Expanding your company’s operations into a different
province or even country can be a significant step in your growth
trajectory, but the process itself can be overwhelming.
When it comes to taxes, here’s what you need to
New province, new rules
From an income tax perspective, you must first establish whether
your company will have what’s referred to as a
“permanent establishment” in the new province, because
this will determine which provinces you will be taxed in. This may
in turn influence your choice of structure for your expansion.
Having a permanent establishment generally means the presence of
a physical location, but can also apply if you have an employee or
agent in the province, hold and distribute inventory there, or
bring in significant amounts of equipment.
One of the biggest practical tax issues your company is likely
to face when opening a new branch is provincial sales tax (PST).
Rules for provinces like B.C., which has both PST and GST, can be
convoluted and different from provinces that have HST (Harmonized
Sales Tax), or only GST (Goods and Services Tax). You’ll also
need to determine what services and activities are subject to PST
(i.e. equipment you bring into the province on a temporary
Before making the move, familiarize yourself with the legal
regulations associated with operating in the new province.
Be structure savvy — branch or subsidiary?
Opening a “branch” normally suggests you will
operate under the same legal entity, with tax filing and payment
obligations in multiple jurisdictions.
The popular alternative structure, in which a new legal entity
is created to operate in a new jurisdiction, is commonly referred
to as incorporating a “subsidiary.” A subsidiary
determines its own tax filing and payment obligations depending on
where it operates.
Each option has advantages and disadvantages, so be sure to
discuss them with your financial and legal advisors. For instance,
within Canada, creating a new subsidiary may not offer significant
tax advantages but could still be the best course of action in
cases where there are specific ownership or other legal
requirements in a particular province — or if there are
concerns about potential liabilities that need to be
Opening a U.S. branch may be woven into your growth strategy,
but Canadian and U.S. taxes don’t always integrate well. Each
state has its own tax regulations, which can lead to complex
issues, such as needing to remit sales taxes to the state, even if
you aren’t required to file income tax returns in that
Expanding into the U.S. (or other foreign jurisdictions) is
significantly more challenging to structure on a tax effective
basis and requires specialized assistance. Often companies that
expand into the U.S. enlist a U.S. resident advisor to help them,
but tax inefficiencies can arise when advisors don’t
understand taxation on both sides of the border. You should
consider relative corporate tax rates, withholding taxes incurred
when repatriating funds to Canada, as well as compliance and
transfer pricing requirements.
If your firm is considering cross-border expansion, ensure you
consult an advisor who understands both Canadian and U.S. tax. And
even if your growth is closer to home, it’s advisable to
involve your accountant early on in the process to ensure
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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