Corporations worldwide are dealing with Canada.
Depending on their level of involvement, these corporations may be
subject to Canadian corporate tax and/or filing
This article will focus on some of the Canadian taxation issues
faced by corporations doing business with Canada.
According to Canadian income tax legislation, any non-resident
corporation that carries on business in Canada or disposes of
certain Canadian property (known as "taxable Canadian
property") will be subject to Canadian corporate income
Therefore, it is important to determine first whether the
corporation is, in fact, carrying on a business in Canada. Many
activities could result in corporations carrying on a business in
Canada, including, but not limited to: the solicitation of orders
in Canada, whether contracts are concluded in Canada and if Canada
is the location of operations that produces the profits.
Not carrying on business in Canada
If it is determined that the foreign corporation is not carrying
on business in Canada, the corporation will not be subject to
Canadian corporate tax or filing obligations. However, if a
corporation disposes of taxable Canadian property, it will still be
subject to Canadian corporate income tax on the disposition even if
it does not carry on business in Canada.
Carrying on business in Canada
If it is determined that the foreign corporation is carrying on
a business in Canada, its Canadian corporate tax obligations will
depend on whether Canada has a tax treaty with the particular
country. If no tax treaty exists, the corporation will be subject
to Canadian corporate tax on business activities carried on in
Canada. It will also be required to file a Canadian corporate
income tax return.
If a tax treaty exists, Canadian corporate tax obligations are
generally dictated by the corporation's permanent establishment
status in Canada. The term permanent establishment varies
according to each individual tax treaty.
If the corporation does not have a permanent establishment in
Canada, the corporation will not be subject to Canadian corporate
tax. However, the corporation must file a corporate tax return to
disclose its Canadian business activities and to claim the
treaty-based tax exemption.
If the corporation has a permanent establishment in Canada, the
corporation is subject to Canadian corporate tax on profits
attributable to that permanent establishment. The corporation is
required to file a Canadian corporate income tax return.
Other Canadian taxation issues
Foreign corporations that are taxable in Canada may also be
subject to branch tax on funds not reinvested in Canada. Branch tax
is generally a 25 percent tax, unless specific tax treaties allow
for a reduced rate or exemption.
If the foreign corporation forms a Canadian subsidiary, the
subsidiary will be subject to Canadian corporate tax and filing
obligations similar to other Canadian corporations.
In cases in which a Canadian corporation makes payments to a
non-resident corporation, such as payments for services, the
Canadian corporation may be required to withhold certain amounts
from these payments. A foreign corporation may be entitled to a
refund of the Canadian taxes withheld, if this is permitted in a
treaty between Canada and the particular country. Corporations
doing business with Canada face numerous other issues, each with
its own set of rules. These include, for example, Canadian sales
tax obligations, Canadian payroll obligations, transfer pricing,
registering a corporation in Canada and employing foreign workers
It is important to consider all aspects of doing business in
and/or with Canada. Being proactive when structuring your business
dealings with Canada, and knowing your Canadian tax and filing
obligations, is a good start.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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