2008-05-25
I recently read an article dealing with Canadian taxation of cross-border transactions. Part of the article discussed the Canadian approach to outbound taxation. In many ways, the Canadian rules for taxing outbound investments are very similar to the U.S. rules.
The U.S. generally allows for deferral -- Canada generally allows for deferral.
The U.S. has certain anti-deferral regimes (subpart F income and passive foreign investment companies) -- Canada has certain anti-deferral regimes (foreign accrual property income, or "FAPI," and foreign investment entities).
The U.S. allows foreign tax credits to offset U.S. tax when foreign profits are repatriated -- Canda allows foreign tax credits to offset Canadian tax when foreign profits are repatriated.
One major difference, however, is that the U.S. generally does not allow foreign profits to be exempt from U.S. taxation when the profits are repatriated. In contrast, Canada exempts from Canadian corporate income tax certain foreign profits of active businesses in countries that have income tax treaties or tax information exchange agreements ("TIEAs") with Canada.
Based solely on information provided in the article, we have created a rudimentary flowchart showing the Canadian taxation of outbound transactions. The flowchart is shown below:
