INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 4): Canada

By Kanish A. Thevarasa and Joe Moëd, Kanish & Partners, Chartered Professional Accountants

Canada’s tax system imposes reporting and compliance obligations on any entity or individual owning assets or operating businesses within Canada (whether or not they are Canadian-resident), as well as on Canadian-resident taxpayers with interests outside Canada.

This article touches on some of the main tax implications of nonresidents doing business or owning assets in Canada, and Canadian residents owning foreign assets.

Types of Business and Taxes

Non-residents can do business in Canada mainly through the following structures:

1. Canadian-resident corporation

Corporations, the most common form of legal entity, are distinct taxable entities, i.e., not fiscally transparent. These can be federally or provincially incorporated. Federal corporations and most provinces require 25% of directors to be Canadian resident, but five provinces have no such requirements.

All Canadian corporations must file an income tax return. Combined corporate tax rates range from 26.5% to 31%, based on the province where the company earns income (not where it is incorporated). There are no restrictions on foreign ownership but withholding tax can apply on dividends leaving Canada, ranging from 5% to 25%, depending on bilateral tax treaties.

2. Branch (a permanent establishment of a foreign entity in Canada)

In general, a branch is taxed the same way as a corporation; it must file an income tax return reporting Canadian net income and pay tax at the same rates as above.

In addition, Canada applies a branch tax on net profits extracted from the branch ranging from 5% to 25%, depending on bilateral tax treaties, to mirror withholding which would apply to a dividend from a Canadian corporation. While a corporation is administratively simpler and has limited liability, if significant losses are expected, a branch may be attractive by allowing direct deduction of losses in the home jurisdiction.

3. Unlimited Liability Corporations (ULCs)

ULCs are a rarer form of corporation, existing in only three provinces. An ULC is taxed the same as other corporations, and its shareholders are fully liable for the ULC’s obligations. Foreign jurisdictions with the concept of a flow-through entity can treat ULCs as flowthrough. ULCs can therefore be an attractive option for non-resident owners from such jurisdictions.

4. Other taxes

Most entities doing business and making taxable sales in Canada, regardless of the type of structure, will also be subject to sales taxes. These exist both federally and provincially, and most are VAT-style taxes.

Entities with employees rendering services in Canada will be subject to payroll taxes. Compliance requirements include calculating withholdings from pay, remitting these to the Canada Revenue Agency (CRA), and filing annual payroll returns.

Trusts and Foundations

A trust in Canada is created when a settlor transfers property to a trustee, to be managed on behalf of other persons (beneficiaries). The most common types are inter vivos trusts (settled during a person’s lifetime) and testamentary trusts (created on a person’s death).

A trust is principally governed by its trust deed, but tax laws impose certain general rules, such as deemed disposition of trust property every 21 years. This triggers capital gains, unless the property is rolled out to certain qualifying beneficiaries.

A Canadian-resident trust is taxed as an individual. Except for certain estates, income retained by a trust is taxed at the highest marginal tax rate, while income distributed to beneficiaries is taxable to them at their marginal tax rate.

Foundations in Canada must be registered as a charity and operate solely for charitable purposes. All registered charities are exempt from paying income tax and can issue donation receipts granting a tax credit for donations made.

Ownership of Foreign Assets

Canada imposes several reporting requirements on Canadian taxpayers (whether they are a Canadianresident corporation, a branch, or an individual) which own foreign assets or trade with related foreign entities. While these do not generally involve a tax liability, compliance is key as the penalties for non-reporting are steep. The main requirements are:

1. T1134

to report ownership of a “foreign affliate” (a non-resident company in which the taxpayer plus related persons own > 10%). This filing must include financial statements of the foreign affliates.

2. T1135

to report ownership of other classes of foreign asset, if their total cost exceeds CAD 100,000 in the tax year.

3. T106

to report a breakdown of transactions and balances with non-arm’s- length non-residents, if the total of the transactions exceeds CAD 1 million. This requirement commonly applies to Canadian subsidiaries of foreign entities.

Estate-Related Matters

In Canada, a beneficiary or estate does not pay inheritance tax on the value of assets received or bequeathed. Rather, assets are deemed disposed at fair market value on death, the estate pays tax on the resulting gain, and the beneficiaries have no further tax liability in Canada on receipts from the estate.

A non-resident inheriting Canadian property has no immediate Canadian tax consequences, but they may have reporting obligations going forward, depending on the type of asset received (e.g., real estate – see below).

Similarly, a Canadian resident inheriting foreign assets has no Canadian tax consequences, aside from the reporting obligations applicable to owners of foreign assets.

Sales of Real Estate

Non-residents are subject to 25% tax on gains from the sale of “taxable Canadian property”, which includes real estate, business assets, and certain shares of private companies.

In some situations, the gain might be exempted from tax by a treaty. However, most of Canada’s treaties permit Canada to tax the gain on Canadian real estate.

The vendor must notify CRA no more than 10 days after the sale, and pay the estimated tax owing or provide adequate security, to obtain a certificate of compliance. Without this certificate, the purchaser (including a non-resident) must withhold 25% of proceeds (50% on certain types of property), and remit this to CRA.

Finally, the vendor must file a tax return, even if no tax is owing, which is due April 30 of the year following the sale for individuals, and six months after its tax year end for a company.

Note that there are also reporting requirements for non-residents receiving rent from Canadian real estate, and compliance is critical for obtaining a certificate of compliance on eventual sale.

Collaboration with Other GGI Members

Our firm advises clients of partner GGI firms in setting up operations in Canada, from a wide variety of sectors including entertainment, manufacturing, fashion, and heavy machinery.

We have recently assisted several USbased fashion brands and equipment manufacturers to expand their operations into Canada, advising on the best structure for their planned level of activity, and setting up the relevant business registrations and compliance procedures.

Future Developments and Summary

At the federal level, there are no major changes on the horizon in the international aspects of the Canadian tax regime. However, a housing affordability crisis in major cities has led several provinces to levy foreign buyers’ taxes on residential real estate, and expansion to other jurisdictions in the coming years is possible.

The above is a high-level overview of international tax compliance regulations in Canada; however, the devil is in the detail. It is therefore recommended to contact Kanish & Partners LLP or a local tax advisor well in advance of any planned activities in Canada, to ensure compliance and effcient tax planning.

Kanish A. Thevarasa

GGI member firm
Kanish & Partners, Chartered Professional Accountants
Advisory, Auditing and Accounting, Corporate Finance, Fiduciary and Estate Planning, Tax
Toronto, Canada
T: +1 416 975 92 92
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Kanish & Partners, Chartered Professional Accountants provides audit, accounting, tax, and business advisory services. Their focus is on advising clients for success. They bring solutions to owner/ managers, whether they’re seeking growth opportunities, or looking for increased efficiency and long-term sustainability.

Kanish A. Thevarasa has been providing high-quality consulting and tax services to small and medium-sized, owner-operated businesses since co-founding the firm in 2000. He is actively involved in several non-profits and cultural groups and sits on the board of The Providence Healthcare Foundation.

Joe Moëd

Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: jonbilous - stock.adobe.com