Canada: Tax-Efficient Regimes and Sectors

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- CANADA TAX-EFFICIENT BUSINESS FORMS
- CANADA TAX-PRIVILEGED BUSINESS SECTORS

Canada Tax-Efficient Business Forms

A number of companies had converted to tax-efficient income trusts in the period 2000-2005, thereby avoiding the general corporation tax regime. However, faced with falling revenues, the government changed the tax rules so that new income trusts are subject to a tax regime that is similar to corporation tax requirements; existing income trusts converted from corporations will be subject to this new regime after 2011. Income trusts are generally therefore no longer tax-efficient vehicles for corporations, although they remain a suitable vehicle for real estate investment trusts and mutual fund investment trusts.

Trusts remain an important tax-efficient sector for individuals wishing to reduce their tax liability, particularly where the trust itself is resident abroad in a lower tax jurisdiction and can also benefit from a double tax agreement. In the case of a family business, with careful planning a trust can serve to protect business assets while reducing the tax liability.

One point to note, though, is the 2009 case of Garron and Garron, Trustees of the Garron Family Trust v. The Queen, which challenged the residence test applying to trusts. As in English law, in Canada it was previously held that the jurisdiction in which the trustees reside and exercise their discretion indicated the residence of the trust. The decision in Garron and Garron held that the corporate residence test should apply to trusts, in that a trust should be deemed resident in the jurisdiction in which its central management and control actually resides. The Canada Revenue Agency, in an interpretation bulletin released in light of this decision, has indicated that a trust’s residence now depends on the jurisdiction in which the trustee who manages and controls the trust resides.

Individuals over age 65 can make tax-free transfers of assets into some types of trust, while trusts that take effect on death can also benefit from certain tax advantages. Canadian trust income is, though, generally subject to higher rate marginal tax rates, so advice should be sought in this area to ensure effective tax savings. Registered retirement savings plans and registered retirement income funds also fall under trust law.

Canadian-controlled private corporations (CCPCs) can claim a small business deduction of 17% on the first CAD500,000 of income, subject to conditions. CCPCs can also benefit from enhanced investment tax credits, and shareholders can qualify for capital gains exemption on disposal of small business corporate shares.

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Canada Tax-Privileged Business Sectors

In the provinces and territories, there are a number of tax credits available for certain sectors, such as for farming, mining, and for investment in forestry and in oil and gas exploration, as well as for venture capital funds. Some provinces and territories also have enterprise zones that offer incentives to certain businesses, mainly in the form of property tax abatement.

At the federal level, there is the Canadian Film or Video Production Tax Credit Program, which gives a refundable tax credit of 25% on certain labour costs not exceeding 60% of total production expenditure. A tax credit is also available for film or video production services in order to stimulate job growth; the credit applies where Canadian and foreign-based film producers employ the services of Canadians. An accredited film or video production certificate must be obtained from the Canadian Audio Visual Certification Office to qualify for these credits.

Tax credits and cash refunds are available to businesses that undertake research and development in Canada, under the Scientific Research and Experimental Development Tax Incentive Program. For example, a CCPC can claim investment tax credits of 35% on the first CAD3m of qualifying R&D expenditure, and 20% on expenditure over the CAD3m threshold.

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