In today’s global economy, it has become easier for companies to conduct their business in other countries. Through technology and mobility of their workforce, companies looking to expand into new markets sometimes pursue opportunities in a foreign country; however, many of these companies may not always be aware of the potential implications of doing cross-border business, including immigration, legal, and taxation issues.
Some foreign companies that come to Canada do not realize that Canada has a well-developed taxation system with strict tax compliance requirements. They may not even become aware of this until they receive correspondence from the Canada Revenue Agency – which may occur after they have been operating in Canada for some time. The consequences can be severe. Failure to comply with Canadian tax requirements can lead to significant penalties and interest.
So, what does a foreign company need to know before they start conducting business in Canada? To ensure that your cross-border venture goes smoothly, we have assembled our Top 10 Corporate Tax Considerations before doing business in Canada:
1. Corporation Income Tax
Depending on the activity and circumstances of conducting business in Canada, the foreign company may need to file a Canadian corporate tax return and pay Canadian corporate tax on their net income earned in Canada.
2. Goods and Services Tax
Canada has a value-added tax system (Goods and Services Tax or Harmonized Sales Tax) that may require the foreign company to charge and collect this tax on revenues earned in Canada. They would then remit it to the Canada Revenue Agency and to file a GST/HST return.
3. Payroll Tax
When employing either Canadian employees or bringing foreign employees to work in Canada, the foreign company would be required to set up a Canadian payroll and facilitate payroll withholdings for these employees. This could include employee’s income tax along with employee and employer social security premiums (Canada Pension Plan and Employment Insurance).
4. Business Number Registration
To facilitate the above three requirements, the foreign company would have to register for a Canadian business number with the Canada Revenue Agency. They may also need to apply for a separate corporate business registration for an Extra Provincial License to conduct business in a particular province of Canada.
5. Tax Status
The Canadian tax status of the foreign corporation may differ from its home country tax status and this could have an impact on its tax planning and ability to bring the profit back to the home country in a tax-efficient manner. For instance, a U.S. Limited Liability Corporation can be treated as a flow-through entity in the U.S. but is treated as a regular corporation in Canada.
6. Non-Resident Withholding Tax
Canada has a withholding tax on the payment of certain income items made to foreign companies. This could apply to the payment of non-arm’s length interest, dividends, royalties, and payment on services performed by the foreign company physically in Canada.
7. Income Tax Treaties
Canada has tax treaties with many countries that can provide relief from double taxation, as well as reduced withholding tax rates on the payments of interest, dividends, and royalties.
8. Branch or Corporation
Depending on the level of activity, the foreign corporation may want to consider whether their Canadian operations should be operated through a Canadian (subsidiary) corporation for taxation and legal reasons.
9. Employee’s Tax Exposure
Foreign employees working in Canada may be subject to Canadian personal income tax on the compensation related to their services performed physically in Canada. This would require them to apply for a Canadian Social Insurance Number and to obtain a valid Canadian work permit.
10. Canadian Tax Authority
The government body that enforces the tax rules and the compliance requirements of the Canadian income tax system is the Canada Revenue Agency (CRA).
Don’t Take Chances. Consult First With Business Advisors and Tax Professionals.
Business expansion into a new country often requires proper planning and understanding of the local business and tax landscape. Fuller Landau’s International Business Group is perfectly positioned to help you plan and set up when considering doing business in Canada. Contact us today for more information.