Doing Business In Canada
Originally Presented At Alliott North American Conference On: January 11, 2012
(updated January 28, 2013)
Presented by:
Aaron Schechter, CA
Tax Partner, Cunningham LLP
aaron@cunninghamca.com
416-496-1051 x309
Topics Covered
1. Types of entities that can be used to do business in
Canada
2. Corporations – incorporating, Canadian taxes, including
HST/GST
3. Individuals
4. Four Case Studies – Traps and Considerations for NonResidents Doing Business in Canada
5. Why do business in Canada?
TOTAL POPULATION - $35M (APPROX.)
* CALGARY - $1.1M
* VANCOUVER - $2.3M
* MONTREAL - $3.6M
* OTTAWA - $1.1M
* TORONTO - $5M
Doing business in Canada
• First question – how?
• Types of entities:
1.
2.
3.
4.
Proprietorship
Branch of US Corporation
Partnership / Joint Venture
Corporation
Types of Entities
1. Proprietorship
•
•
Taxed in Canada as individual to the extent there is a
permanent establishment in Canada
New rules introduced in 5th Protocol to Treaty with respect to
“permanent establishment”
• Presence and revenue test – 183 days in 12 month
period and >50% of enterprise’s revenues
• Same/connected project test – 183 days in 12
month period relating to same/connected project
2. Branch
•
Taxed as Cdn corporation and subject to additional 5%
Branch Tax on after-tax income > $500,000 if not reinvested
in Canada
Types of Entities
3. Partnership / Joint Venture
•
•
•
Not a taxable entity for Canadian tax purposes
Partners/joint venturers are taxed on partnership/JV income
Branch Tax would also apply
4. Corporation
•
•
If a permanent establishment will be created in Canada,
generally recommended that a corporation be used.
Considerations:
•
•
Where to incorporate?
What type of corporation?
Incorporating in Canada
• Where to incorporate?
•
•
No relevance to where carrying on business
Register separately to carry on business in another prov.
•
Federal, Ontario, Alberta, Manitoba, Newfoundland and
Saskatchewan require 25% directors to be resident in
Canada
• What type of corporation to incorporate?
•
•
Regular corporation (limited liability)
Unlimited liability corporation
•
•
•
NSULC (Nova Scotia), BCULC (British Columbia), AULC
(Alberta)
Hybrid entity, flow through (i.e. partnership) for US tax
purposes; corporation for Cdn tax purposes
Not entitled to Treaty benefits under 5th Protocol (25%WTR)
Canadian Corporate Taxes
• Income taxes
•
•
Federal, Provincial
No Municipal income tax
• Harmonized Sales Tax / Goods & Services Tax / Retail
Sales Tax
• Payroll taxes
•
Canada Pension Plan, Employment Insurance cost to
employer (approx. $3,250 per employee)
•
Employer Health Tax 1.95% on salaries > $400,000 (Ontario)
•
Canada Pension Plan, Employment Insurance and income
tax withholding from employee’s remuneration and remitting
requirements
Canadian Income Tax Basics
Non-Canadian Controlled Private Corporations
Corporate Income Tax Rates (Current as at 1/28/2013)
Federal
Provincial Combined
Alberta
15%
10%
25%
BC
15%
10%
25%
Manitoba
15%
12%
27%
New Brunswick
15%
10%
25%
Newfoundland
15%
14%
29%
Nova Scotia
15%
16%
31%
Northwest Territories
15%
11.5%
26.5%
Nunavat
15%
12%
27%
Ontario
15%
11.5%
26.5%
Prince Edward Island
15%
16%
31%
Quebec
15%
11.9%
26.9%
Saskatchewan
15%
12%
27%
Yukon
15%
15%
30%
Harmonized Sales Tax (HST) / Goods &
Services Tax (GST) / Retail Sales Tax (RST)
• GST is a Value Added Tax (5%) on most goods/services
sold
• RST is a sales tax on most goods/services sold
• Most provinces have or will be harmonizing the Federal
GST and RST into an HST that is a Value Added Tax
• E.g. Ontario 13% HST
• Some provinces have maintained the separate GST and
RST systems
• E.g. Manitoba 5% GST and 7% RST
Harmonized Sales Tax (HST) / Goods &
Services Tax (GST) / Retail Sales Tax (RST)
• Non-residents “carrying on business” in Canada must
register for GST/HST regardless if they have a
permanent establishment
• As a GST/HST registrant, corporation must charge the
GST/HST where applicable and is also generally entitled
to a refund (Investment Tax Credit (ITC)) on GST/HST
paid
• Non-residents “carrying on business” in Canada must
also post a security deposit of 50% of the estimated net
HST it expects to remit to the CRA in the next 12 months
(minimum $5,000; maximum $1,000,000)
Canadian Income Tax Basics
Personal Income Tax Rates
• Progressive tax brackets
• Each Province and Federal have different brackets
• 4 types of income that can be taxed at different rates:
•
Regular income (employment, self-employment, interest, rent)
•
Capital gains (50% of tax rate of regular income)
•
Eligible dividends (generally public company dividends)
•
Non-eligible dividends (generally private company dividends)
Canadian Income Tax Basics
2013 Marginal Personal Income Tax Rates
Ontario Resident
(Combined Federal and Ontario)
Canadian Dividends
first $39,723
Other
Income
20.05%
Capital
Gains
10.03%
Eligible Non-Eligible
Dividends Dividends
-1.89%
2.77%
over $39,723 up to $43,561
24.15%
12.08%
3.77%
7.90%
over $43,561 up to $69,963
31.15%
15.58%
13.43%
16.65%
over $69,963 up to $79,448
32.98%
16.49%
14.19%
17.81%
over $79,448 up to $82,422
35.39%
17.70%
17.52%
20.82%
over $82,422 up to $87,123
39.41%
19.70%
19.88%
23.82%
over $87,123 up to $135,054
over $135,054 up to
$509,000
over $509,000
43.41%
21.70%
25.40%
28.82%
46.41%
23.20%
29.54%
32.57%
49.53%
24.76%
33.85%
36.47%
Canadian Income Tax Basics
Taxability of U.S. individual residents
• Employment income earned by a non-Canadian resident
individual while in Canada is not taxable per Treaty as
long as <$10,000 or individual is in Canada <183 days
and remuneration paid by US company
•
•
May still have to file a personal income tax return in Canada
Whole host of Cdn payroll tax issues for US company
• Self-employed business income only taxable if individual
has permanent establishment per Treaty
•
•
Likely still has to file a personal income tax return in Canada
even if no permanent establishment
If services performed in Canada, payments are subject to
15% withholding tax (refunded when personal tax return filed)
Canadian Income Tax Basics
Taxability of U.S. individual residents (cont’d)
• Dividends and royalties paid by Cdn resident are subject
to withholding tax based on Treaty
• Interest no longer subject to withholding taxes per Treaty
• Rents earned and capital gains realized on Cdn real
estate (and companies that own real estate) are taxable
in Canada
•
•
Rents and capital gains on real estate are subject to
withholding tax
Capital gain on real estate (and sale of shares of company
that owns real estate) requires the obtaining of a clearance
certificate and evidence of withholding tax paid
Tax Considerations and Traps for
Non-residents
Thin Capitalization Rules
• US Corporation incorporates a Canadian subsidiary
corporation and subscribes for nominal share capital,
$100.
• US Corporation capitalizes the Canadian subsidiary with
a $1,000,000 interest bearing loan (10%).
• Trap: Interest expense is denied to Canadian subsidiary
to the extent
Interest bearing debt to non-residents minus (1.5 x equity belonging to non-resident) X Interest on debt
Interest bearing debt to non-residents
• Solution: make debt non-interest bearing
Tax Considerations and Traps for
Non-residents
Treaty Based Corporate Tax Return
• US Corporation sells goods into Canada via an
independent sales agent. All contracts finalized at head
office in US.
• US Corporation is deemed to be “carrying on business”
in Canada.
• Trap: Even though income earned by US Corporation is
not subject to tax in Canada because there is no
permanent establishment, there is still a requirement for
US Corporation to file a “Treaty Based” Canadian
corporate income tax return.
Tax Considerations and Traps for
Non-residents
Multiple Issues
• US Corporation sells manufacturing equipment to a
Canadian corporate customer for $1,000,000 plus a
$150,000 fee for installation and training services.
• US Corporation sends a team of its employees to install
the equipment and train the Canadian corporate
customer’s staff.
• The US Corporation’s team will have to spend 1 month in
Canada.
Tax Considerations and Traps for
Non-residents
• Trap: 15% withholding tax
•
All payments made by Canadian corporate customer for installation
and training services performed in Canada by US Corporation’s
employees will be subject to 15% withholding tax.
•
Solution #1: US Corporation should file a “Treaty Based” Canadian
corporate income tax return to recover full refund of withholding tax
since no permanent establishment.
•
Solution #2: US Corporation can apply for a “Treaty-Based
Regulation 105 Waiver” to exempt it from being subject to the 15%
withholding requirement. A waiver may be granted by the CRA when
a non-resident corporation (or its employees) is (are) required,
pursuant to a contract or an agreement, to be physically present in
Canada for 180 days or less.
Tax Considerations and Traps for
Non-residents
• Trap: Employer Tax Issues and Obligations
•
As a non-resident employer employing individuals who
perform services in Canada, US Corporation will be required
to follow Canadian domestic payroll tax law and will be
subject to the following obligations:
•
•
US Corporation will be required to register with the CRA
for Canadian payroll purposes;
US Corporation will be required to withhold a prescribed
amount of Canadian personal income taxes from each
pay cheque on behalf of each individual employee in
respect of employment services performed and remit the
amount to the CRA;
• EI and CPP likely not required to be remitted/paid.
Tax Considerations and Traps for
Non-residents
• Trap: Employment Income and Personal Tax Issues
•
Remuneration derived by the U.S. resident employee will be
taxable in Canada to the extent that the amounts are in
respect of the employment exercised in Canada unless:
• Such remuneration does not exceed $10,000; or
• The employee is present in Canada for a period or
periods not exceeding 183 days in any 12 month period
• The individual will be required to obtain a Canadian tax
identification number, file a Canadian personal income tax
return and pay Canadian personal income taxes on his or her
Canadian source employment income
Tax Considerations and Traps for
Non-residents
•
Solution #1: US Corporation and individual employees
comply with administrative requirements (i.e. filing tax returns,
withholding requirements, etc.).
•
Solution #2: the employer and employee can jointly file a
“Treaty-Based Regulation 102 Waiver” . If the waiver
application is accepted by the CRA, US Corporation will be
absolved from the Canadian personal income tax withholding
requirements.
In addition, the individual employees will not be required to
file a Canadian personal income tax return.
Tax Considerations and Traps for
Non-residents
Real Estate
• US individual (or corporation, or LLC – it doesn’t matter)
owns a rental building in Canada.
• Tenant pays monthly rent directly to US resident.
•
Trap: Withholding taxes required on rents paid to nonCanadian resident
•
The tenant is technically required to withhold 25% of rental
payment and remit it to CRA. If tenant does not withhold and
remit, the non-resident is required to remit every time rent
payment is received.
•
Penalties and interest could be applicable if no withholdings
are received by the CRA.
Tax Reasons for Doing Business In
Canada?
• Low combined corporate income tax rates
• Low withholding rate on repatriation of funds back to US
• Significant tax credits for profitable corporations carrying
on Scientific Research & Experimental Development
• Favourable tax depreciation rates on most classes of
assets, including full write-off over 3 years on M&P
equipment
• Federal and provincial carry back of losses to preceding
3 years and carry forward for immediate use in any of the
next 20 years
Cunningham LLP
Who are we? www.cunninghamca.com
• 6 partner firm; 40+ staff
• Located in Toronto
• Assurance, non-assurance, corporate and personal tax
compliance
• Valuations and corporate finance
• Strategic tax planning for owner-managed business
• Wealth management