Resurrecting the Advisory Panel’s Recommendation for a Full Exemption System


For some time there has been debate about our current system of providing double tax relief for foreign-source active business income earned by Canadian corporations indirectly through foreign affiliates.  In the 1970’s the drafters of the Act chose a hybrid mechanism using both the exemption and credit systems.  But this requires surplus account tracking, and over the decades the compliance burden of the surplus rules has increased out of all proportion to the original policy objectives intended to be advanced.  It is now highly contestable whether Canada should continue to claim taxing jurisdiction over active business income earned in countries with which we do not have a tax treaty or TIEA.

Scott Wilkie and Nick Pantaleo led the charge advocating for Canada to abandon the credit features of this system, and replace it with a full exemption system, in their 2007 travelling lectureship series.  The Advisory Panel on Canada’s System of International Taxation then took up the cause in 2008 by recommending a full exemption system. But this has not been implemented, and today we still have unnecessarily complex foreign affiliate rules that require costly surplus tracking, in the circumstances of our de facto exemption system which generates little or no tax revenue from the continued use of the credit system.  The credit system doesn’t protect the Canadian tax base, and no longer serves any useful tax policy purpose.

I have now tried to resurrect this issue in my recent paper and presentation for the Canadian Tax Foundation’s annual conference.  I have also published this op-ed in the National Post, which is an attempt to summarize the issue for a wider readership than international tax experts.  With the OECD BEPS pillar 2 debate nearing conclusion, we may see more attention focused on our international tax rules as Canada grapples with how to implement the global minimum tax “best practices”.  I suggest that however we choose to adopt the pillar 2 proposals, we should revisit the fundamental policy of our foreign affiliate rules and finally move to a simpler full exemption system that reduces the compliance burden of surplus tracking for Canadian multinationals competing abroad.


- Professor Geoffrey Turner