INFocus: Corporations doing business with Canada – Some taxation issues

Date: August, 2012 different country flags

Originally published in the Summer 2012 issue of Comments.

Corporations worldwide are dealing with Canada. Depending on their level of involvement, these corporations may be subject to Canadian corporate tax and/or filing obligations.

This article will focus on some of the Canadian taxation issues faced by corporations doing business with Canada.

Legislation

According to Canadian income tax legislation, any non-resident corporation that carries on business in Canada or disposes of certain Canadian property (known as “taxable Canadian property”) will be subject to Canadian corporate income tax.

Therefore, it is important to determine first whether the corporation is, in fact, carrying on a business in Canada. Many activities could result in corporations carrying on a business in Canada, including, but not limited to: the solicitation of orders in Canada, whether contracts are concluded in Canada and if Canada is the location of operations that produces the profits.

Not carrying on business in Canada

If it is determined that the foreign corporation is not carrying on business in Canada, the corporation will not be subject to Canadian corporate tax or filing obligations. However, if a corporation disposes of taxable Canadian property, it will still be subject to Canadian corporate income tax on the disposition even if it does not carry on business in Canada.

Carrying on business in Canada

If it is determined that the foreign corporation is carrying on a business in Canada, its Canadian corporate tax obligations will depend on whether Canada has a tax treaty with the particular country.

If no tax treaty exists, the corporation will be subject to Canadian corporate tax on business activities carried on in Canada. It will also be required to file a Canadian corporate income tax return.

If a tax treaty exists, Canadian corporate tax obligations are generally dictated by the corporation’s permanent establishment status in Canada. The term permanent establishment varies according to each individual tax treaty.

  • If the corporation does not have a permanent establishment in Canada, the corporation will not be subject to Canadian corporate tax. However, the corporation must file a corporate tax return to disclose its Canadian business activities and to claim the treaty-based tax exemption.
  • If the corporation has a permanent establishment in Canada, the corporation is subject to Canadian corporate tax on profits attributable to that permanent establishment. The corporation is required to file a Canadian corporate income tax return.

Other Canadian taxation issues

Foreign corporations that are taxable in Canada may also be subject to branch tax on funds not reinvested in Canada. Branch tax is generally a 25 percent tax, unless specific tax treaties allow for a reduced rate or exemption.

If the foreign corporation forms a Canadian subsidiary, the subsidiary will be subject to Canadian corporate tax and filing obligations similar to other Canadian corporations.

In cases in which a Canadian corporation makes payments to a non-resident corporation, such as payments for services, the Canadian corporation may be required to withhold certain amounts from these payments. A foreign corporation may be entitled to a refund of the Canadian taxes withheld, if this is permitted in a treaty between Canada and the particular country.

Corporations doing business with Canada face numerous other issues, each with its own set of rules. These include, for example, Canadian sales tax obligations, Canadian payroll obligations, transfer pricing, registering a corporation in Canada and employing foreign workers in Canada.

It is important to consider all aspects of doing business in and/or with Canada. Being proactive when structuring your business dealings with Canada, and knowing your Canadian tax and filing obligations, is a good start.

Connect with the Author

This publication was prepared by the Tax Group and discusses some of the Canadian taxation issues faced by corporations doing business with Canada. To speak with someone in our Tax Group, contact info@crowesoberman.com.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.

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