doing business in canada - Davies Ward Phillips & Vineberg LLP

Amendments, SIFTs and their unitholders are taxed in a manner similar to corporations and their shareholders.Certain real estate investment trusts (REITs) are exempt from SIFT taxation.The application of the SIFT Amendments to SIFTs existing on October 31, 2006 is deferred until 2011 providedthere is no "undue expansion" of the SIFT before that time as determined in accordance with guidelinesreleased by the Department of Finance (the "Guidelines").Specific rules were enacted to facilitate the conversion of SIFTs into corporations. Such rules providemechanisms for a unitholder to be able to dispose of SIFT units on a rollover basis on a corporate conversionreorganization. These rules also facilitate corporate conversions of SIFTs by addressing issues such as employeeoptions, debt settlement, and third-party creditors.General Anti-Avoidance RuleThe Tax Act includes a broadly-worded anti-avoidance rule ("GAAR") to prevent "abusive avoidancetransactions". The rule supplements specific anti-avoidance rules in the Tax Act. GAAR is not intended to applyto a transaction that is undertaken primarily for bona fide purposes other than to obtain a tax benefit, or thatdoes not result in an abusive tax avoidance. If GAAR applies, CRA may re-determine the tax consequences of atransaction or series of transactions resulting in tax liability for one or more participants in the transaction(s).SPECIAL RULES FOR NON-RESIDENTSWithholding TaxA person resident (or deemed resident) of Canada who makes a payment to a non-resident in respect of mosttypes of passive income (including dividends, rent, and royalties) is generally required to withhold tax equal to25% of the gross amount of the payment. Interest that is “participating debt interest” and interest paid orcredited by a Canadian resident to a non-arm’s length non-resident person is also subject to withholding tax.Conversely, interest other than "participating debt interest" paid by a Canadian resident to an arm's length nonresidentperson is exempt from withholding tax.The fifth protocol to the Canada-U.S. tax treaty has eliminated withholding tax for payments of interest to nonarm'slength U.S. persons that are entitled to the benefits of such treaty for 2010 and subsequent years.The 25% withholding rate may be reduced under an applicable tax treaty. For dividends, the typical treaty rateis 15%, except where the shareholder is a corporation that beneficially owns 10% or more of the voting shares ofthe dividend payer, in which case the rate is generally reduced to 5%. The typical treaty rate on royalties is 10%and may be reduced to 0% on certain royalties.A partnership, any member of which is a non-resident, is itself deemed to be a non-resident under the Tax Act.Consequently, a payment by a Canadian resident to a partnership with any non-resident members is subject tofull withholding tax; however, administratively, CRA may permit the payer to look through the partnership andwithhold based on the residence and treaty status of the members of the partnership.Although withholding tax is imposed on the non-resident recipient, the resident payer is required to deduct thetax and remit it to CRA on behalf of the non-resident, failing which the resident payer becomes liable for the tax.A non-resident carrying on business through a Canadian branch may be deemed to be a resident of Canada forpurposes of the withholding tax rules. The effect of these rules is to make certain payments made by the nonresidentto another non-resident subject to Canadian withholding tax.86 Tax Considerations