- The
foreign affiliate is resident in a country listed
in the income tax regulations as a designate country
with a tax treaty in force with Canada.
- Dividends
are paid out of the foreign affiliate's "exempt
surplus"
The
"Exempt surplus" is defined as:
- Earnings
from active business activities carried out from the
affiliate's permanent establishment. (Thus interest
earned from the deposit of funds in a bank account
does not come within the definition of exempt surplus.)
- Certain
capital gains;
- Dividends
received by the foreign affiliate from the exempt
surplus of other affiliates.
Thus
dividends remitted to a Canadian parent by an Irish
affiliate which manufactures goods for export to the
UK market and which enjoys a tax holiday under Irish
laws will not be taxed in the hands of the Canadian
corporate entity. (N.B. A characteristic of double taxation
treaties is to define certain categories of income as
exempt surplus income which qualifies for tax free repatriation).
Budget
2007 had this to say with regard to the exempt surplus
rule:
"Although
its mismatch with interest deductibility has been a
long-standing problem, the 'exempt surplus' rule in
itself is a key competitive advantage of the Canadian
tax system. The rule allows a Canadian company to earn
business income through a foreign affiliate in any tax-treaty
country, and bring that income back to Canada, with
no Canadian tax. Since the only tax on this business
income will be that paid to the foreign country in which
it is earned, the system ensures that Canadian firms
are able to operate on a level playing field with their
foreign competitors.
With
the proposal above to resolve the interest deductibility
problem, it is no longer necessary to link the exemption
to the presence of a tax treaty. In the current environment,
it is more appropriate to link the exemption to the
presence of a comprehensive exchange of information
agreement.
Budget
2007 therefore proposes to extend the exemption to active
business income from non-treaty jurisdictions as well
as treaty countries, provided those jurisdictions agree
to exchange tax information with Canada. This will give
Canadian firms more scope to expand internationally,
especially into new and emerging markets, without our
tax system imposing additional costs that could reduce
their competitiveness, while also maintaining tax fairness.
It will also encourage non-treaty jurisdictions to join
in the efforts of Canada and our treaty partners to
control international tax evasion."
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Canadian
International Holding Companies
