistance is requested, including any specific issues raised by the foreign tax administration or CRA affecting the Canadian taxpayer and the related amounts (in both Canadian and foreign currency), each supported by calculations;
h) for transfer pricing cases, contemporaneous documentation as described in subsection 247(4) of the Act;
i) 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);
j) 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;
k) 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;
l) a statement indicating whether the taxpayer has filed a notice of objection or a notice of appeal in Canada;
m) 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 in similar proceedings in the foreign country, a statement to that effect;
n) 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;
o) any other relevant facts;
p) a copy of any settlement or agreement reached with the other jurisdiction which may affect the MAP process; and
q) the taxpayer’s views on any possible bases on which to resolve the issues.”
As such, accurate and detailed explanations of the facts and circumstances from which has arisen the double taxation will be required to obtain Canadian Competent Authority assistance and a satisfactory resolution of the issue.
Other alternatives to obtain relief
Alongside with the request for Competent Authority assistance, the Canadian taxpayer should always file a Notice of Objection at the Appeals Branch on the same double taxation issue and clearly request that this notice be held in abeyance pending resolution by the Canadian Competent Authority as indicated in paragraph 38 of Information Circular IC71-17R5.
However, the Notice of Objection is subjected to the strict time limits prescribed by the Canadian Income Tax Act. Therefore, specific steps must be followed to ensure that the taxpayer rights are preserved.
A Canadian taxpayer may also go to Court to get resolution on any tax adjustment in which case the basis of the tax adjustment itself would be challenged. But then again the taxpayer should request that the appeal filed in Court be held in abeyance pending resolution by the Canadian Competent Authority. Otherwise, the Competent Authority process will be terminated as indicated in paragraph 39 of Information Circular IC71-17R5.
It must be noted that the Canadian Competent Authority cannot alter a Canadian court decision. As clearly stated in paragraph 43 of Information Circular IC71-17R5, “the Canadian Competent Authority will not undertake any action that would undermine a Canadian court decision or a case before the courts”.
Since the agreement negotiated by the Canadian Competent Authority may be rejected by the taxpayer, the Notice of Objection process and the Court process may enable the taxpayer to find a better outcome in the resolution of double taxation.
In the case of an administrative appeal (i.e., the Notice of Objection), the taxpayer may thereafter go back to the Canadian Competent Authority provided that complete or satisfactory relief has not be achieved at the Appeals Branch.
However, paragraph 55 of Information Circular IC71-17R5 clearly indicates that the “Canadian Competent Authority will (only) accept another request by the taxpayer on the (same) issue but […] will not negotiate the issue a second time.” It would only be presented to the other relevant Competent Authority.
When it arises, double taxation rapidly becomes a complex issue. Proper and satisfactory resolution is highly sensitive to undertaking the proper steps in a timely manner. If your company faces double taxation resulting from a CRA assessment or reassessment, the first step is to determine the applicable Canadian Income Tax Act statute-barred dates and the applicable time limits under the applicable tax treaty.
For more RBRT Transfer Pricing’s Technical Notes click here.
RBRT Inc. is all about transfer pricing. We specialize in transfer pricing, tax treaties and other international tax matters. Our services include transfer pricing documentation (transfer pricing policies and procedures, BEPS and C-doc), transfer pricing dispute resolution, tax treaty matters including double tax relief, tax treaty-based returns and waivers, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek tax advice and tax counsel from RBRT Inc. as required.