Chapter 14

Question 1

How can a domestic country use three potential solutions to reduce or eliminate double taxation?

Answer 1

1. Exempt foreign income from taxation in the home country (simplest way but not ideal).
2. Give a credit for foreign income taxes paid to reduce taxes owed in the home country.
3. Negotiate a treaty agreement with foreign countries to share the right to tax different types of income.

Question 2

What is one way to achieve tax savings?

Answer 2

By using holding companies and other ways of structuring investments in countries that exempt foreign income.

Question 3

What are the applicable sources of tax law?

Answer 3

1. Domestic tax law in the country where the income is generated.
2. Domestic tax law in the country where the recipient of the income resides.
3. Any tax treaty between the town countries.

Question 4

How are international tax treaties ‘concluded’ (created)?

Answer 4

On a bilateral basis.

Question 5

The background on international treaties is relevant for the following reasons:

Answer 5

1. Treaties are typically bilateral (two-way) in nature and are not as effective when more than two countries are involved.
2. The main purpose of treaties is to remove or reduce double taxation.
3. Many countries have implemented international treaties with several other countries, making it more challenging for those countries to be flexible (compared to their signing no tax treaties at all and dealing with double taxation differently_.

Question 6

What is the purpose of international tax treaties?

Answer 6

To reduce or eliminate double taxation.

Question 7

Residence is most commonly used to determine which jurisdiction has taxing authority. Different countries use different criteria when determining what constitutes residency for tax purposes. What are the determinants in Canada?

Answer 7

1. Whether the individual has ties to a residence or spouse in Canada.
2. Secondary residential ties (eg. a summer home) social ties and Canadian-issued identification.

Question 8

What is the special day rule on a non-resident spending time in Canada?

Answer 8

At 183 days, they are considered a resident of Canada for tax purposes.

Question 9

Canada has adopted as the starting point for treaties negotiates, what are the following criteria to resolve questions fo residency?

Answer 9

1. An individual shall be deemed a resident only of the state (country) in which he or she has a permanent home. If a permanent home is available in both states the one in which he or she has closer personal and economic relations shall be considered his or her residence (referred to as ‘center of vital interests’)
2. If the center of vital interests cannot be determined it will then consider the state where he or she makes the habitual home as the place of residence.
3. If the individual has a habitual home in both states (or in neither of them), the state in which he or she is considered a ‘national’ will be considered the place of residency.
4. If the individual is deemed a national of both states (or neither of them) the authorities of each state shall settle the matter by mutual agreement.

Question 10

What would happen in the absence of a treaty?

Answer 10

1. Both the source and residence country can tax whatever its domestic tax laws permit.
2. Compliance across border requires both countries to cooperate with each other.

Question 11

How are interest dividends and royalties generally considered?

Answer 11

Passive income. In other words, the individual is entitled to them without doing any additional work.

Question 12

What are the net effects of most income tax treaties?

Answer 12

1. The source country has the first right of taxation by way of withholding tax.
2. The residence country is free to tax but will also attempt to relieve the impact of the source country’s taxation.
3. Many countries opt for tax credits as opposed to exemptions in order to preserve their tax base as much as possible.

Question 13

What is the difference between tax credit and tax deduction?

Answer 13

Tax credit will directly reduce one’s tax liability. Tax deduction reduces his or her income.

Note: Tax relief from foreign taxes comes in the form of a tax deduction and that is when the foreign taxes withheld are more than 15%. The excess over 15% is treated as a tax deduction as opposed to a tax credit.

Question 14

What are some ways trusts have commonly been used for?

Answer 14

1. Cross-border estate and succession planning.
2. Tax-efficient investing in foreign jurisdictions.
3. Maintaining funds for heirs.
4. Protecting assets from the settlor’s creditors.
5. Charitable giving.
6. Special purpose.

Question 15

Why would a country create an anti-avoidance rule?

Answer 15

To curtail the use of offshore trust and foundations as a means of avoiding tax.

Question 16

Do partnerships offer less or more transparency than corporations?

Answer 16

They offer less which makes them unable to benefit from tax treaties.

Question 17

What is a hybrid company?

Answer 17

Is a company whose obligation is limited by the guarantees of its members but that also has share capital.

Question 18

What are the four categories of tax havens?

Answer 18

1. Investment base havens.
2. Base havens for business activities.
3. Treaty havens and special concession havens.
   4.Residence havens for individuals.

Question 19

What are ‘treaty havens’ and ‘special concession havens’?

Answer 19

They are offshore centers that have reasonable domestic tax rates or that offer special tax regimes permitting their treaty networks to be used for offshore activities and treaty shopping.

Question 20

What does Delaware LLC stand for?

Answer 20

Delaware Limited Liability Corporation.

Question 21

Is a Delaware LLC transparent or not transparent?

Answer 21

Is transparent for tax purposes unless the members choose to be taxed like a corporation under the US ‘check-the-box’ rules.

Question 22

What is GAAR?

Answer 22

General Anti-Avoidance Rule. Governments can disallow any tax strategies that may technically comply with the rules but are regarded as overly aggressive and abusive.

Question 23

Under GAAR, what are the three stage-stage test that CRA as the authority to adjust taxes payable?

Answer 23

1. Was it an avoidance transaction?
2. Were taxes saved or deferred as a result?
3. Were the transactions undertaken for reasons other than tax purposes?

Question 24

Individuals will face a ‘market-to-market’ regime if they have expatriated or will expatriate on what date and meet any of the three conditions?

Answer 24

Date: June 17 2008
1. An annual average taxable income for the prior five years above a specified amount, which is adjusted for inflation.
2. A net worth of $21 million US (or. more) on the date of expatriation.
3. Failure to comply with federal tax obligations, such as not filing an annual tax return in any of the preceding five years.

Question 25

What are three types of information exchange?

Answer 25

1. Spontaneous.
2. Exchange on request.
3. Automatic exchange.

Question 26

What does the US ‘saving clause’ do?

Answer 26

Provides an additional tax credit on their US tax return to bring their global tax bill back down to what it would have been if they were a resident of the United States only.