Foreign companies that want to carry on business in Canada generally do so through a Canadian branch or a Canadian subsidiary. This BLOG outlines the general tax rates for non-residents carrying on business in Canada using one of those structures for 2013.
A Canadian branch of a foreign company that is carrying on business in Canada through a permanent establishment will be subject to tax under Part I of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (the “Income Tax Act”) on its income from the business carried on in Canada attributable to the branch. A Canadian subsidiary corporation of a foreign company will be considered resident in Canada and subject to Canadian income tax on its worldwide income.
Canadian corporate income tax is levied both at the federal and provincial level. The current federal corporate tax rate for 2013 is 15% on general active business income and the combined federal and provincial corporate tax rates in 2013 range from 25% to 31%, depending on the province in which the permanent establishment is located.
The following table outlines the current combined federal and provincial corporate tax rates on general active business income:
Combined Federal and Provincial Tax Rates for non-manufacturing income of a Corporation that is not a Canadian-controlled private Corporation
Click here to view table.
Where a Canadian branch receives passive income such as rents, royalties or interest, the payor is required to withhold and remit to Canada Revenue Agency non-resident withholding tax. However, if the income is attributable to the Canadian permanent establishment, it will be exempted from Canadian withholding tax under the Income Tax Regulations because this income will be subject to Canadian income tax. To preclude withholding, the non-resident must obtain a withholding tax waiver from Canada Revenue Agency. This waiver is available where Canada Revenue Agency is satisfied that income potentially subject to non-resident withholding tax is reasonably attributable to the business of the Canadian branch.
Payments on account of dividends, interest and royalties made by a Canadian subsidiary corporation to a non-resident shareholder will be subject to Canadian withholding tax. Pursuant to Part XIII of the Income Tax Act, withholding tax at the rate of 25% will apply. However, in many instances, the 25% withholding tax will be reduced by virtue of an applicable provision in a tax treaty between Canada and the state of residence of the non-resident to whom the payment is made.
The following table outlines the Canadian withholding tax rates for certain countries with which Canada does have a tax treaty:
Canadian withholding tax rates for certain tax treaty countries
Click here to view table.
If a non-resident opts to use a branch in Canada, the non-resident customers will be dealing with an entity that is a non-resident of Canada. As a result, section 105 of the Income Tax Regulations requires Canadian customers to withhold and remit to Canada Revenue Agency 15% from payments for services rendered by the non-resident in Canada. This withholding is on account of, and will be applied by Canada Revenue Agency against, the non-resident’s Canadian income tax and branch tax liability. In certain situations, treaty based waivers can be obtained from Canada Revenue Agency.
For more information on Carrying on Business in Canada see: Business Laws of Canada (2012-2013 Edition) Miller Thomson LLP, Thomson Reuters, ISBN-13: 9780314613486. Call 1-800-328-4880.
It should be noted that we are members of the Law Society of the various provinces of Canada and, as such, we are only qualified to express our views and opinions, and we have confined our views and opinions, with respect to the laws of the various provinces of Canada and the federal laws of Canada applicable therein, and accordingly we have made no investigation of the laws of any other jurisdiction. We specifically note that we have not considered the laws, including tax laws, of any foreign jurisdiction. Accordingly, prior to proceeding with the Canadian operations, we strongly recommend that you obtain foreign legal and tax advice.