Doing Business In Canada

Originally Presented At Alliott North American Conference On: January 11, 2012

(updated January 28, 2013)

Presented by:

Aaron Schechter, CA

Tax Partner, Cunningham LLP

aaron@cunninghamca.com 416-496-1051 x309

Topics Covered

1. Types of entities that can be used to do business in Canada

2. Corporations – incorporating, Canadian taxes, including HST/GST

3. Individuals

4. Four Case Studies – Traps and Considerations for Non-Residents Doing Business in Canada

5. Why do business in Canada?

TOTAL POPULATION - $35M (APPROX.)

* TORONTO - $5M

* MONTREAL - $3.6M

* VANCOUVER - $2.3M

* OTTAWA - $1.1M

* CALGARY - $1.1M

Doing business in Canada

• First question – how?

• Types of entities:

1. Proprietorship2. Branch of US Corporation3. Partnership / Joint Venture4. Corporation

Types of Entities1. Proprietorship

• Taxed in Canada as individual to the extent there is a permanent establishment in Canada

• New rules introduced in 5th Protocol to Treaty with respect to “permanent establishment”

• Presence and revenue test – 183 days in 12 month period and >50% of enterprise’s revenues

• Same/connected project test – 183 days in 12 month period relating to same/connected project

2. Branch• Taxed as Cdn corporation and subject to additional 5%

Branch Tax on after-tax income > $500,000 if not reinvested in Canada

Types of Entities

3. Partnership / Joint Venture• Not a taxable entity for Canadian tax purposes

• Partners/joint venturers are taxed on partnership/JV income

• Branch Tax would also apply

4. Corporation• If a permanent establishment will be created in Canada,

generally recommended that a corporation be used.

• Considerations:

• Where to incorporate?• What type of corporation?

Incorporating in Canada• Where to incorporate?

• No relevance to where carrying on business

• Register separately to carry on business in another prov.

• Federal, Ontario, Alberta, Manitoba, Newfoundland and Saskatchewan require 25% directors to be resident in Canada

• What type of corporation to incorporate?• Regular corporation (limited liability)

• Unlimited liability corporation

• NSULC (Nova Scotia), BCULC (British Columbia), AULC (Alberta)

• Hybrid entity, flow through (i.e. partnership) for US tax purposes; corporation for Cdn tax purposes

• Not entitled to Treaty benefits under 5th Protocol (25%WTR)

Canadian Corporate Taxes

• Income taxes• Federal, Provincial

• No Municipal income tax

• Harmonized Sales Tax / Goods & Services Tax / Retail Sales Tax

• Payroll taxes• Canada Pension Plan, Employment Insurance cost to

employer (approx. $3,250 per employee)

• Employer Health Tax 1.95% on salaries > $400,000 (Ontario)

• Canada Pension Plan, Employment Insurance and income tax withholding from employee’s remuneration and remitting requirements

Canadian Income Tax BasicsNon-Canadian Controlled Private CorporationsCorporate Income Tax Rates (Current as at 1/28/2013)

FederalProvincial Combined

Alberta 15%10% 25%

BC 15%10% 25%

Manitoba 15%12% 27%

New Brunswick 15%10% 25%

Newfoundland 15%14% 29%

Nova Scotia 15% 16%31%

Northwest Territories 15% 11.5%26.5%

Nunavat 15%12% 27%

Ontario 15%11.5% 26.5%

Prince Edward Island 15% 16%31%

Quebec 15%11.9% 26.9%

Saskatchewan 15%12% 27%

Yukon 15%15% 30%

Harmonized Sales Tax (HST) / Goods & Services Tax (GST) / Retail Sales Tax (RST)

• GST is a Value Added Tax (5%) on most goods/services sold

• RST is a sales tax on most goods/services sold

• Most provinces have or will be harmonizing the Federal GST and RST into an HST that is a Value Added Tax

• E.g. Ontario 13% HST

• Some provinces have maintained the separate GST and RST systems

• E.g. Manitoba 5% GST and 7% RST

Harmonized Sales Tax (HST) / Goods & Services Tax (GST) / Retail Sales Tax (RST)

• Non-residents “carrying on business” in Canada must register for GST/HST regardless if they have a permanent establishment

• As a GST/HST registrant, corporation must charge the GST/HST where applicable and is also generally entitled to a refund (Investment Tax Credit (ITC)) on GST/HST paid

• Non-residents “carrying on business” in Canada must also post a security deposit of 50% of the estimated net HST it expects to remit to the CRA in the next 12 months (minimum $5,000; maximum $1,000,000)

Canadian Income Tax Basics

Personal Income Tax Rates

• Progressive tax brackets

• Each Province and Federal have different brackets

• 4 types of income that can be taxed at different rates:• Regular income (employment, self-employment, interest, rent)

• Capital gains (50% of tax rate of regular income)

• Eligible dividends (generally public company dividends)

• Non-eligible dividends (generally private company dividends)

Canadian Income Tax Basics2013 Marginal Personal Income Tax Rates

Ontario Resident(Combined Federal and Ontario)

Canadian Dividends

Other Capital Eligible Non-EligibleIncome Gains Dividends Dividends

first $39,723 20.05% 10.03% -1.89% 2.77%

over $39,723 up to $43,561 24.15% 12.08% 3.77% 7.90%

over $43,561 up to $69,963 31.15% 15.58% 13.43% 16.65%

over $69,963 up to $79,448 32.98% 16.49% 14.19% 17.81%

over $79,448 up to $82,422 35.39% 17.70% 17.52% 20.82%

over $82,422 up to $87,123 39.41% 19.70% 19.88% 23.82%

over $87,123 up to $135,054 43.41% 21.70% 25.40% 28.82%

over $135,054 up to $509,000

46.41% 23.20% 29.54% 32.57%

over $509,000 49.53% 24.76% 33.85% 36.47%

Canadian Income Tax BasicsTaxability of U.S. individual residents

• Employment income earned by a non-Canadian resident individual while in Canada is not taxable per Treaty as long as <$10,000 or individual is in Canada <183 days and remuneration paid by US company

• May still have to file a personal income tax return in Canada

• Whole host of Cdn payroll tax issues for US company

• Self-employed business income only taxable if individual has permanent establishment per Treaty

• Likely still has to file a personal income tax return in Canada even if no permanent establishment

• If services performed in Canada, payments are subject to 15% withholding tax (refunded when personal tax return filed)

Canadian Income Tax BasicsTaxability of U.S. individual residents (cont’d)

• Dividends and royalties paid by Cdn resident are subject to withholding tax based on Treaty

• Interest no longer subject to withholding taxes per Treaty

• Rents earned and capital gains realized on Cdn real estate (and companies that own real estate) are taxable in Canada

• Rents and capital gains on real estate are subject to withholding tax

• Capital gain on real estate (and sale of shares of company that owns real estate) requires the obtaining of a clearance certificate and evidence of withholding tax paid

Tax Considerations and Traps for Non-residentsThin Capitalization Rules

• US Corporation incorporates a Canadian subsidiary corporation and subscribes for nominal share capital, $100.

• US Corporation capitalizes the Canadian subsidiary with a $1,000,000 interest bearing loan (10%).

• Trap: Interest expense is denied to Canadian subsidiary to the extent

Interest bearing debt to non-residents minus (1.5 x equity belonging to non-resident) X Interest on debt

Interest bearing debt to non-residents

• Solution: make debt non-interest bearing

Tax Considerations and Traps for Non-residentsTreaty Based Corporate Tax Return

• US Corporation sells goods into Canada via an independent sales agent. All contracts finalized at head office in US.

• US Corporation is deemed to be “carrying on business” in Canada.

• Trap: Even though income earned by US Corporation is not subject to tax in Canada because there is no permanent establishment, there is still a requirement for US Corporation to file a “Treaty Based” Canadian corporate income tax return.

Tax Considerations and Traps for Non-residents

Multiple Issues

• US Corporation sells manufacturing equipment to a Canadian corporate customer for $1,000,000 plus a $150,000 fee for installation and training services.

• US Corporation sends a team of its employees to install the equipment and train the Canadian corporate customer’s staff.

• The US Corporation’s team will have to spend 1 month in Canada.

Tax Considerations and Traps for Non-residents• Trap: 15% withholding tax

• All payments made by Canadian corporate customer for installation and training services performed in Canada by US Corporation’s employees will be subject to 15% withholding tax.

• Solution #1: US Corporation should file a “Treaty Based” Canadian corporate income tax return to recover full refund of withholding tax since no permanent establishment.

• Solution #2: US Corporation can apply for a “Treaty-Based Regulation 105 Waiver” to exempt it from being subject to the 15% withholding requirement. A waiver may be granted by the CRA when a non-resident corporation (or its employees) is (are) required, pursuant to a contract or an agreement, to be physically present in Canada for 180 days or less.

Tax Considerations and Traps for Non-residents• Trap: Employer Tax Issues and Obligations

• As a non-resident employer employing individuals who perform services in Canada, US Corporation will be required to follow Canadian domestic payroll tax law and will be subject to the following obligations: 

• US Corporation will be required to register with the CRA for Canadian payroll purposes;

• US Corporation will be required to withhold a prescribed amount of Canadian personal income taxes from each pay cheque on behalf of each individual employee in respect of employment services performed and remit the amount to the CRA;

• EI and CPP likely not required to be remitted/paid.

Tax Considerations and Traps for Non-residents

• Trap: Employment Income and Personal Tax Issues

• Remuneration derived by the U.S. resident employee will be taxable in Canada to the extent that the amounts are in respect of the employment exercised in Canada unless:

• Such remuneration does not exceed $10,000; or• The employee is present in Canada for a period or

periods not exceeding 183 days in any 12 month period

• The individual will be required to obtain a Canadian tax identification number, file a Canadian personal income

tax return and pay Canadian personal income taxes on his or her Canadian source employment income

Tax Considerations and Traps for Non-residents

• Solution #1: US Corporation and individual employees comply with administrative requirements (i.e. filing tax returns, withholding requirements, etc.).

• Solution #2: the employer and employee can jointly file a “Treaty-Based Regulation 102 Waiver” . If the waiver application is accepted by the CRA, US Corporation will be absolved from the Canadian personal income tax withholding requirements.

In addition, the individual employees will not be required to file a Canadian personal income tax return.

Tax Considerations and Traps for Non-residentsReal Estate

• US individual (or corporation, or LLC – it doesn’t matter) owns a rental building in Canada.

• Tenant pays monthly rent directly to US resident.

• Trap: Withholding taxes required on rents paid to non-Canadian resident

• The tenant is technically required to withhold 25% of rental payment and remit it to CRA. If tenant does not withhold and remit, the non-resident is required to remit every time rent payment is received.

• Penalties and interest could be applicable if no withholdings are received by the CRA.

Tax Reasons for Doing Business In Canada?• Low combined corporate income tax rates

• Low withholding rate on repatriation of funds back to US

• Significant tax credits for profitable corporations carrying on Scientific Research & Experimental Development

• Favourable tax depreciation rates on most classes of assets, including full write-off over 3 years on M&P equipment

• Federal and provincial carry back of losses to preceding 3 years and carry forward for immediate use in any of the next 20 years

Cunningham LLPWho are we? www.cunninghamca.com

• 6 partner firm; 40+ staff

• Located in Toronto

• Assurance, non-assurance, corporate and personal tax compliance

• Valuations and corporate finance

• Strategic tax planning for owner-managed business

• Wealth management