Are you planning on doing business in Canada? If yes, then this article is for you.
There are many tax implications that arise when doing business in Canada. If you haven’t considered tax, then you may be in for a big surprise.
Branch Office in Canada
The tax structure of your Canadian operations is one of the first considerations when doing business in Canada.
It’s less expensive and in certain cases very tax efficient to start your business in Canada as an unincorporated division, i.e. a branch, of your corporation.
Any profits from a Canadian branch of a US or other foreign corporation are subject to income tax in Canada. For corporations in the United States, the income tax paid in Canada on branch profits is creditable. Additionally, US corporations can offset losses from a Canadian branch against their taxable income. Other foreign corporations may have similar rules.
As many start-up businesses incur losses in the first couple of years of operations, it’s advantageous to open a branch in Canada in order to take advantage of the flow-through of the Canadian branch’s losses to your corporation.
A branch is taxed like a corporation in Canada. However, an additional tax applies to branches, which is known as Branch Tax.
Incorporation – Doing Business in Canada
Incorporating in Canada makes sense if you are concerned about limiting your liability. As in the US, Canadian corporations have limited liability protection, which means that in the event of a lawsuit, the only assets which are at risk are the assets inside the Canadian corporation. Shareholder’s assets are protected.
Additionally, the federal income tax rate for Canadian corporations is very low, at only 18% and is scheduled to be reduced to 15% by 2012.
Repatriation of Profits from Canada to United States
When doing business in Canada, you should consider how you are going to repatriate the profits generated in Canada to your home country.
Profits may be repatriated by way of dividends. The normal withholding tax rate on dividends is 25%.
However, the US-Canada Tax Treaty reduces the rate of withholding tax on dividends paid by a Canadian subsidiary corporation to its US parent corporation to only 5%.
In addition, withholding tax on interest has been eliminated. Therefore, the cost of capitalizing your Canadian operations with debt is now less expensive from a tax perspective.
Sales Tax or Value Added Tax
The Canadian government imposes a goods and services tax (i.e. sales tax) of 5%. In addition, certain Canadian provinces, which have not harmonized their sales taxes with the federal government in Canada, charge a provincial sales tax.
Most provinces in Canada have harmonized their sales taxes with the federal government in Canada, resulting in a combined provincial and federal sales tax of 12 to 13% (know as harmonized sales tax or HST).
About the Author, International Tax Accountant in Canada
Allan Madan is a Canadian Chartered Accountant who practices in the Greater Toronto Area. He is an international tax accountant and expert, and has assisted many US and foreign corporations with Canadian tax planning and Canadian tax filing requirements.
To learn more about Allan Madan, please see International Tax Accountant in Canada