Canada: Tips And Traps For Non-Residents With A Presence In Canada

Last Updated: January 11 2017
Article by Aaron Schechter, CPA, CA

Are you a non-resident with a presence in Canada? A presence could be defined as employees, businesses, subsidiaries, investments or loans. If so, here are 10 tips and traps you should consider.

1. Thin Capitalization Rules

Issue: A Canadian company capitalized by non-residents cannot exceed a 1.5:1 non-resident interest bearing debt to equity ratio in order to obtain an interest deduction and avoid punitive Canadian tax consequences.

Planning: Attention must be given to complying with the interest bearing debt to equity ratio. Consideration should be given to converting debt into equity or making debt non-interest bearing.

2. Back to Back Loan Rules

Issue: A Canadian subsidiary is financed with an interest bearing loan from a U.S. corporation, which obtained the funds by borrowing from a non-U.S. entity in the corporate group. Even though the Canada-US Tax Treaty provides for an exemption from withholding tax on interest in respect of related party debt, the Canadian corporation may still be subject to a Canadian withholding tax in certain situations. For example, if the US company borrowed the funds from a related entity in another tax jurisdiction, the government authorities may treat the loan as if the funds were borrowed from the latter lender and subject the interest payment to Canadian withholding tax.

Planning: Review all intercompany loans within the corporate group. Consider having non-interest bearing loans within the corporate group or avoiding a U.S. entity as an intermediary if the end borrower is a Canadian company.

3. Non-Canadian Corporation Carrying on Business in Canada

Issue: If a non-Canadian corporation has a representative (i.e. an employee or subcontractor) who physically provides services while in Canada, the payee must withhold a 15% tax (24% if services provided in Quebec). A non-Canadian corporation may incorrectly assume that this Canadian withholding tax is a final tax. However, the amount is simply an estimated payment and not a final withholding tax. If the corporation does not have a permanent establishment in Canada, it will receive a full refund of the taxes withheld if a tax return is filed. Alternatively, if the company does have a permanent establishment in Canada, it will be taxed on its Canadian sourced net income and the Canadian withholding tax would be treated as a tax payment against that liability upon filing a Canadian tax return. There are penalties for not filing a Canadian tax return if the non-resident is considered carrying on business in Canada.

Planning: The non-Canadian corporation may be able to apply for a tax waiver to be exempt from the 15% or 24% withholding tax, if it does not have a permanent establishment in Canada. In addition, the non-Canadian corporation must file a Canadian corporate tax return within six (6) months of its year end to avoid penalties and interest where it has a requirement to file a tax return.

4. Non-Canadian Corporation Sending its Employees to Canada

Issue: If the non-Canadian corporation's employees physically provide services in Canada, the non-Canadian corporation has Canadian payroll withholding tax responsibility and obligations.

Planning: The non-Canadian corporation may be able to apply for a one-off tax waiver for a limited period of time or a blanket waiver absolving it from Canadian payroll obligations (two year period blanket) under certain circumstances.

5. Non-Canadian Corporation Purchasing a Business in Canada

Issue: A purchaser wishes to buy assets of the business in order to benefit from the increased step up in their cost base; the Canadian vendor wishes to sell shares.

Planning: It may be possible to structure the purchase and sale transaction as a "hybrid" transaction. This would be a partial share and a partial asset transaction, satisfying both the purchaser's and the Canadian vendor's objectives and creating a "win-win" situation.

6. Canadian Subsidiary of U.S. Parent Company Anticipates Losses

Issue: Operating losses incurred by a limited liability Canadian corporation owned by a U.S. parent are trapped in Canada.

Planning: If losses are anticipated, consider incorporating an unlimited liability corporation ("ULC") in Canada in which to operate the Canadian business. A ULC is considered a flow through entity for U.S. tax purposes such that the U.S. parent will be able to benefit from utilizing the losses against its own income.

7. Canadian Unlimited Liability Corporation Repatriating Funds to U.S. Parent Company

Issue: A dividend from a Canadian ULC to its U.S. parent company is not permitted treaty benefits under the Canada-US Tax Treaty. As a result, the dividend will be subject to a 25% withholding tax.

Planning: The Canadian ULC may be able to increase its paid up capital ("PUC") by way of a legal resolution. The PUC increases would be eligible for the low 5% dividend withholding tax. The Canadian ULC would then distribute its PUC as a return of capital to its U.S. parent with no further instance of Canadian tax.

8. Canadian Subsidiary Repatriates Funds Back to its Non-Canadian Parent Company by Way of a Loan

Issue: If the loan is not repaid within a year from the end of the fiscal year in which the loan was made, the loan could be recharacterized as a dividend subject to Canadian withholding tax.

Planning: A comprehensive review of all loans made by a Canadian subsidiary to its non-Canadian parent must be undertaken on an annual basis. In certain circumstances, consideration should be given to having the non-Canadian company repay the loan.

9. Canadian-Controlled Foreign Subsidiary Makes a Loan to its Canadian Parent Company

Issue: If the loan is not repaid within two years, the amount of the loan may be included as taxable income to the Canadian parent company to the extent that there are not certain surplus and cost basis balances in respect of the foreign subsidiary.

Planning: A comprehensive review of all loans made by a foreign affiliate company controlled by a Canadian corporation must be reviewed. Certain surplus and cost basis calculations must be undertaken in respect of all Canadian-controlled foreign affiliate corporations. In certain circumstances, consideration should be given to having the loan repaid to the foreign affiliate.

10. Non-Canadian Selling Real Estate

Issue: A purchaser must withhold 25% of the gross purchase price and remit it to the Canada Revenue Agency ("CRA") as a tax instalment on behalf of the non-Canadian vendor.

Planning: Either before the sale or within 10 days after the sale, the non-Canadian vendor can apply for what is commonly referred to as a Section 116 certification. Only 25% of the gain would be required to be withheld and remitted to the CRA. If there was a gain on the property, the non-Canadian vendor would still be required to file a Canadian income tax return to report the sale.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Aaron Schechter, CPA, CA
Similar Articles
Relevancy Powered by MondaqAI
Stikeman Elliott LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Stikeman Elliott LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions