Question 1

Summarize the taxation of the income of controlled and non-controlled foreign affiliates.

Accepted Answer

Controlled Foreign Affiliates - Whether the resident Canadian shareholder is an individual or a corporation, Foreign Accrual Property Income (FAPI)that is earned by a Controlled Foreign Affiliate must be included in income on an accrual basis as it is earned. When these amounts are subsequently paid out as dividends they will be included in the income of the Canadian shareholder but will be eligible for an offsetting deduction to recognize the fact that the amount was previously taxed as FAPI. If the dividend is paid from non-FAPI sources of income, it will be included in income, but, in the case of Canadian corporate shareholders, may be completely or partially offset by the ITA 113(1)deduction from Taxable Income depending upon whether Canada has entered into a tax treaty or Tax Exchange Information Agreement (TEIA)with the source country. Canadian individual shareholders would obtain partial relief through the foreign tax credit system only, since they are not entitled to the ITA 113(1)deduction. This generally encourages individuals to hold shares in foreign corporations through a resident Canadian corporation. Non-Controlled Foreign Affiliates - The income of Foreign Affiliates that are not controlled will not be accrued as it is earned. Rather, it is included in income when dividends are received from the Foreign Affiliate. If the dividend is paid from active business income earned in a country with which Canada has a tax treaty or TEIA, it will be eliminated by the ITA 113(1)deduction in the calculation of Taxable Income. In addition, dividends paid out of the non-taxable portion of some types of capital gains, or the full amount of capital gains resulting from dispositions of property used in an active business in a country with which Canada has a tax treaty or TEIA, are deductible under ITA 113(1). When the ITA 113(1)deduction is available, no credit can be taken for any foreign taxes paid. Alternatively, i f the dividend is paid out of passive income, or earned in a non-treaty/non-TEIA country, it will be included in income and only be eligible for deductions under ITA 113 to the extent income taxes or withholding taxes have been paid on the amounts distributed.

Question 2

The Canada/U.S. tax treaty allows Canada to tax the business income of U.S. residents, provided that business is operated in Canada through a permanent establishment.

Accepted Answer

The Canada/U.S. tax treaty contains provisions allowing Canada to tax the business income of U.S. residents if that business is operated in Canada through a permanent establishment. This is known as the "business profits" article of the treaty.

Question 3

If there is a conflict between the Canadian Income Tax Act and the Canada/U.S. tax treaty, the provisions of the treaty must be used.

Accepted Answer

This is known as the "treaty override" rule, which gives priority to the provisions of the tax treaty over domestic tax law.

Question 4

Indicate the types of income on which non-residents are subject Canadian Part I taxes.

Accepted Answer

The answer of Indicate the types of income on which...

Question 5

If a non-resident is required to pay Part XIII tax in Canada, they will have to file a Canadian tax return.

Accepted Answer

Part XIII tax is a withholding tax on certain types of income paid to non-residents of Canada, such as dividends and rental income. This tax is generally the final tax obligation to Canada on this income, so non-residents subject to Part XIII tax typically do not need to file a Canadian tax return for this income.

Question 6

John Barth has $20,000 of foreign source business income, from which the government in the foreign jurisdiction has withheld $2,000. Briefly describe the treatment of the withholding amount in determining John Barth's Canadian Tax Payable.

Accepted Answer

The answer of John Barth has $20,000 of foreign source...

Question 7

Clarkson Equipment Ltd. is a manufacturer of construction equipment that is used throughout the world. The factory is located in Windsor, Ontario and the majority of its manufacturing operations take place at that location. In the current year, the Company negotiated a very significant contract with an African country with which Canada has a comprehensive tax treaty. The contract requires not only the provision of the Company's equipment, but instruction and training of the operators as well. Given the magnitude of this contract, Clarkson is considering establishing a subsidiary in the African country to carry out the terms of the agreement. Compare the Canadian tax treatment of income earned if the contract was handled through the Canadian head office with the tax treatment if a non-resident subsidiary is used to carry out the contract.

Accepted Answer

The answer of Clarkson Equipment Ltd. is a manufacturer of...

Question 8

Provide two examples of the type of income on which Part XIII tax is assessed.

Accepted Answer

The answer of Provide two examples of the type of...

Question 9

In general, employment income earned in Canada is subject to Part I tax. However, the Canada/U.S. tax treaty provides exceptions to this general rule. Describe these exceptions.

Accepted Answer

The answer of In general, employment income earned in Canada...

Question 10

Explain why dividends received by individuals from non-resident corporations do not usually receive the same gross up and tax credit treatment that is accorded to dividends received from taxable Canadian corporations.

Accepted Answer

The answer of Explain why dividends received by individuals from...

Question 11

If a non-resident individual has Part I Tax Payable and is required to file a Canadian tax return, he will not be eligible for any of the usual credits against the total amount payable.

Accepted Answer

Non-resident individuals may be eligible for some credits against the total amount of Part I Tax Payable. This includes the foreign tax credit and the tuition tax credit (if applicable).

Question 12

If a U.S. resident receives interest on Canadian participating debt, she will be required to pay Part XIII tax on the amounts received.

Accepted Answer

Interest received by a U.S. resident from Canadian participating debt is typically subject to Part I tax, not Part XIII tax. Part XIII tax generally applies to non-resident withholding tax on certain types of passive income (e.g., dividends, rental income), but interest income from participating debt is usually taxed under Part I for non-residents carrying on business in Canada or disposing of taxable Canadian property.

Question 13

List two objectives that are served by international tax treaties.

Accepted Answer

The answer of List two objectives that are served by...

Question 14

An individual emigrates from Canada at a time when he owns shares in a private company with a fair market value of $500,000 and an adjusted cost base of $300,000. Two years later, he decides to return to Canada. At this time he still owns the shares. What are the tax consequences of his departure from Canada and his return to Canada.

Accepted Answer

The answer of An individual emigrates from Canada at a...

Question 15

If an individual resident of Canada emigrates to the U.S., he will have a deemed disposition at fair market value of the assets in his brokerage accounts and his RRSP.

Accepted Answer

While an individual resident of Canada emigrating to the U.S. will have a deemed disposition at fair market value of the assets in his brokerage accounts, this does not apply to his Registered Retirement Savings Plan (RRSP). The RRSP can remain intact until withdrawal.

Question 16

A non-resident individual owns a rental property in Canada. While her rental revenues would be subject to Part XIII tax, as an alternative, she can elect to pay taxes under Part I, rather than Part XIII. Why might she wish to make this election?

Accepted Answer

The answer of A non-resident individual owns a rental property...

Question 17

The Canada/U.S. tax treaty permits Canadian taxation of business income earned by a U.S. business that has a "permanent establishment" in Canada. The treaty also indicates that, in some situations, an individual can be considered to be a permanent establishment for the purposes of this rule. Describe these situations.

Accepted Answer

The answer of The Canada/U.S. tax treaty permits Canadian taxation...

Question 18

When a person emigrates from Canada, there is no deemed disposition/reacquisition of their Canadian real estate holdings. However, ITA 128.1(4)(d)allows a taxpayer to elect to have a deemed disposition/reacquisition of real estate at the time of their departure. Why would an individual wish to make this election? Briefly explain your conclusion.

Accepted Answer

The answer of When a person emigrates from Canada, there...

Question 19

When an individual immigrates to Canada, there is a deemed disposition/reacquisition at fair market value of most of their capital property. Briefly explain why this is an important provision for most individuals.

Accepted Answer

The answer of When an individual immigrates to Canada, there...

Question 20

If a U.S. resident earns less than $10,000 in Canadian employment income, the employment income will not be taxed in Canada even if the income is paid by a Canadian business that deducts the payments.

Accepted Answer

This is because the Canada-US tax treaty provides an exemption for individuals who are residents of one country but employed in the other country and earn less than a certain amount of income. For US residents working in Canada, the exemption threshold for 2021 is CAD $10,000. Therefore, if a US resident earns less than $10,000 in Canadian employment income, the income will not be taxed in Canada.

Quiz 20: International Issues in Taxation