Foreign companies that want to carry on business in Canada generally do so through a Canadian branch or a Canadian subsidiary. This post outlines the general tax rates for non-residents carrying on business in Canada using one of those structures.
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.1 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 2012 is 15% on general active business income and the combined federal and provincial corporate tax rates in 2012 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:
| Province | Rate |
|---|---|
| British Columbia | 25% |
| Alberta | 25% |
| Saskatchewan | 27% |
| Manitoba | 27% |
| Ontario | 26.5% |
| Quebec | 26.9% |
| New Brunswick | 25% |
| Nova Scotia | 31% |
| Prince Edward Island | 31% |
| Newfoundland | 29% |
| Yukon | 30% |
| Northwest Territories | 26.5% |
| Nunavut | 27% |
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:
| Country4 | Interest5 | Dividends6 | Royalties7 |
|---|---|---|---|
| Australia | 10% | 5/15% | 10% |
| China, People’s Republic | 10 | 10/15 | 10 |
| Denmark | 10 | 5/15 | 0/10 |
| Finland | 10 | 5/15 | 0/10 |
| France | 10 | 5/15 | 0/10 |
| Germany | 10 | 5/15 | 0/10 |
| Ireland | 10 | 5/15 | 0/10 |
| Japan | 10 | 5/15 | 10 |
| Mexico | 10 | 5/15 | 0/10 |
| Netherlands | 10 | 5/15 | 0/10 |
| New Zealand | 15 | 15 | 15 |
| Norway | 10 | 5/15 | 0/10 |
| South Africa | 10 | 5/15 | 6/10 |
| Sweden | 10 | 5/15 | 0/10 |
| Switzerland | 10 | 5/15 | 0/10 |
| United Arab Emirates | 10 | 5/15 | 0/10 |
| United Kingdom | 10 | 5/15 | 0/10 |
| United States | 0 | 5/15 | 0/10 |
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 Regulation 105 withholding tax please refer to our previous post.
For more information on Carrying on Business in Canada see: Business Laws of Canada (2011 Edition) Miller Thomson LLP, Thomson Reuters, ISBN-13: 9780314602305. Call 1-800-328-4880.
Qualification
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.
If you would like more information on establishing a business in Saskatchewan please contact the author of this posting, Crystal Taylor at (306) 667-5313 or cltaylor@millerthomson.com.
If you would like specific legal advice based on your particular circumstances, please contact one of the following lawyers at Miller Thomson LLP:
William Fowlis
Calgary, National Leader
wfowlis@millerthomson.com
Cheryl Teron
Vancouver
cteron@millerthomson.com
Joseph W. Yurkovich
Edmonton
jyurkovich@millerthomson.com
Crystal Taylor
Saskatoon
cltaylor@millerthomson.com
George Nystrom
Regina
gnystrom@millertomson.com
James Hutchinon
Toronto
jhutchinson@millerthomson.com
Aaron Rodgers
Montreal
arodgers@millerthomson.com
1 A Canadian branch of a foreign company will also be subject to a branch tax under the Income Tax Act. The branch tax is levied on the after-tax income of the corporation, reduced by an investment allowance reflecting the retention of business assets and retained earnings in Canada. The branch tax is 25% of the branches after tax profits. Where Canada has a tax treaty with the foreign company’s country, the branch tax rate is typically 5%-15%. Tax treaties may also provide for a lifetime exemptions fo the first $500,000 (CAD) of income otherwise subject to branch tax.
2 Substantively enacted as at June 30, 2012.
3 The actual treaty should be consulted to determine if specific conditions, exemptions or tax-sparing provisions apply for each type of payment. The rates indicated in the table to apply to payments from Canada to the treaty country; in some cases, a treaty may provide for a different rate of withholding tax on payments from the other country to Canada.
4 Please note this Table only contains information on the identified treaty countries; other countries may also have a tax treaty with Canada eligible for reduced treaty withholding tax.
5 Canada eliminated its domestic withholding tax on certain arm’s length interest payments; however, non-arm’s length payments continue to be subject to a 25% withholding tax.
6 Dividends subject to Canadian withholding tax include taxable dividends (other than capital gains dividends paid by certain entities) and capital dividends. The withholding tax rate on dividends under the terms of Canada’s tax treaties generally varies depending on the percentage of ownership of the total issued capital or percentage ownership of the voting rights owned by the recipient.
7 Royalties generally are defined to include:
- Payments received as consideration for the use of or the right to use any copyright, patent, trademark, design or model, plan, secret formula or process.
- Payments received as consideration for the use of or the right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience.
- Payments in respect of motion picture films, works on film or videotape for use in connection with television.
- In some cases, technical assistance in respect of these items is also included.
