Canada’s Controlled Foreign Affiliate (CFA) Rules

When people think about reducing tax burdens in high-tax countries, the typical strategy that comes to mind is setting up a company in a tax haven to earn profits without paying taxes. However, what seems like an obvious idea to most individuals is equally obvious to governments and tax authorities. Combating tax avoidance through offshore tax havens has been a perpetual focus for tax agencies in most developed countries. But how exactly do tax authorities address such behavior?

One common approach is the implementation of Controlled Foreign Company (CFC) rules. These rules essentially state that if a foreign company is controlled by local residents, its profits—whether distributed or not—can be deemed as distributed to the residents and taxed under the residents’ domestic tax laws. In other words, even if a tax haven company earns substantial profits and is not taxed locally, the resident’s government will treat those profits as if they belong to the resident and impose taxes accordingly. While CFC rules vary across countries, this article focuses on Canada’s version of these rules: the Controlled Foreign Affiliate (CFA) regime.

Let’s dive into Canada’s CFA rules and how they function. Before proceeding, it’s worth noting that these rules are highly complex, and consulting a tax advisor is strongly recommended when applying them.