The non-resident-owned investment corporation ("NRO") is a Canadian corporation that is not subject to regular Canadian corporate tax. In many cases it can be effectively utilized by non-residents as a vehicle to invest in Canada. The total tax burden can be reduced and management of the non-resident parent company’s foreign tax credit position given more flexibility.
An NRO is a Canadian corporation owned by non-residents that, effectively, is taxed as if it were a non-resident of Canada. It pays a refundable federal tax of 25% on its taxable income (excluding certain capital gains). This tax is refunded as the NRO pays or is deemed to pay dividends to its shareholders, at which time the dividend is subject to withholding tax. Under Canadian domestic law, the withholding tax rate is 25% but is often reduced by tax treaty provisions. For example, the rate may be reduced to 10% under the Canada-U.S. Income Tax Convention where the U.S. corporate shareholder owns at least 10% of the NRO voting equity.
Provincial income tax is generally not imposed on an NRO except in limited circumstances. An NRO is not subject to federal "Large Corporations Tax" and its use can often be structured to minimize or eliminate provincial capital taxes.
A corporation must meet the following criteria throughout a taxation year to qualify as an NRO for the year:
All shares and funded debt of the NRO must be beneficially owned by non-residents of Canada.
The NRO can only derive its income from specified sources (which includes interest on debt to a related entity such as a Canadian operating company owned by the NRO’s non-resident shareholder).
Not more than 10% of the company’s gross revenue for each taxation year can be in the form of rents, hire or chattels, charterparty fees or remunerations.
The NRO’s principal business in each taxation year cannot be from the making of loans or trading and dealing in securities.
The term "principal business" is not defined; however, it is generally interpreted to mean its main activity. Theoretically, it may be argued that a company that made one loan and had no other source of income has a "principal business" of making loans during the year in question. To minimize this potential exposure, the NRO can be structured so that it purchases an existing debt so that it clearly will not lend any money but rather be a purchaser of debt. By structuring any financing in this manner, it is arguable that the NRO has acquired a loan receivable (i.e. is not the original lender) and thus is not in the money lending business. An advanced tax ruling published by Revenue Canada confirms that the acquisition of a loan by an NRO from a third-party bank should not cause the NRO to be engaged in the principal business of making loans, as prohibited by the definition.
A company that meets the requirements may be given special NRO status only if it so elects in prescribed manner within 90 days following the start of its first taxation year. This election can be revoked effective for any subsequent taxation year, if desired.
Foreign corporations can benefit by using an NRO as a means of financing their Canadian subsidiaries. With a properly-structured NRO, they may defer foreign tax on income of the Canadian operation, reduce withholding tax on distributions to the foreign parent and facilitate the parent’s use of foreign tax credits in respect of Canadian source income.
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The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor.
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