CANADIAN OFFSHORE INCOME:  REPORTING RULES

Foreign Income Reporting Rules

If you or your company has offshore assets, Revenue Canada wants to know about them. Under the current rules from Bill C-92, (April 25, 1997) several information returns were introduced. Revenue Canada will use this information to scrutinize and probe all offshore holdings including; trusts, IBC's, investments, debts, shares, bank holdings, real property. They say they only want details for knowledge and to ensure complete reporting of current income, but we believe that it also means you have opened up all your assets to constant review in the future and closer tax inspection.

Revenue Canada seems to be following the lead of the IRS with respect to offshore entities and transactions. Some of the reporting is tougher and some is not as tough but the intend is the same... they want to know everything.

Ongoing Affiliated Rules

Revenue Canada separates "out of Canada business" into several categories. Two of the most common arrangements are associated with certain types of income from a related entity. If the relationship/transactions are "not at arms-length" , then both Revenue Canada and the IRS look fairly hard at the relationship and the distribution of profit.

Passive income earned by a foreign subsidiary is taxable in Canada to the Canadian parent on a current (accrual) basis whether it is paid or not to shareholders. This income is described as FAPI  (foreign accrual property income).

Active business income can still be earned by subsidiaries (if you can prove to Revenue Canada that it is a "real" corporation) and taxed at better offshore rates if 90% or more of its income comes from third party transactions. Active business profits earned by a foreign sub are taxed when profits are repatriated. Certain tax credits are available for foreign taxes paid and certain dividends out of surplus are tax free to the corporation (not individuals).

In 1994, new rules extended the "passive income" net to include much of the "investment business". FAPI rules are complex in nature with Revenue Canada attempting to minimize the possibility of a firm being having "active business" and ultimately make it subject to the higher and current Canadian taxes.

There are anti-avoidance rules particular to foreign subsidiaries when:

• Importing goods into Canada, insuring Canadian risks or holding Canadian debt.
• Financing activities of operating subsidiaries or affiliates.
• Operating foreign banking and dealing in debt obligations.
• Developing real estate for sale.
• Leasing property, licensing technology or factoring receivable.
• Buying foreign resource properties.

New Foreign Reporting Rules

You or your company or trust or partnership are required to file one or more of the four new Information Returns if:

• you have an interest in foreign property totally more than $100,000 (this includes, shares, bank accounts, debts/obligations and real property except homes) (this excludes interest in foreign affiliates, active business property, RPPs RRSPs and RRIFs);
• you have one or more foreign affiliates, either corporations or trusts;
• you have transferred or loaned property to a non-resident trust, and/or;
• you have received distributions from or are indebted to an offshore trust.
• For these four new Reports to be filed , the data required is quite detailed and includes information on the offshore entities and persons involved and any Canadian involved;

Transfers or Loans to Non-Resident Trusts
T 1141, section 233.3

Where a Canadian resident, loans or transfers property to a non-resident trust (in which a Canadian has a beneficial interest) or to a corporation controlled by it, at any time before the end of a taxation year. Includes situations where a Canadian is the Settlor or the trust or is in a non-arm length position with a beneficiary or potential beneficiary. Also where a transfer occurs, it was for less value than what was received or there is a loan with low or no interest that remains unpaid for more than 180 days after a calendar year.

Distributions from a Non-Resident Trust
T 1142, section 233.6

Where a Canadian taxpayer is beneficially interested in a non-resident trust and has received a distribution of property (income or principal) from the trust or is indebted to the trust.

Interests in Certain Foreign Property
T 1135, section 233.3

Where a Canadian taxpayer owns or has interest in foreign property where at any time in the year the adjusted cost base to the taxpayer exceeds $100,000. Types of foreign property identified include:

• funds or intangible property which are situated, deposited or held outside of Canada and tangible property situated outside of Canada;
• shares of a non-resident corporation (would include IBCs, LLCs, Annuity IBCs);
• interest in a non-resident trust or partnership;
• interest in, or rights with respect to, non-resident entities;
• indebtedness owed to a non-resident person, and;
• properties that are convertible, exchangeable or confer a right to acquire the above types of property.

Not included are types of property used or held in the course of carrying on an active business and personal use properties.

Interests in One or More Foreign Affiliates
T 1134, section 233.4

Where a Canadian taxpayer owns or has an interest in foreign affiliates including trusts. A Canadian taxpayer or partnership that owns directly or together with related persons at least 10% of any class of shares of a non-resident corporation. This is regardless of the value of the shares.

Finally...

The subjectivity of the FAPI tests and tightening of the rules makes it much more complex for Canadian firms to operate legitimate enterprises outside of Canada and still be able to compete globally. That's why the Can-Offshore program is important to use and for Canadian firms and individuals to have customized solutions in place.

The Can-Offshore program has been designed for Canadians so that it follows the rules. With our program, assets are legally secure and may accumulate exempt from taxes and prying eyes.

 

Offshore Reporting Rules Part 2