Many Canadians wish to purchase a vacation home or investment property south of the border. However, few carefully consider how they will structure the purchase and its tax implications before buying. Many U.S. lawyers suggest buying properties intended for rental purposes through a limited liability company (LLC). LLCs are popular in the United States since they shield their owners from any personal liability and they allow for flow-through taxation (that is, the LLC does not pay taxes, the taxes flow through to the individual member). However, they create tax problems for Canadian owners who may end up paying taxes on their rental income twice, once in the United States and once in Canada. Canadians are required to declare income earned from U.S. real estate on both a U.S. income tax return and their Canadian income tax return. Under U.S. law, LLCs are a flow-through entity, which means all the income generated in the LLC is attributable to its owner. So, if the owner is the Canadian investor, the investor will be taxed directly at the individual tax rate. The Canada Revenue Agency, on the other hand, views an LLC as a corporation, which is liable for its own income taxes. Because Canada and the U.S. do not recognize the tax entity as being the same, there is a risk that the owners will be taxed in both the U.S. and Canada. The Canada-U.S. tax treaty protects Canadians from double taxation, since the taxes paid in the United States can be credited against the taxes owed on the same income in Canada. However, when different entities, in this case, a corporation and an individual, pay tax on the same income, those credits are not transferable. A better option for Canadians might be a limited partnership (an LP). Structured properly, an LP will provide its owner with pass-through taxation, the liability protection of an LLC and, since it is treated as the same entity for tax purposes in both the U.S. and Canada, it will allow its owner to claim credit in Canada for taxes paid in the U.S. If you have any questions about how to structure your U.S. real...
Read MoreIs Supply Management Really on the Table at the TPP?
With the conclusion of the Trans Pacific Partnership (TPP) negotiations possibly in sight, there is some discussion of potential changes to Canada’s supply management system for dairy, poultry and eggs. While it is possible that Canadian negotiators will accede to demands by trade partners and liberalize access to the supply managed sectors, after years of living with the current system, we should note that supply management is resilient. Time and time again, supply management has survived trade negotiations and disputes largely intact. Even the concessions made in the Canada – E.U. Comprehensive Trade and Economic Agreement (CETA) negotiations only amount to a mere nibbling around the edges. Supply management will likely end at some point, but that point is probably very far off into the future. This is so for both non-economic and non-trade policy reasons. Supply managed producers are far better organized than producers in any other Canadian agriculture sectors due to the mechanism established to operate the system. Supply management is directed by a complex web of legislation, regulations and Orders that operate to control the domestic production of supply managed products, like poultry and dairy. Included within this structure are inter-related Federal and Provincial producer organizations that work with their Federal and Provincial supervisory bodies to establish production levels in Canada. Given the coordination within the industry, producer organizations can easily call on their producer members to put pressure on politicians knowing that their members will likely respond favourably. Supply managed producers also have a tangible interest beyond their daily business operations because of their quota value. When supply management was established, producers were given quota, at no cost, based on their historic production. Since then, producers have bought, sold, and traded quota and many have used it as security. As a result, individual producers have significant value invested in quota which they generally treat as an asset. Taking dairy as an example, in the August 2011 edition of MacLeans, Andrew Coyne reported that the average quota value was approximately $25,000 per cow[1]. According to Farm & Food Care Ontario, there are 70 cows in an average milking herd.[2] At $25,000 per cow, the quota value...
Read MoreChina State-Owned Enterprises (SOE) Investments in Canada
Foreign direct investment (FDI) is undoubtedly a vital element to the development and future growth of the Canadian economy. Over the last several years, the Government of Canada has taken active steps to encourage this advancement and has worked to improve Canada’s investment regime to make it a more attractive investment destination for foreign investors. However, large Chinese investments into the Canadian oil and gas industry over the last few years have led to amendments to the Investment Canada Act, which brought about new regulations pertaining to FDI that address policy concerns about the nature of investments made by State-Owned Enterprises (SOE). These amendments have created new barriers to SOE’s investments into Canada and raise a potentially serious concern as to Canada’s ability to attract FDI into the future. In the wake of CNOOC’s acquisition of Nexen Inc. and Petrona’s acquisition of Progress Energy in 2012, the Government amended the Investment Canada Act (ICA) in an attempt to strike a balance between its desire to promote FDI in Canada, and concerns about allowing a foreign SOE to acquire control of large Canadian players in key sectors, like the oil sands. The main concern has been that SOEs may be influenced by a foreign government’s political agenda and that this political agenda may conflict with Canadian industrial and economic objectives. The Amendments, which became effective in June 2013, significantly expand the Government’s power to declare that a foreign investing entity is an SOE and consequently, to declare that an otherwise non-reviewable acquisition by an SOE is subject to government review. While it was hoped that the Government would clarify the treatment of foreign SOEs investing in Canada, the language of the Amendments have created some uncertainty as to how and when SOE investments will be reviewable. Specifically, it is unclear what constitutes “indirect government influence” for the purposes of defining an SOE under the ICA and what qualifies as an “exceptional basis” for approving SOE investments. The newly expanded definition of SOE, to include not just an entity directly or indirectly owned and controlled by a foreign government, but one that is directly or indirectly under foreign government influence, gives the...
Read MoreCanada-China FIPA and Impact on Bi-Lateral Investment
The Canada-China FIPA entered into force on October 1, 2014, after long negotiations that spanned well over a decade. This agreement represents China’s 140th bilateral investment treaty and Canada’s 25th. The main purposes of a FIPA are to establish clear investment rules and measures to protect foreign investors against discriminatory or arbitrary government practices, to provide effective compensation in the event of an expropriation and to enhance the overall predictability of the policy framework governing foreign investments. The existence of a FIPA has proven useful in terms of promoting the Parties’ respective markets as a more attractive and stable destination for investment with clearly defined and enforceable rules. China’s continued growth as an economic superpower is significant for global investment and holds particular importance for Canadians, now that the Canada-China FIPA is in place. Foreign Direct Investment (FDI) has rapidly become an essential corporate strategy for Canadian companies competing in the global economy, allowing them to gain access to foreign markets and acquired new technologies among a panoply of other important benefits. Although the statistics show that inflows of FDI from China are increasing, they remain but a small portion of total FDI inflows into Canada, leaving much untapped potential for expansion and growth. For investors and or/business owners in Canada and China, it is important to gain a basic understanding of the Canada-China FIPA’s implications and how they may affect your bottom line. The FIPA offers many substantive investor protections that can often be leveraged by investors and/or companies, whose investments may have been negatively affected by a Government measure, to secure proper compensation. For a preliminary overview of the Canada-China FIPA, the protections it offers to investors from both countries and its dispute settlement mechanisms (ISDS) see our presentation “The Canada-China FIPA and its Impact on Investment Relations” [slideshare id=43916866&doc=canada-chinainvestmentwlllp-150126143838-conversion-gate01] Here is some more text after the...
Read MoreCanada, U.S., Cuba – The Spirit of Free Trade and Building Ports – Part III
Last week we quoted Alanis Morissette – “isn’t it ironic, don’t you think …” It appears that the back and forth actions and reactions over the Port of Prince Rupert Ferry Terminal Project (the “Prince Rupert Ferry Project”) have resulted in a kind of trade related “mutually assured destruction” (otherwise known as “M.A.D.” in other contexts). There is some irony in that a “defensive” trade measure originally designed by Canada to counter the extraterritorial reach of a U.S. measure aimed at blocking trade with Cuba (the FEMA), was recently employed to block a U.S. measure’s application on Canadian soil in the Prince Rupert Ferry Project. While at the same time, the U.S. began re-opening trade with Cuba. It even appears that the “good offices” of Canada have been leveraged in bringing the two Cold Warriors together. Aside from recognizing the irony and the importance of staying up to date with how international trade measures can affect your business, here are some further thoughts. The halt that was put on the Prince Rupert Ferry Project by the invocation of the FEMA has occurred at a time when both Canadian and Americans need the work and at a time when business could certainly use the improved infrastructure. Therefore, perhaps it is time we consider the need for better metaphorical “bridge building” between the world’s two largest commercial partners. Yes, the Buy America Act and the application of the FEMA seem to have added to an ever growing list of trade irritants, but it is important to keep them in perspective. On a positive note, it should be highlighted that approximately $2 Billion of two-way trade crosses the Canada-U.S. border every day – unimpeded by trade barriers and increasing exponentially via various measures and tools the two countries have put in place. In fact, it is often said that over 98% of our bi-lateral commerce takes place without irritants and that the attention or “noise” caused by the headlines over cases like the Prince Rupert Ferry Project gives us (Canadians, Americans, and all those watching us fight) an inaccurate impression of the state of Canada-U. S. trade relations. This is probably correct....
Read MoreCanada, U.S., Cuba – The Spirit of Free Trade and Building Ports – Part II
We began exploring Buy America provisions in the wake of the South Park Bridge Project in Colorado [https://www.wl-tradelaw.com/buy-america-and-the-integrated-north-american-economy/]. In that case, the U.S. Government ultimately decided not to require that Canadian steel used in the Bridge Project be removed. However, the Canadian Government faced mounting pressure to implement reciprocal local content restrictions to retaliate against Buy American provisions. These desired restrictions would effectively ban the use of foreign products and materials in any major federal infrastructure projects. In November 2014, the U.S. again attempted to apply Buy America restrictions, but this time to a project on Canadian soil, at the Port of Prince Rupert in British Columbia [https://www.wl-tradelaw.com/buy-america-affecting-projects-in-canada/]. In response, the Canadian Government issued an Order under the Foreign Extraterritorial Measures Act (FEMA) to counter the application of the Buy America provisions to the Port of Prince Rupert Project, valued at $15 million [https://www.wl-tradelaw.com/canada-u-s-cuba-the-spirit-of-free-trade-and-building-ports-part-1/]. This order effectively prohibits compliance with the Buy America requirements in connection with this particular project and means that bidders cannot agree to use only U.S.-made iron and steel. On January 22, 2015, the Government of Alaska cancelled bids for the Port of Prince Rupert Project “for the time being”, likely to avoid the implications of a trade dispute with Canada. The Alaskan Government stated that regular operations would be maintained at the facility until a proper solution can be found. Suggested courses of action have included Alaska seeking a waiver from the U.S. Federal Government of the Buy America provisions, as well as having the State directly fund the project, none of which have proved acceptable or feasible to Alaska thus far. The State of Alaska’s Governor’s Office has suggested that they are hoping to re-engage in the late fall. The Government of Canada’s response to this potential trade dispute has been widely applauded by Canadian steel industry advocates as a strong showing of leadership in upholding the spirit of free trade. Minister of International Trade, Ed Fast, stated that the application of Buy America on Canadian soil was completely unacceptable and an “affront to Canadian sovereignty” and that “Buy America provisions deny both countries’ companies and communities the clear benefits that arise from...
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