Despite growing speculation that the OECD’s BEPS 2.0 project may fail, both pillar 1 and pillar 2 continue to attract a great deal of attention from taxpayers, practitioners, academics, and government officials. Although pillar 2 is not covered in depth in this issue, I would note that the Canadian Tax Foundation’s Pillar Two Symposium, which was held in Ottawa on July 27, brought together representatives from all four of these constituencies, in an effort to work through many of the difficult conceptual and practical considerations that would be involved in Canada’s implementation of the pillar 2 regime. Those who missed this event can access the videos on the CTF website, and the symposium papers will be published in the Canadian Tax Journal.
In this issue, we cover a very specific aspect of pillar 2, with a relatively detailed examination by John Tobin and Emma Huang of the impact of the arm’s-length principle on the computations required by that system. The article is very helpful regarding these computations: the model rules and commentary, on their own, can make your head spin.
Michael Kandev and Jennifer Lee then report on what appears to be the first casualty of BEPS 2.0—namely, the termination of the US-Hungary income tax treaty. This development will have significant implications for Canadian taxpayers that have Hungarian structures financing their US operations. In the next article, continuing with the theme of financing structures, Alex Pouchard reports on recent decisions of the highest Luxembourg tax court involving the characterization of financial instruments commonly referred to as mandatorily redeemable preference shares (MRPS). It was decided that the instruments in question in those cases should be treated as equity rather than debt for Luxembourg tax purposes, which could give rise to retroactive adverse implications for Canadian taxpayers that have used those instruments.
Continuing the theme of retroactive implications and the Canadian implications of foreign court decisions, Kim Maguire reports on the BC Supreme Court’s recent Kraft decision, a case in which the taxpayer sought a declaration nullifying a capital contribution to a Dutch subsidiary that would give rise to unanticipated consequences under Canada’s foreign affiliate dumping rules. Although these rules have been in place for several years, they represent for our tax system yet another layer of complexity that is bound to lead to pitfalls. Is there a safety net?
On financing more generally, we have the insightful and practical contribution by Balaji Katlai and Hugh Neilson, involving various considerations that arise under the new excessive interest and financing expenses limitation (EIFEL) rules in the context of emerging business enterprises. One may be forgiven for asking whether our public policy instruments are at times working at cross-purposes.
Hetal Kotecha has contributed a very helpful analysis of the implications for CCPCs and other, smaller enterprises of the 2022 budget proposals to effectively increase the Canadian corporate tax rate on passive income and taxable surplus derived through CCPCs’ foreign affiliates.
We round out the issue with two helpful summaries of noteworthy public statements made by Canadian government officials. Samantha D’Andrea covers the Finance round table at the 2022 IFA Canada Tax Conference, which was held on May 17—in particular, comments that Finance made regarding the new EIFEL rules, the new hybrid mismatch arrangement rules, the new mandatory disclosure rules, and, of course, BEPS 2.0. Silvia Wang and Clara Pham cover the IFA CRA round table, focusing on the CRA’s comments on the very extensive documentation that the agency will require to support deductions claimed by taxpayers under section 113 in respect of distributions of foreign affiliate surplus.
We are grateful to our contributors for all of their hard work, their insights, and their enthusiasm.
On a final note, I will add my voice to others who have noted the passing, on June 8, of Donald G.H. Bowman, former chief justice of the Tax Court of Canada. Please look for Scott Wilkie’s heartfelt tribute on the CTF website, which reviews Bowman’s tremendous legacy both in general and with respect to international taxation. Donald Bowman was and will continue to be an inspiration.
EY Law LLP, Montreal