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posted 4 weeks ago
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As global connectivity increases and tax laws grow more complex, tax authorities worldwide, including the Canada Revenue Agency (CRA), are intensifying efforts to collect taxes from individuals with foreign assets. Pursuing taxes on foreign assets challenges the traditional Revenue Rule while presenting opportunities to increase tax revenues. The Revenue Rule is a long-standing legal principle stating that one country’s courts will not enforce another country’s tax laws. Canada adheres to the Revenue Rule, as affirmed by the Supreme Court of Canada in the landmark case United States of America v. Harden, 1963 CanLII 42 (SCC), [1963] SCR 366. In this decision, Justice Cartwright noted: “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.”
Tax authorities like the CRA can bypass the Revenue Rule by leveraging collection-assistance provisions embedded in bilateral tax treaties. These provisions enable tax authorities in one country to request assistance from another country’s tax authorities to collect taxes owed. Typically, these provisions are reciprocal, meaning that both treaty partners agree to help each other with tax collection efforts when requested. For instance, Article XXVI of the Canada-United States Convention with Respect to Taxes on Income and on Capital (the “Canada-US Treaty“), titled Assistance in Collection, permits Canada and the United States to “lend assistance to each other in the collection” of revenue claims, including taxes and civil penalties.”
Despite their significance, collection-assistance provisions are relatively uncommon. As of October 2024, only seven out of Canada’s 94 bilateral tax treaties include such provisions. These countries are the United States, the United Kingdom, the Netherlands, Norway, Germany, New Zealand, and Spain. This article will explore the collection-assistance provisions in these seven bilateral tax treaties, offering a general overview of the CRA’s ability to pursue tax collection in foreign jurisdictions. Additionally, it will address the limitations of the CRA’s capacity to collect taxes from countries and regions that lack such provisions.
A bilateral tax treaty is an agreement between two countries that allocates taxing rights and provides mechanisms for resolving tax-related issues between the two nations. The primary aim of these treaties is to reduce the risk of double taxation and combat tax evasion. Collection-assistance provisions, which are included in some bilateral tax treaties, can vary significantly. As of October 2024, Canada has entered into seven bilateral tax treaties that contain collection-assistance provisions. These treaties include:
Collection assistance provisions typically do not mandate or compel a country to offer assistance. The decision to provide assistance is ultimately at the discretion of the country receiving the request. Additionally, these provisions are often accompanied by clauses that allow for the sharing and exchange of relevant information between the countries involved.
However, the collection-assistance provisions vary across different bilateral tax treaties. Some treaties, like the Canada-UK and Canada-Spain treaties, feature broad provisions that allow for mutual assistance in tax collection without providing extensive details. In contrast, other treaties, such as the Canada-US and Canada-Norway treaties, include more detailed and specific clauses outlining the process for collection assistance. These treaties may impose restrictions, such as limitations on the time frame for assistance, specific conditions related to the taxpayer’s citizenship or tax residence status, and limits on the types of taxes eligible for collection.
Although tax authorities view collection-assistance provisions as valuable tools, they often come with limitations and conditions that must be adhered to by the countries involved. One key limitation is that countries have the right to refuse assistance if the request infringes upon their sovereignty or public policy. For example, if fulfilling the request would violate a country’s constitutional principles, the assistance can be denied.
Before seeking assistance from another country, the CRA must first exhaust all domestic remedies for tax collection within Canada. This requires the CRA to have utilized Canadian courts and other administrative procedures to collect the taxes before requesting help from a foreign tax authority.
Additionally, collection assistance is generally only available once the tax debt is final and enforceable, meaning that all domestic legal avenues, such as appeals or challenges, have been fully exhausted. If a tax issue is still under dispute—such as during an ongoing tax audit, an unresolved objection with the CRA Appeals Division, or a pending appeal before the Tax Court of Canada—the collection-assistance provisions will not apply.
Furthermore, not all types of taxes or taxpayers fall under collection-assistance provisions. The assistance is limited to taxes specified in the treaty, typically including income taxes, corporate taxes, and certain wealth taxes. Other types of taxes, such as VAT or customs duties, may not be included.
Taxpayers with international connections should be mindful of the possibility of cross-border tax collection. As countries collaborate to address tax evasion and enforce compliance, the role of collection-assistance provisions in tax treaties is expected to grow in importance.
A taxpayer should first determine if he or she has assets, income, or residence in a country that has a collection-assistance provision in its tax treaty with Canada. Currently, only seven countries have agreed to assist Canada in tax collection. If the taxpayer’s assets are located in countries outside this list, there is no immediate concern regarding CRA collection. However, if assets are in the United States, the United Kingdom, the Netherlands, Norway, Germany, New Zealand, or Spain, proper planning with legal professionals can help mitigate the risks associated with cross-border tax collection.
Before the CRA can request assistance from a foreign tax authority, it must first exhaust all domestic remedies. This means taxpayers can collaborate with one of our knowledgeable Canadian tax lawyers to explore all available appeal options, negotiated payment arrangements, or other forms of relief within Canada before addressing potential foreign collection efforts.
In some cases, a taxpayer may challenge the collection-assistance process if the CRA fails to follow required procedures or if domestic laws in the foreign jurisdiction are violated. However, pursuing such a challenge against tax authorities like the CRA is a complex and difficult process, as demonstrated by existing case law in Canada, which is reviewed and discussed in the following section.
A Canadian tax resident must report foreign income on his or her income tax returns, disclose information about foreign properties if the total value of specified foreign properties exceeds $100,000 CAD via Form T1135, and report interests in foreign affiliates using Form T1134. These requirements help the CRA gain insight into a taxpayer’s foreign assets. However, even if a taxpayer fails to pay taxes in Canada, the CRA may face challenges in accessing foreign assets. It is essential for Canadian taxpayers to understand the limitations on the CRA’s ability to collect taxes from foreign jurisdictions.
If you’re facing collection actions from the CRA or have been threatened with such actions, particularly concerning your foreign assets, it’s crucial to consult with one of our experienced Canadian tax lawyers. Our expert tax attorneys can offer expert legal advice, help you understand your tax obligations, communicate effectively with the CRA, and assist in preparing and proposing payment plans.
Countries that have agreed to assist the CRA in collecting taxes typically also agree to share relevant information under the terms of tax treaties. For example, Article XXVII of the Canada-US tax treaty outlines provisions for the exchange of information between Canadian and US tax authorities. This allows the CRA and the IRS to exchange information that is necessary for enforcing the treaty’s provisions or the domestic tax laws of either Canada or the US, provided that the exchange does not conflict with the terms of the treaty.
Additionally, the CRA may possess information about your foreign assets through tax returns and information returns filed by you or related parties. If you have previously submitted a T1135 form, reporting foreign assets with a total value exceeding $100,000 CAD, or a T1134 form, disclosing your interest in foreign affiliates, the CRA will be aware of your foreign holdings. Failing to file these forms can result in penalties.
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 experienced 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 articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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