Canada business set up strategy in 2023
Since 2003, Healy Consultants Group PLC assists multi-national Clients conduct business in Canada.
Multi-national Clients planning to conduct business in Canada can do so either i) directly through a Canadian branch or ii) indirectly through a Canadian LLC subsidiary.
Furthermore, it is wise to consider if your Canadian business can be classified as tax resident or non-resident. And should the company be registered federally or provincially?
- Depending on the province or territory, the combined federal and provincial corporate tax rate on general active business income ranges between 23% and 31%.
- A Canadian resident corporation is generally liable for both federal income tax at a rate of 15%, and provincial income tax in those provinces in which it has a permanent establishment. For example, a Canadian corporation that carries on business in the province of Ontario through a permanent establishment is generally liable for income tax at a combined rate of 26.5%, consisting of federal tax levied at a rate of 15% and Ontario tax levied at a rate of 11.5%.
- Companies pay federal, provincial and municipal taxes. The combined federal and provincial or territorial corporate tax rates vary depending upon the province or territory where a corporation conducts business and the nature of its operations.
- Corporate income taxes are payable in monthly instalments, with balances owing due two months after the corporation’s taxation year-end. Corporation tax returns must be filed no later than six months after the year-end, with no extensions available.
- A provincial tax return must also be filed for each province in which the corporation has a permanent establishment.
- Funds repatriated to an overseas parent company suffer Canadian withholding tax of 25% including i) royalties ii) dividends iii) management fees iv) administrative fees and v) technical service fees.
- Our multi-national Clients planning to operate a services business in Canada must do so through a Canadian subsidiary. It is impractical for a foreign corporation to operate a Canadian services business either directly or through a Canadian branch. As well as corporation tax on annual net profits, non-residents suffer 15% withholding tax on amounts received for services rendered in Canada.
- Double taxation treaties reduce withholding tax rates. For example, the Canada-US Treaty allows i) 5% withholding tax on dividends and ii) 10% on royalties.
- Prior to the repatriation of profits to overseas shareholders, we recommend our multi-national Clients secure a clearance certificate from CCRA. This certificate allows overseas payments to enjoy withholding tax exemption.
- Where the foreign corporation is resident in a country with which Canada has a double-tax treaty, the corporation will generally be exempt from Canadian taxation on its business profits, except to the extent that the profits were earned through a permanent establishment situated in Canada.
- Our multi-national Clients have a Canadian ‘permanent establishment’ if one or more of the following conditions are met:
- fixed place of business through which the business of the corporation is wholly or partly carried on. For example, an office, factory, workshop or building site; or
- carrying on business in Canada through a Canadian intermediary. For example, a dependent agent, acting on behalf of the overseas company, having the authority to conclude contracts in the corporation’s name.
- A non-resident should ensure that they have not established principal-agent relationships with anyone related to the economic activities.
Goods and Services Tax (GST)
- Multi-national Clients making taxable supplies in Canada in the course of a commercial activity are required to register for and charge, collect and remit goods and services tax (GST) on such supplies. The federal government imposes a GST of 5%. All provinces impose an additional provincial sales tax (PST).
- For example, total Ontario sales tax is 13% including i) an 8% Ontario component and ii) a 5% federal component. Multi-national Clients making retail sales in Quebec must obtain a RST licence or registration number in the province. Quebec VAT is 9.975%.
- PST generally does not apply to purchases of taxable goods, software, and services acquired for resale. Registered vendors can claim this resale exemption by providing to their suppliers either their PST number or a purchase exemption certificate. Certain exemptions also exist for use in manufacturing, farming, and fisheries.
- If the subsidiary has been formed under the laws of a specific Canadian province or territory, the subsidiary will need to register in each Canadian jurisdiction where business will be conducted, other than its jurisdiction of formation.
Canada-USA double taxation treaty
To enjoy double taxation treaty benefits, the Canadian entity must have a ‘permanent establishment’. Treaty benefits include:
- Dividends withholding tax is 5%. IP withholding tax is 10%.
- USA goods that satisfy NAFTA Rules of Origin are generally entitled to duty-free entry into Canada. The exporter must provide the importer with a duly completed and signed NAFTA Certificate of Origin.
- Zero Canadian withholding tax on arm’s length or non-arm’s length interest paid to US persons.
- A US. LLC cannot benefit from the Canada-US Tax Treaty because, in the view of the CRA, it does not qualify as a US taxpayer under the Treaty.
- Multi-national Clients can apply for one of the programs enabled by the Canadian government, such as the Immigrant Investor Venture Capital Program.
- One can apply for the Canadian Entrepreneur Startup Visa, which was created for foreign investors.
- Current expenditures on scientific research and experimental development can be deducted in the year incurred or carried forward indefinitely to be used at the taxpayer’s discretion to minimise tax payable
Non-resident-owned investment corporation
- The non-resident-owned investment corporation (NRO) is a Canadian corporation that is not subject to regular Canadian corporate tax. In many cases it can be effectively utilised by non-residents as a vehicle to invest in Canada. The total tax burden can be reduced, and management of the non-resident parent company’s foreign tax credit position given more flexibility.
- An NRO is a Canadian corporation owned by non-residents that, effectively, is taxed as if it were a non-resident of Canada. It pays a refundable federal tax of 25% on its taxable income (excluding certain capital gains). This tax is refunded as the NRO pays or is deemed to pay dividends to its shareholders, at which time the dividend is subject to withholding tax. Under Canadian domestic law, the withholding tax rate is 25% but is often reduced by tax treaty provisions. For example, the rate may be reduced to 10% under the Canada-US Income Tax Convention, where the US corporate shareholder owns at least 10% of the NRO voting equity.
- Provincial income tax is generally not imposed on an NRO, except in limited circumstances. An NRO is not subject to federal Large Corporations Tax and its use can often be structured to minimise or eliminate provincial capital taxes.
- A corporation must meet the following criteria throughout a taxation year to qualify as an NRO for the year:
- All shares and funded debt of the NRO must be beneficially owned by non-residents of Canada.
- The NRO can only derive its income from specified sources (which includes interest on debt to a related entity such as a Canadian operating company owned by the NRO’s non-resident shareholder).
- Not more than 10% of the company’s gross revenue for each taxation year can be in the form of rents, hire or chattels, charter party fees or remunerations.
- The NRO’s principal business in each taxation year cannot be from the making of loans or trading and dealing in securities.
- Foreign corporations can benefit by using an NRO as a means of financing their Canadian subsidiaries. With a properly-structured NRO, they may defer foreign tax on income of the Canadian operation, reduce withholding tax on distributions to the foreign parent and facilitate the parent’s use of foreign tax credits in respect of Canadian source income.
Topics of focus for tax authorities
When doing business in Canada, and to not attract negative attention from the Canadian government, our multi-national Clients should maintain high professional standards regarding:
- Transfer pricing.
- Whether non-residents have a permanent establishment in Canada.
- Treaty shopping to reduce Canadian withholding tax and capital gains tax.
- Charging management fees and general and administrative expenses.
Because of the following international agreements, federal government procurement documents and contracts are highly standardised and generally inflexible:
- The Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA);
- The Canada-United States-Mexico Agreement;
- WTO Revised Agreement on Government Procurement (AGP).
- The Common Reporting Standard (CRS) for the automatic exchange of financial account information between foreign tax authorities requires Canadian financial institutions to have procedures to identify accounts held by residents of any country other than Canada or the United States, and to report the required information to the CRA. Having satisfied itself that each jurisdiction has appropriate capacity and safeguards in place, the CRA will formalise exchange arrangements with other jurisdictions, leading to the exchange of information on a multilateral basis.
- Canada reports enhanced tax information to the United States under an intergovernmental agreement between Canada and the United States to improve international tax compliance and to implement the US FATCA.
Healy Consultants Group PLC helps our multi-national Clients conduct business in Canada. Contact us for a free consultation.