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Answers to Taxing Questions About Doing Business in Canada
Canada and the United States have the largest bilateral trading relationship in the world, with $1.6 billion worth of goods and 300,000 people crossing our shared border every day. About 80 percent of Canada’s population of 33.5 million lives within 90 miles of the border, providing American businesses with a large potential market very close to home. But U.S. businesses wanting to tap into the Canadian market will also encounter complex tax and reporting requirements north of the border.
Cross-border income tax
Under Canadian law, income attributable to a foreign corporation carrying on business in Canada may be taxable. “Carrying on business” is a broad term that may include (but is not limited to):
- Sending employees to perform services
- Renting a warehouse
- Engaging an independent sales force
- Disposing of taxable Canadian property
- Importing goods into the country
It may be possible for U.S. companies to reduce or eliminate Canadian tax under the provisions of the taxation treaty between the two neighbors.
Any foreign company carrying on business in Canada, even if it claims protection under the taxation treaty, is required to file Canadian income tax returns. These returns are due six months after the company’s fiscal year-end; no extensions are granted. Should the returns not be filed on time, the company is subject to penalties whether there is a balance of tax payable or not.
Even if a U.S. corporation’s business profits would not be subject to tax in Canada, as long as the corporation is carrying on business in the country, it would still be required to file Canadian tax returns to claim benefits under the treaty, and it would still be liable for the penalties should it neglect to file.
As a business changes and grows it is advisable to periodically review the situation to determine whether there has been a change in status.
Withholding tax for nonresidents rendering services in Canada
Nonresidents rendering services in Canada are subject to 15 percent withholding tax on the gross payments received; additional provincial withholding may also be required. The tax can be collected for services provided by anyone residing outside the country, either directly through nonresident or Canadian employees, or indirectly through subcontractors.
If a subcontractor from the U.S. or another country provides services for a nonresident, the subcontractor would also have to withhold and remit the tax.
A nonresident service provider will receive a Form T4A-NR from its customer indicating amounts received, withheld, and remitted. A copy of the form is also forwarded to the Canada Revenue Agency, which will then expect to receive a Canadian corporate income tax return. The amount of tax withheld will offset any amount owed. Should the company qualify for an exemption under the taxation treaty, all of the withholding taxes would be refunded.
A waiver from the withholding tax may be available for companies claiming protection under the taxation treaty, or based on a calculation of income and expenses. Waiver applications must be submitted at least 30 days before providing the services in Canada or before the initial payment for the services. Beware, though, that obtaining a waiver does not relieve a company of the obligation to file Canadian corporate income tax returns.
Taxes on employees
If a nonresident company regularly sends employees to Canada, it may be required to withhold and remit Canadian federal and provincial taxes. The taxation treaty provides that, if certain conditions are met, an employee who is a resident of the United States would not be subject to Canadian income tax on employment income earned in Canada. For U.S.-resident employees who meet these conditions, a waiver from withholding tax may be available, but only in advance of the services being performed. Whether or not the tax is to be withheld, the employer must prepare and file income statements each calendar year no later than February 28 of the following year.
Employees are still obligated to file a Canadian personal income tax return even if waivers have been granted.
Varied and complex sales taxes
The Canadian federal government and most provinces levy value-added sales taxes (goods and services tax, or GST, and its variants in the provinces), which means that tax is collected and remitted at each stage in the production and marketing of most goods and services. Registered businesses may recover taxes paid on most goods and services acquired in the operation of their businesses.
If a company is carrying on business in Canada, importing goods into Canada, or has certain other types of presence in the country, it may have to register with the Canada Revenue Agency and charge and remit sales taxes. Penalties for not filing and remitting, or for filing and remitting late, can be onerous.
In some cases, even if it is not required, there may be advantages for a nonresident corporation to voluntarily register. This would allow the company to recover sales taxes paid on expenses incurred in Canada.
The sales tax regimes in Canada are quite varied and complex. Before doing business in Canada, it’s a good idea to consult with an international tax advisor to help determine whether a corporation has sales tax filing requirements north of the border.