Canadian tax rules can be overwhelming for foreign companies wanting to do business in Canada. This article explains in laymen terms, whether a foreign business is liable for tax in Canada, and what’s required from a tax compliance perspective.
Permanent Establishment in Canada
A business that has a permanent establishment in Canada is liable for tax on the profits earned through that Canadian permanent establishment.
A permanent establishment includes:
- A fixed place of business, such as an office, workshop or factory.
- A construction or installation project site in Canada, where the project lasts more than 12 months.
In addition, a foreign business may be considered to have a permanent establishment in Canada if:
- The foreign business has a Canadian agent who has the authority to conclude contracts on behalf of the foreign business in Canada. The best example of this is a sales agent in Canada that is representing your company and has the authority to conclude contracts on your company’s behalf. By virtue of the sales agent, your business may have a permanent establishment in Canada.
On the flip-side, a permanent establishment does not include:
- Goods kept in a Canadian warehouse for the purposes of storage, delivery or display.
A foreign business that does have a permanent establishment in Canada is required to file a Canadian income tax return (also referred to as a branch tax return) and will be subject to the general corporate income tax rate on the profits derived from the permanent establishment. For more info on permanent establishments in Canada check out my International Tax Accountant in Canada blog.
Permanent Establishment in Canadian Provinces
The provincial income tax statutes should also be examined to determine whether a foreign business is carrying on a business in a particular province. Just because a foreign business has a Canadian permanent establishment for federal tax purposes, it does not mean that the foreign business will have a permanent establishment in a Canadian province. Fortunately, most Canadian provinces have very similar rules as the federal government regarding permanent establishments, making it easier for businesses to assess their federal and provincial tax exposure.
Canada-US Treaty Tax Return
If your company does not have a permanent establishment in Canada but is still doing business in Canada, then your company is still required to file a tax return, commonly referred to as a Canadian-US treaty tax return. A treaty tax return does not impose the income tax, but simply informs the Canadian authorities that your company is conducting business in Canada, and does not have a permanent establishment in Canada.
The threshold of what constitutes ‘doing business in Canada’ is very low. For example, foreign corporations that sell goods in Canada which are shipped from the US to Canadian customers can still be considered to be doing business in Canada and will therefore have to file a Canadian-US treaty tax return.
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.