If you are a US based corporation and are planning on expanding to and doing business in Canada, then this article is a must read. I will address the tax implications of expanding to Canada, as they particularly relate to US corporations.
US Companies Carrying on Business in Canada – tax implications
Any person (individual or corporation) that is carrying on business in Canada is required to file a Canadian tax return, under Canadian domestic tax law.
“Carrying on Business” is a very broad term and therefore encompasses most activities that US businesses engage in Canada.
According to the Canadian income tax act a US company is carrying on business in Canada if that company:
1. Produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs anything in Canada;
2. Solicits orders or offers anything for sale there through an agent or servant, whether the contract or transaction is completed inside or outside of Canada; or
3. Disposes of certain resource properties or Canadian real estate.
Thus, the threshold for what constitutes “carrying on business in Canada” is very low. US companies expanding to Canada must examine their activities to determine if they are carrying on business in Canada, and if they are, those companies will be required to file a Canadian income tax return.
Liability for Tax in Canada – for US Companies
The potential liability for income tax in Canada is an important tax implication for US companies expanding to Canada. US companies that expand to Canada are liable for Canadian income tax if they:
- Carry on a Business in Canada
- Dispose of Taxable Canadian Property (e.g. real estate or shares of private companies)
However, the Canada-US Tax Treaty provides relief for some US companies that carry on business in Canada. According to the Canada-US Tax Treaty, only those US companies that carry on business in Canada through a permanent establishment are required to pay income tax on the business profits earned through that establishment.
A permanent establishment includes a fixed place of business (such as an office), or an agent in Canada that has the authority to bind contracts on behalf of the US Company.
Canadian Treaty Based Tax Return for US Companies
US companies that are carrying on business in Canada but do not have a permanent establishment in Canada are not liable for Canadian income tax and must file a tax return in Canada. In such a situation, the tax return to be filed is referred to as a “Treaty Based Tax Return”, and is in substance an information-type return that does not compute or levy tax.
Failure to file a Canadian Treaty Based Tax Return could result in penalties of up to $2,500 for each return for each year.
It’s also a wise idea for a US corporation that carries on business in Canada to file a Canadian Treaty Based Tax Return, in order to assert its position that it is not taxable in Canada, because it does not have a Canadian permanent establishment. Consider filing this return as a type of “insurance.”
Canadian Subsidiary of US Corporation – tax implications
Canadian corporations have a relatively low tax income rate of approximately 30% (combined federal and provincial income tax). Therefore, US companies often opt to create a Canadian corporation for their Canadian operations, rather than operate through a branch.
In addition, repatriation of profits from the Canadian subsidiary corporation to the US parent corporation is an important tax implication of expanding to Canada.
One way to repatriate profits to the US is through dividends. Dividends paid by Canadian corporations to their US parent corporation are subject to Canadian withholding tax of only 5%.
Interest paid by Canadian corporations to their US parent corporation is no longer subject to withholding tax pursuant to the Canada-US Tax Treaty. It’s therefore a good tax planning point to capitalize Canadian corporations with debt.
As a US corporation planning to expand to Canada, it’s a wise idea to set-up a subsidiary Canadian corporation because of the tax benefits.
About the Author, Canadian Accountant for US Companies
Allan Madan is a Canadian Chartered Accountant and a Tax expert that has assisted many US companies with their expansion to Canada.
Many of Allan’s clients include US corporations that have business operations in Canada or that are Canadian subsidiaries of US companies.
To learn more about Allan, please see International Tax Accountant Toronto
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