In many cases, foreign companies doing business in Canada are in need of additional expertise to effectively navigate the Canadian tax system. Specifically, U.S. companies find themselves confronting a tax environment that is very different from their domestic system. When doing business in Canada, here are some of the key tax considerations foreign companies should be prepared to navigate.
Threshold for taxation
In our opening conversation with a foreign based client, we must first determine if they will be subject to income tax in Canada. We need to conclude if they are operating in Canada with or without a "permanent establishment," as this ultimately determines their exposure to Canadian income tax. If carrying on a business in Canada without a "permanent establishment," there is typically a treaty exception available. For example, businesses that are simply selling and shipping goods into Canada with no physical presence or employees deployed to the country are generally exempt from Canadian income tax. In these cases, it is advisable to file a Canadian income tax return to indicate reliance on the applicable treaty provisions. In a more complicated scenario (i.e. storing goods in a Canadian warehouse, an advertising campaign directed at the Canadian market, employees intermittently deployed to Canada, a dedicated office in Canada), it may be determined that you have a permanent establishment in Canada, in which case you will be subject to Canadian income tax and are likely in need of further corporate structuring advice. The ultimate structure will be a function of several key items, including anticipated profits, repatriation strategy and the interplay of home and host country taxation.
Regulation 102
Any employee (resident or non-resident) physically rendering services in Canada is generally subject to Canadian income tax, CPP and employment insurance withholdings, irrespective of the nature and extent of these employment services. Should a non-resident corporation deploy an employee to render services for a single day in Canada, there is a resulting payroll withholding obligation. Given the significant burden associated with maintaining compliance in this respect, both administrative and treaty provisions are available to provide relief in certain situations. The Canada Revenue Agency recently introduced a new system of administrative relief to address this and other similar situations, though certain actions are still required to gain access to this relief (it is not automatic). Penalties for non-compliance can be severe. Therefore, it is imperative that you engage your Collins Barrow tax advisor for guidance in these situations.
Regulation 105
This regulation deals with non-residents performing non-employment type services in Canada. Similar to employment services, any time a non-resident corporation or independent contractor physically performs services in Canada, there is a withholding requirement. A common misconception surrounds the situation where a non-resident corporation has engaged another non-resident sub-contractor to physically perform services in Canada. In this case, the payment would also be subject to a 15% withholding requirement.
GST/HST considerations
We typically begin our analysis by determining whether a non-resident corporation is "carrying on business in Canada for GST/HST purposes." Based on CRA interpretation and general jurisprudence, this threshold is quite low. Factors to consider include the location of employees, the place of delivery, the location of inventory and the location where business contracts are executed. If it is determined that you are "carrying on business in Canada," there is a requirement to register for GST/HST purposes and collect tax on "taxable" sales. In certain cases, it may also be advisable to voluntarily register for GST/HST, which can result in significant recovery of GST/HST that would otherwise form a cost of doing business in Canada. It is important to note that any GST/HST costs incurred are generally eligible for 100% recovery/credit in Canada.
We regularly encounter U.S. based corporations that are not "carrying on business in Canada," but are importing goods into the country and incurring a 5% GST cost upon importation. This cost can be substantial and may be recoverable. Your Collins Barrow tax advisor can help assess this and other aspects of your operation to maximize sales tax recovery and overall efficiency.
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.
