Tax Implications of U.S. Companies Expanding to Canada Watch Video
Allan Madan, CPA, CA
Many American companies today are looking towards Canada as one of the primary destinations Read More…
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
Hi, Alan that was a very informative article. I was wondering what is the difference between a branch and a subsidiary for tax purposes?
Hi Michelle,
In terms of tax purposes, branches and subsidiaries are subjected to similar tax laws. Canadian branches of foreign corporations are subjected to income tax in the same ways as if it was classified as a subsidiary. One major difference is that permanent establishments under which branches fall also have to pay a ‘branch tax’. Branch tax is payable at the rate of 25% of the after-tax profits of the branch operations not being reinvested in Canada. Branch tax is roughly equivalent to the withholding tax, which would be payable on dividends paid by a Canadian subsidiary to its foreign parent organization. The rate is reduced under certain tax treaties to 10% or 15%. Under the Canada-U.S. Treaty, the rate has been further reduced in certain circumstances to 5% of after-tax profits. In addition, certain treaties, such as the Canada-U.S. and Canada-U.K. treaties, provide for an exemption from branch tax.
Best Regards,
Allan Madan
Hi Allan,
is there anyway to avoid or at least minimize the branch tax?
Hi Shane,
If you are classified as a branch then you will have to pay branch tax. So in order to avoid paying it is simply to convert or structure your company into a subsidiary or if you are located in either British Columbia, Alberta or Nova Scotia then you can structure into an unlimited liability corporation (ULC) which can avoid Canadian branch tax.
Best Regards,
Allan Madan and Team
Hi Allan,
I’ve heard that some recent changes in the US-Canada Tax treaty have severe repercussions for ULC’s? is that correct?
Hi Huy,
There was some provisional changes in 2008 limiting treaty protection for fiscally transparent entities on both sides of the border. This potentially denied treaty-reduced withholding tax rates on certain payments from a Canadian ULC to a US recipient. So many people were concerned that ULC’s were no longer viable options for US investors looking to create separate legal entities in Canada for investment or expansion purposes.
The CRA however erased these doubts by making amendments which accepts the use of various repatriation strategies and multiple-shareholder UlCs to avoid the new treaty exclusions.
Best Regards,
Allan Madan and Team
Hi Allan,
What if during the course of my working in Canada I become a Canadian permanent resident and receive Canadian citizenship, would I be allowed a credit for the taxes that I paid when I was not a PR/citizen?
Hi Charles,
Unfortunately there are not many available options in terms of tax credit. Depending on your citizenship/residency of another country and if Canada had a tax treaty/arrangement then you could have received tax credits from that specific country as to avoid double taxation. If you specify your country, I could possibly further assess your situation.
Best Regards,
Allan Madan and Team
Hi Allan,
I run an online ebay business, if I make a sale to a Canadian customer, does that count as carrying on business and would I have to file a Canadian tax return?
Hi Thompson, Assuming that you are an American based seller with no permanent establishment in Canada and are shipping the sold goods from the United States then you do not have to file a Canadian tax return. You however will have to disclose all of your income from your ebay business including your Canadian sales to the IRS.
Best Regards,
Allan Madan and Team
I am also a US ebay seller with significant sales to Canadian customers. What if I have a contract with FedEx that gives me discount on shipping to Canada. Since FedEx has a permanent establishment in Canada, how would that affect me?
Hi Chrissy,
As long as you are not soliciting orders or offering anything for sale in Canada through FedEx then it will have no tax implications for you. FedEx are the ones that will be subjected to tax in Canada.
Best Regards,
Allan Madan and Team
Hi Allan,
What about American S Corporations in Canada? what are their tax implications?
Hi Cruz,
Please have at look at this article on S Corporations http://madanca.com/s-corporation-for-canadians
How are American LLC’s treated for tax purposes, are they eligible for treaty benefits?
Hi J.J.,
Unlike branches and subsidiaries, an LLC is not eligible for treaty benefits under the Canada-US Income Tax Treaty. However, in some circumstances it is possible for LLC’s to access some of the treaty benefits by using the look-through rule which requires Canada to extend Treaty benefits to a US resident where the following conditions are met. First, the US resident must be considered under US tax law to have derived Canadian-source income, profit, or gain through an entity, such as an LLC, that is not resident in Canada. Second, the US tax treatment of such amount is the same as if it had been derived directly by the US resident instead of through a fiscally-transparent entity.
The look-through rule is meant to enable US resident members of a fiscally-transparent entity, such as an LLC, to access Treaty benefits for the amount of Canadian-source income, profit, or gain derived by the entity and proportionally allocated to the US resident members.
The CRA’s long standing position is that an LLC is a corporation for the purposes of the Canada Income Tax Act, and the LLC must, therefore, pay Canadian taxes like any other corporation. The members of the LLC will not pay Canadian income tax on the LLC’s income even if the members are considered to earn the income under US tax law.
Best Regards,
Allan Madan and Team
Hi Allan,
I own an electronic commerce company that host websites for many different clients around the world including Canadians. My company is based in Argentina but my servers which are used to host the websites is physically located and housed in Canada. I have no Canadian office nor employees other then ones I contracted to set up the server. There is also no personnel needed to maintain the ongoing functioning of the servers. I have no Canadian bank account, payment is made in Argentina, and the contract for my services takes place outside of Canada. I also have no ties and would be classified as a non-resident. In this situation, would I be classified as carrying on business in Canada? Thank you in advance, I know this is a complicated matter.
http://www.youtube.com/watch?v=X2jyaqN-sQg
Companies that own a server that is located in Canada will be deemed as carrying on business and will face tax implications
Hi Allan, I am a non-resident of Canada and have an engineering company based in Spain. My company provides services to many different countries around the world. For a job in Canada, I have been contracted by a Canadian company to perform work on an oil platform. This is my only contract in Canada, and I will be temporarily in Canada for a period of 1 week to do this job. My payment for this job will be outside of Canada.
Would I be classified as carrying on business in Canada?
Hi Guillermo,
Generally you would not be classified as carrying on business in Canada since you have no major business operations physically in Canada outside of your temporary one week assignment. Though the number of the workers entering to do this contract might cause some problems, but if it is only you then there is not sufficient evidence to conclude that you are carrying on business in Canada.
Best Regards,
Allan Madan and Team
Regarding this carrying on business issue, it seems that one condition is insufficient evidence to suggest that a person/company is carrying on business.
Hi Timothy,
carrying on business in Canada seems to be a really grey area, sometimes a single condition can warrant being classified as one while other times it won’t be. Since each case is different with many variables, it is ultimately up to the CRA and the Supreme Court of Canada to decide.
Hi Allan, If as a non-resident of Canada, how would withholding tax impact departure tax?
Hi Arielle,
Withholding tax and departure tax have no bearing on each other. Some assets may be subjected to both withholding and departure tax upon becoming a non-resident of Canada. While you may defer some departure tax, you will not be able to defer withholding tax. However it may be possible to reduce/receive tax credits for withholding taxes paid depending on your country of residence.
Best Regards,
Allan Madan and Team
Besides using security is there any other way to defer departure tax?
Hi Mahmoud,
At this point in time, the CRA only accepts security for deferring on departure tax.
Best Regards,
Allan Madan and Team
Hi Allan, can you elaborate more on the cascading payments?
Thanks,
Hi,
I quit as a regular employee and started my own company (INC.) in Aug 2014. I got paid as a contractor from Sep onwards of the same year but have not withdrawn any funds from my business acc during the FY 2014. Should I mention the business income while filing my personal IT return for the year 2014? Does it impact my personal income taxes for the FY 2014 in any way?
Thanks
Hi Sam,
Assuming that you have incorporated your own company, any income earned by the company would be reported on the corporation’s corporate tax return (T2), rather than on your personal tax return T1.
Depending on how you subsequently structure your compensation (for instance, salary versus dividend payments from your corporation), your earnings will be classified accordingly on your personal tax return.
Please let us know if you have any further questions.
I represent a US company that provides online service to Canadian customers. All work is performed in the US and I do not have a Canadian PE. Would Canadian regulation 105 apply on payments to the US entity?
Hi Tom,
No, regulation 105 will not apply because the services were not physically performed in Canada.
Thank you. This was my assumption and I hope the Canadian companies understand this.
Would the non-resident company have to register for GST?
Yes, GST/HST must be charged to Canadian customers and an HST return should be prepared and filed with the Canada Revenue Agency (CRA). Also, your company should file a treaty based tax return with the CRA to claim an exemption from Canadian corporate income tax pursuant to the Canada-US tax treaty.
We can take care of these filings for you.
Hi Allan,
If a US LLC wants to establish a subsidiary in Canada, is it correct that the US entity will be taxed for its worldwide income in Canada because of the Canadian subsidiary or is it just the worldwide income of the Canadian subsidiary that is subject to Canadian taxes?
Thanks.
hi Domtash,
The Canadian subsidiary has to pay Canadian income tax on its worldwide income. The LLC is not liable for tax in Canada unless it earns Canadian sourced income.
I have read that a U.S. corporation with a subsidiary corporation in Canada can repatriate paid up capital (PUC) exempt from Canadian withholding. Is there a specific reference in the Income Tax Act (or U.S. Canada Treaty) that addresses that topic?
Hi Bill, a return of capital (PUC) from a Canadian corporation to its US parent is not subject to Canadian withholding taxes. See Part 13 of the Canadian Income Tax Act.