What we learn about franchising in Canada as a strategic tax
It has been a long-standing stereotype that Canadians live in a
deep freeze for 364 days of the year, say "aboot" instead
of "about", and are crushed under some of the highest
taxes in the world. Of course, like most stereotypes, these are not
necessarily based on facts. In particular, it is a revelation to
most international franchisors to discover that corporate
tax rates in Canada are at, or most likely below, the levels they
encounter in their home countries. While our personal tax
rates may be higher, Canadian government has been focussed on
building and keeping equity at home by offering corporate tax rates
that are among the lowest of the G8 nations.
The issue was brought to the forefront with the recent
announcement that Tim Hortons Inc., the iconic Canadian
franchise brand, had agreed to be purchased by Burger King
Worldwide Inc., controlled by Brazilian equity firm 3G
Capital. The merger would create the third-largest food service
brand in the world, with annual sales of $23 billion through over
18,000 restaurants in 100 countries. As part of the process, the
merged company's head office will be moved to Canada, while
Burger King retains a base of operations in America. Despite Burger
King's claims that the move is not for tax purposes, it seems
quite clear that it will provide substantial benefits to the
American giant from a tax perspective. Savvy international
franchisors can use this mega-deal as an example of how they can
leverage aggressive Canadian corporate tax rates to their
advantage, and not just on inversion transactions. In the Burger
King deal, for example, debt from Canadian operations can be taken
on by the US partner company, which can then make interest payments
on the debt to minimize or eliminate its US income. This has the
net effect of shifting income made internationally to Canada, where
the company will be taxed at a more favourable rate.
Another method would be charging the international partner
management fees, for example, and paying those fees out of the
higher-taxed entity to reduce its overall income. The income tax on
the fees charged would then be paid at the lower Canadian rate.
Most cross-border lawyers and accountants can advise as to
other ways to maximize the performance of a franchise system that
has units in multiple jurisdictions, including Canada.
So while you may think of Canadians as little more than very
polite folk with universal health care and a rabid obsession for
hockey, don't discount the fact that for franchisors,
Canada is also one of the most desirable destinations in the world
to help boost the bottom line for any franchisor. Remember
that the next time you order a double-double at Burger King.
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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