Published: October 28, 2024
Last Updated: October 28, 2024
Introduction: The Collection-Assistance Provision in Tax Treaties Between Canada And Other Countries
As the world becomes increasingly interconnected and tax laws become more onerous, tax authorities around the world, including the Canada Revenue Agency (CRA), are highly motivated to collect taxes from taxpayers with foreign assets. Collecting taxes from taxpayers with foreign assets provides the tax authorities with both a challenge to the long-standing Revenue Rule and an opportunity for the tax authorities to potentially collect more tax revenue. The Revenue Rule, also known as the rule against foreign revenue enforcement, is a general legal principal that the courts of one country will not enforce the tax laws of another country. Canada is subject to the Revenue Rule, as evidenced in the unanimous Supreme Court Decision in United States of America v. Harden, 1963 CanLII 42 (SCC), [1963] SCR 366. Cartwright J. noted that: “a foreign State cannot escape the application of [the Revenue Rule], which is one of public policy, by taking a judgment in its own courts and bringing suit here on that judgment.”
However, tax authorities like the CRA can circumvent the Revenue Rule by including collection-assistance provisions via bilateral tax treaties. Collection-assistance provisions in tax treaties are clauses that enable tax authorities in one country to request help from tax authorities in another country to collect taxes. These provisions generally are reciprocal, meaning that both countries involved in the treaty agree to assist each other in the collection of taxes when requested. For example, Article XXVI of the Canada-United States Convention with Respect to Taxes on Income and on Capital (“Canada-US Treaty”), Assistance in Collection, allows Canada and US to “lend assistance to each other in the collection” to revenue claims, including taxes and civil penalties.
Nevertheless, collection-assistance provisions remain relatively rare as only seven out of the 94 bilateral tax treaties Canada, as of October 2024, includes some forms of collection-assistance provisions. The seven countries that have agreed to assist with Canada tax collections in their countries are the United States, the United Kingdom, the Netherlands, Norway, Germany, New Zealand, and Spain. This article will examine the collection-assistance provisions in the seven bilateral tax treaties to provide a general overview of the CRA’s ability to collect tax from foreign jurisdictions. The CRA’s apparent inability to collect tax from other countries and regions will also be discussed at the end of this article.
Collection-Assistance Provisions: Different Bilateral Tax Treaties Have Different Collection-Assistance Provisions.
A bilateral tax treaty is an agreement between two countries allocating taxing rights and to provide mechanisms for resolve tax-related issues between the two countries. The general goal is to prevent double taxation to a certain extent and to deter tax evasion. The collection-assistance provisions included in the bilateral tax treaties can be quite different. There are in total seven bilateral tax treaties that Canada have entered into that include some form of collection-assistance provisions: Convention between Canada and the United States of America with respect to Taxes on Income and on Capital (“Canada-US treaty”), Convention between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains (“Canada-UK treaty”), Convention between Canada and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“Canada-Netherland Treaty”), Convention between the Government of Canada and the Government of the Kingdom of Norway 2002 for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (“Canada-Norway Treaty”), Convention between Canada and New Zealand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“Canada-New Zealand Treaty”), Convention Between Canada and Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (“Canada-Spain Treaty”), and Agreement Between Canada and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Certain Other Taxes, the Prevention of Fiscal Evasion and the Assistance in Tax Matters (“Canada-Germany Treaty”).
Collection-assistance provisions generally do not require or obligate a country to provide assistance. The final decision is to be made by the country that receives the request for assistance. In addition, collection-assistance provisions are usually accompanied by provisions that permit countries to share and exchange relevant information.
Nevertheless, different bilateral tax treaties include different collection-assistance provisions. Some bilateral treaties, such as the Canada-UK treaty and the Canada-Spain treaty, include a very general collection-assistance provision, which simply permits the two countries to assist with each other in collection of taxes without providing too many details. Others, such as the Canada-US treaty and the Canada-Norway treaty, include much more elaborate clauses governing the collection-assistance requests. Different restrictions are included in bilateral tax treaties, which can include an imposed limitation period, restricted scope of collection in terms of the taxpayer’s citizenship/tax-residence status, and specific types of taxes to be collected.
Restrictions: The CRA Can Only Ask Another Jurisdiction to Help with Certain Types of Collections
While tax authorities may consider collection-assistance provisions a powerful tool, these provisions usually come with certain limitations and conditions that countries must follow. To begin with, countries retain the right to refuse assistance if the request would violate their sovereignty or public policy. For instance, if the requested collection violates the requesting country’s constitutional principles, the request can be denied.
Before requesting assistance from another country, CRA must have exhausted all available domestic remedies to collect the taxes within its jurisdiction. This means the CRA must have pursued collection through Canadian courts and other administrative mechanisms before turning to a foreign tax authority for help.
Moreover, collection assistance is typically only available when the tax debt is final and enforceable, meaning all domestic legal avenues, such as appeals or challenges, have been exhausted. If a tax matter is still under dispute (e.g. an ongoing tax audit review, an objection awaiting a decision from the CRA Appeals Division, or a Tax Court of Canada appeal yet to be heard), the collection-assistance provisions will not be applicable.
In addition, not all types of taxes and taxpayers are covered under collection-assistance provisions. Collection assistance is limited to taxes covered by the treaty, which typically include income taxes, corporate taxes, and some forms of wealth taxes. Other forms of tax, such as VAT or customs duties, may not be covered.
Application of the Collection-Assistance Provisions: Will the CRA be Able to Collect Taxes From Your Foreign Assets?
Taxpayers with international ties must be aware of the potential for cross-border tax collection. As countries work together to combat tax evasion and ensure compliance, the importance of collection-assistance provisions in tax treaties will likely become even more significant.
A taxpayer should first identify whether he or she has assets, income, or residence in a country that has a collection-assistance provision in its tax treaty with Canada. Only 7 countries currently agreed to assist with Canada in tax collection. A taxpayer does not need to be concerned about assets in any other countries being subject to CRA’s collection. If the taxpayer has assets in the United States, the United Kingdom, the Netherlands, Norway, Germany, New Zealand, and/or Spain, proper planning with the assistance of legal professionals may help minimize the risks of cross-border collection.
Before the CRA can seek assistance from a foreign tax authority, nevertheless it must exhaust all domestic remedies. This means a taxpayer can work with one of our expert Canadian tax lawyers to explore all possible appeal options, negotiated payment arrangements, or sought relief within Canada before worrying about foreign collection efforts.
Under certain circumstances, a taxpayer may also be able to challenge the collection-assistance process on the basis of CRA’s failure to follow required procedures or the violation of domestic laws in the foreign jurisdiction. However, a challenge like this, going against tax authorities like the CRA, is going to be a difficult battle, as evidenced by the existing case laws in Canada, reviewed and discussed in the following section.
Pro Tips – Protect Your Foreign Assets From CRA Collection
A Canadian tax resident is required to report foreign income on his or her income-tax returns, to provide the CRA with information related to their foreign properties if the aggregated value of the taxpayer’s specified foreign properties exceeds $100,000 Canadian dollars via T1135, and to inform the CRA the taxpayer’s interest in foreign affiliates via T1134. All of the requirements enable the CRA to learn about a taxpayer’s foreign assets. However, the CRA may not be able to access such foreign assets even if the taxpayer fails to pay his or her taxes in Canada. It is important for Canadian taxpayers to know the restrictions on CRA’s ability to collect from a foreign jurisdiction.
If you’re facing CRA’s collection actions or if CRA has threatened to take collection actions against you, especially if it concerns your foreign assets, you should engage with one of our expert Canadian tax lawyers. Our expert tax attorneys can provide legal advice and assist you with understanding your tax obligations, communicating with the CRA, and preparing and proposing payment plans to the CRA.
FAQ:
How Does CRA Know That I Have Foreign Assets?
Countries that agree to assist with CRA to collect taxes generally also agree to exchange relevant information with the CRA under the tax treaties. For example, Article XXVII of the Canada-US treaty includes provisions governing the exchange of information between Canadian and US taxing authorities. Specifically, the taxing authorities, the CRA and the IRS, can exchange “such information as is relevant for carrying out” the provisions of the treaty or of the domestic laws of Canada/US concerning taxes, so long as the domestic tax law is not contrary to the treaty.
In addition, the CRA may have information in relation to any foreign assets via the tax returns and information returns filed by you or related persons. If you have filed a T1135 form before, reporting your foreign assets with aggregate value exceeding $100,000 CAD, or a T1134 form, reporting your interest in foreign affiliates, then the CRA will be aware of your foreign assets. If you fail to file those forms you are subject to penalties.
What Happens When CRA Takes Collection Action To Collect Tax From Foreign Jurisdictions?
When a tax debt becomes final, after the taxpayer of the debt exhausts all possible avenues of dispute, the CRA should first look to collect the tax debt from the taxpayer’s assets in Canada. If the taxpayer’s assets in Canada cannot cover the total amount of tax debt and the taxpayer has foreign assets in one of the seven countries that agree to provide Canada with collection assistance, the CRA will then have to make a formal request to the taxing authority in that country to request relevant information and collection assistance. Subject to the applicable bilateral tax treaty, the taxing authority in that country will decide if CRA’s request is accepted. A taxpayer generally can challenge the decision to accept such a request if the request is against public policy or is invalid under the applicable tax treaty. If you have concerns regarding a CRA’s request for collection assistance from another country, please contact one of our expert Canadian tax lawyers for legal advice specific to your case.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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