Businesses expanding into Canada could face penalties levied by Canada Revenue Agency for not complying with Canadian tax reporting requirements. Canada's recent 2010 Federal Court of Appeal ("FCA") decisions affirmed that penalties apply where a non-resident of Canada does not file or late files Canadian income tax returns even when no taxes may be owed. The 2010 FCA decisions put a heavier onus on non-residents to file Canadian income tax returns on a timely basis.
In accordance with Canada's income tax treaties, the business income of a non-resident is generally taxable in the country of residence only, unless a taxpayer "carries on business" in Canada through a permanent establishment ("PE") in Canada. The determination of whether a non-resident has a PE in Canada is made through a thorough review of the applicable income tax treaty between Canada and the non-resident's country of residence. Non-residents of Canada that "carry on business" in Canada through a PE, are required to file a Canadian branch income tax return and would be subject to income tax in Canada on any profits attributable to its PE in Canada.
Even in the absence of a PE in Canada, it is nevertheless important for non-residents to determine whether they are conducting business in Canada in order to ensure that all Canadian income tax filing requirements and applicable withholdings are complied with in a timely manner to avoid unnecessary penalties and interest.
Canadian tax authorities require that all corporations that are non-residents of Canada but who have "carried on business" in Canada during a taxation year file a Canadian income tax return, even in the absence of a PE in Canada. However, non-residents that "carry on business" in Canada would not be subject to Canadian income tax where there is no existence of a PE in Canada. In these circumstances, the non-resident would file a "treaty-based" income tax return to disclose treaty benefits claimed that preclude the non-resident from Canadian taxation. Whether a non-resident is "carrying on business" in Canada is dependent on certain factors that would be considered for the non-resident's particular situation and the type of business being conducted. Failure to file a treaty-based income tax return on a timely basis will result in penalties for each year of delinquency. The penalties for late-filed treaty-based income tax returns apply even though there is no tax owing.
Non-residents of Canada that dispose of taxable Canadian property ("TCP"), such as real estate situated in Canada, are also required to file a Canadian income tax return. A non-resident may chose to not file on a timely basis the Canadian tax return reporting the disposition in circumstances where a clearance certificate was obtained from the Canadian tax authorities and Canadian income taxes for the disposition had been remitted. In light of the recent 2010 FCA decisions, non-residents should file the Canadian income tax return reporting dispositions of TCP on a timely basis to avoid late filing penalties.
Non-residents expanding their businesses into Canada should also give consideration to the following:
The best ownership structure for the Canadian activity such as a branch, corporation, partnership or limit activity in Canada so there is no PE in Canada.
Non-residents carrying on business in Canada may be required to register and charge sales tax (GST/HST) on sales to Canadian customers. GST/HST rates vary from province to province. The threshold for "carrying on business" in Canada differs for GST/HST and income tax purposes.
15% Canadian withholding tax on payments made to non-residents of Canada for services rendered in Canada must be withheld by Canadian customers.
Non-residents may have payroll obligations where employees are conducting employment duties in Canada.
Transfer pricing planning to mitigate audit exposure and reduce the overall effective tax rate for the group.
Evaluate whether the income attributable to a PE in Canada is reasonable in light of the functions performed and risks assumed by the Canadian branch or corporation.
SLF Can Help
We can assist businesses expanding into Canada in determining Canadian tax reporting obligations as well as in developing and implementing effective tax planning structures and strategies.
You can find more information by contacting one of our tax partners:
Brett M. Starkman +1 (416) 780-2226
Pierre Kirouac +1 (514) 788-5632
Maria T. Severino +1 (416) 780-2232
We also invite you to visit our website http://www.slf.ca/.
Schwartz Levitsky Feldman LLP is an independent member of HLB International.