The Canadian Revenue Agency does not allow foreign companies to carry on business in Canada without paying taxes on their income. The Income Tax Act states that if a non-resident carries on business in Canada, the non-resident is subject to tax on any income it earns from the business in Canada.
Whether or not non-resident companies are carrying on business in Canada is a major issue for the Canadian Revenue Agency. If non-residents are deemed to be carrying on business in Canada, then CRA can tax all the income produced in Canada. The Canadian courts have followed the UK courts on this issue and tend to look at each case individually. However, there are still principles that will guide the Courts in their decision-making process. The two most relevant factors in determining whether business is being carried on are:
- The place where the contract is made
- The location of the operations from which the profits arise.
It is important to note that the Courts have distinguished between carrying on business in Canada versus carrying on business with Canada. Simply allowing Canadians access to goods would not deem a non-resident liable for taxes without other factors present such as an office or a warehouse where Canadians can look at the items or purchase them directly.
CRA has published its opinion regarding the most relevant factors for determining the location of a source of income. The following is CRA’s breakdown of business type and relevant factor:
- Development and sale of real property – the place where the property is situated
- Merchandise trading – the place where the sales are habitually completed, but other factors, such as the location of the stock, the place of payment or the place of manufacture, are considered relevant in certain situations.
- Trading in intangible property; (stocks and bonds) – the place where the purchase or sale decisions are normally made
- Money lending – the place where the loan arrangement is in substance completed
- Personal property rentals – the place where the property available for rental is normally located
- Real property rentals – the place where the property is situated
- Service – the place where the services are performed.
Any non-resident company that has agents soliciting orders or offering anything for sale may be deemed resident in Canada and be subject to tax on the income generated by that agent.
Much of the case law focuses on whether these agents are working directly for non-resident companies or can be considered independent contractors, thus not allowing the income generated by these independent contractors to be taxable in Canada.
Carrying on business in Canada as opposed to with Canada will have a major effect on whether your income is taxable in Canada. If your company offers anything for sale or provides any services in Canada, the possibility of being deemed to be carrying on business in Canada is always present.
We are Canadian tax lawyers and if you are unsure whether you carry on business in Canada or with Canada, we can help. In addition, if CRA has assessed you for taxes that you think are invalid because you do not carry on business in Canada, call us right away to set up an initial consultation. We can provide the legal tax advice necessary to solve your tax problems.