Canada Business and Taxation Guide. Add your logo here. Business and Taxation Guide to Canada

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1 Add your logo here. Business and Taxation Guide to Canada 1

2 Preface This guide was prepared and updated by John Durland at MNP LLP, in February Website: Praxity participating firms in Canada include: Brand Finance PLC, Canada MNP LLP Mazars Canada Contact details, office addresses and specialisms for each of these participating firms are available on Praxity 2014 Global Alliance Ltd. All rights reserved. MNP LLP is a participant firm of Praxity - the world s largest alliance of independent accountancy firms, which has a presence in more than 600 countries. The authors have made every effort to ensure commentary and factual information contained within this publication are accurate and current. The information/ views expressed are not official statements of position, and should not be considered as commercial or technical client advice without seeking professional guidance. This publication has been prepared only as a guide. No responsibility can be accepted by Praxity for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. Any views expressed, or advice given, are those of the author/authors only and Praxity cannot be held responsible for them.

3 Contents Page 1. General information Opportunities and possible obstacles for foreign investors 1.2 Area and population 1.3 Government and law 1.4 Currency 1.5 Securities Commissions 1.6 Antitrust considerations 1.7 Immigration laws 2. Regulation of foreign investment 9 3. Government incentives Federal incentive programmes 3.2 Provincial and local investment incentives 4. Business organisations available to foreigners Corporation 4.2 Partnership 4.3 Sole proprietorship 4.4 Unlimited liability company 4.5 Joint venture 4.6 Trusts 5. Setting up and running business organisations Incorporation 5.2 Partnership formation 5.3 Labour laws 5.4 Protection of Intellectual Property (IP) 5.5 Accounting and auditing 6. Corporate taxes and social charges Incorporation 6.2 Partnership formation 6.3 Federal corporate income tax 6.4 Provincial and territorial taxes 6.5 Withholding tax 6.6 Transfers to foreign corporations 6.7 Corporate liquidations or distributions 6.8 Other taxes 7. Personal taxation Canadian residents 7.2 Non-residents 7.3 Part-year residents

4 7.4 Partnership 7.5 Death of a taxpayer 7.6 Gifts and loans to non-arm s length parties 7.7 Canada Pension Plan (CPP) and Employment Insurance (EI) 7.8 Provincial and territorial tax 8. Double taxation agreements Double taxation treaty agreements 8.2 Withholding tax rates 8.3 Treaty rates 9. Sales and use taxes Portfolio investment for foreigners Investment of cash 10.2 Investment in Canadian stocks, securities and commodities 10.3 Investment in Canadian real estate 11. Trusts Types of trusts 11.2 Trust taxation 12. Practical information Transport 12.2 Language 12.3 Time relative to GMT 12.4 Business hours 12.5 Public holidays

5 1. General information 1.1 Opportunities and possible obstacles for foreign investors Canada offers a wide range of investment opportunities to companies and individuals. Some key attractions for foreigners (also referred to in this guide as non-residents ) include: Large and diverse markets Traditionally, an open policy to foreign investors Highly-skilled workforce, ranking 3 rd in the list of Organisation for Economic Cooperation and Development (OECD) member countries, which recognises higher education achievement (the percentage of adults that attain post-secondary education) Extensive natural resources, including oil and natural gas reserves, timber, minerals and metals One of the world s major trading nations, with a tri-lateral free-trade agreement with the United States and Mexico - North America Free Trade Agreement (NAFTA) and bilateral free-trade agreements with Panama, Jordan, Colombia, Peru, Israel, Chile and Costa Rica. Canada also has a free-trade agreement with several European Free Trade Associate (EFTA) countries Political and economic stability The following aspects of Canada require careful consideration from foreign investors and may, in some circumstances, be drawbacks: Market expertise - knowledge of and sensitivity to consumer attitudes, buying habits and styling nuances is required; some foreign investors may find it difficult to market specialist products because of the size and diversity of the North American marketplace An extremely competitive and innovative market, which requires careful monitoring in order to meet rapidly changing demand A highly-skilled workforce results in higher annual compensation in many employee categories, which a foreign investor may not be accustomed to. 1.2 Area and population Canada is the world s second largest country by land area. It lies in the northern part of the western hemisphere, bordered by the United States to the south, the U.S. state of Alaska to the northwest, and the Atlantic and Pacific, and Arctic Oceans to the east, west, and north, respectively. The total land area of Canada is 9,984,670 square kilometres, approximately 3,855,103 square miles. The country offers varied climate conditions for a foreign investor to consider, from the cool temperatures of the eastern Maritime Provinces, to the mild, wet climate of the province of

6 British Columbia, to the seasonal severities of the Yukon, Northwest and Nunavut territories. Canada s population is approximately 35.2 million. The most densely populated areas are in the central provinces of Quebec and Ontario, and the western provinces of British Columbia and Alberta. Major cities in Canada include Ottawa and Toronto (Ontario) Calgary and Edmonton (Alberta) Montreal and Quebec City (Quebec) Vancouver and Victoria ( British Columbia) Winnipeg (Manitoba) Regina and Saskatoon (Saskatchewan) St. John s (Newfoundland) Halifax (Nova Scotia) Whitehorse (Yukon) Yellowknife (Northwest Territories) Iqaluit (Nunavut). 1.3 Government and law Canada is a parliamentary democracy and a constitutional monarchy. As a federal state, it is responsible for its own federal constitution and any constitutional changes. The federal legislature (Parliament) comprises a House of Commons and a Senate. The House of Commons members are elected by Canadian citizens over the age of 18 in districts, based on census population counts. Members of the Senate are appointed by the Governor General on recommendation of the Prime Minister. The Governor General is appointed on the recommendation of the Canadian government. The Prime Minster is effectively the head of administration and is generally the leader of the majority party in the House of Commons. In addition to the federal government, provincial governments share some legislative responsibilities. The federal government has legislative authority in matters that concern all Canadians, such as the regulation of national and international trade, national defence, federal taxation, banking, criminal law, and citizenship. Provincial governments have legislative authority in health and social services, provincial taxation, education, property, civil rights, provincial and municipal courts, and other local matters. The three territories (Northwest, Yukon, and Nunavut) are administrated locally, but are regulated by the federal government. 6

7 Provincial law also governs municipal government bodies. Municipal governments generally have authority over local municipal matters including traffic, police, fire rescue and sanitation. Canadian law covers statutes and judicial decisions. In nine of the ten provinces and the three territories, the legal system is largely based on common law, which includes decisions from English common law. In the province of Quebec, private law is based on civil law. 1.4 Currency The monetary unit used in Canada is the Canadian dollar ($), sometimes abbreviated as C$ to distinguish from other dollar denominated currencies. The International Standards Organization (ISO) currency code is CAD. One dollar is divided into 100 cents. 1.5 Securities Commissions Securities law is under provincial jurisdiction. Each province and territory in Canada has its own separate securities legislation and regulator. Despite the various regulating bodies, securities legislation in Canada is largely coordinated through the Canadian Securities Administrators, an organisation comprising all provincial regulators. The federal government is currently proposing a transition from provincial to federal securities legislation. Any domestic corporation proposing to make a public offering of its own securities must register with the provincial and territorial regulatory bodies in the jurisdictions where the securities are being offered. A prospectus must be reviewed by the principal regulatory body and also be made available to potential investors. Where securities are being offered in the province of Quebec, the prospectus must also be translated into French. Certain private placements may be exempt from the prospectus filing requirement and may only require abbreviated disclosure documents. 1.6 Antitrust considerations Antitrust/competition policy is regulated by the federal government. The Competition Act of 1889 includes legislation intended to promote competition in the marketplace by prohibiting anti-competitive practices. With few exceptions, it applies to all businesses in Canada. The Competition Act contains both criminal sanctions as well as non-criminal provisions that allow a committee - the Competition Tribunal (the Tribunal ) - to review business practices. Practices commonly reviewed by the Tribunal include mergers and acquisitions. Larger mergers must meet certain notification and filing requirements prior to the transaction being carried out. The Tribunal has authority to issue orders to prohibit or take corrective action against anti-competitive activities. As a result, the acquisition of a controlling interest in the assets or stock of a Canadian corporation, whether publicly or privately held, and whether or not affected by merger with an existing or new corporation, must involve consideration of the Competition Act. 7

8 Violations to the Competition Act range from monetary penalties issued by the Tribunal to criminal prosecution. 1.7 Immigration Laws Decisions for the legal admission of foreign nationals into Canada are shared by the Constitution Act, 1867, the Citizenship Act, and the Immigration and Refugee Protection Act. Canadian immigration laws allow for immigration and, in certain instances, refugees. There are generally two types of immigrants: temporary and permanent. Temporary residents are foreign nationals who are authorised to enter and stay in Canada on a temporary basis (to visit, study, or work). Permanent residents are foreign nationals that are authorised to remain in Canada on a permanent basis. Foreign nationals that qualify as business visitors do not require a work permit. A business visitor is defined as someone who comes to Canada to engage in international business activities, without directly entering the Canadian labour market. Foreign nationals that do not qualify as business visitors who want to work temporarily in Canada require work permits. To obtain a work permit, a Canadian employer or client must first obtain a Labour Market opinion/confirmation from Service Canada, a federal government agency. Certain exceptions from this requirement are available. Specifically, an individual may be eligible for a work permit as an intra-company transfer from another nation under various international trade agreements, for instance NAFTA, the Canada Chile Free Trade Agreement (CCFTA) and the General Agreement on Trade and Services (GATS). NAFTA also allows designated business professionals to enter Canada for pre-arranged temporary employment with a Canadian employer or client. 8

9 2. Regulation of foreign investment Canada does not impose controls on currency exchange. Consequently, a foreign investor or exporter is not restrained from repatriating the capital or profits generated from a Canadian business or investment. This is subject to any withholding tax required by Canadian law, modified as appropriate by a Double Taxation Agreement (see section 8). The Investment Canada Act (ICA) is administered by the Department of Canadian Heritage (also known as Industry Canada). The ICA permits foreign investment of many new businesses without review. However, non-canadians who acquire control of an existing Canadian business or who wish to establish a new unrelated Canadian business must submit either a notification or an application for approval above certain thresholds. In 2000, the Government of Canada introduced the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Under this legislation, there are no restrictions on the amount of money that an individual can bring into or take out of Canada, nor is it illegal to do so. However, amounts greater than C$10,000, or its equivalent in a foreign currency, must be reported to the Canada Border Services Agency (CBSA). The reporting requirement includes coins or currency of any country and securities such as traveller s cheques, stocks and bonds. Funds sent by mail or courier are also subject to CBSA reporting requirements. Reporting generally occurs at the place of importation or exportation, or at a CBSA office. Only physical movements of currency and monetary instruments are required to be reported to the CBSA. Consequently, electronic transfers of funds are not subject to the CBSA reporting requirements. As Canada is a free-enterprise economy, no industry is specifically closed to private enterprises. However, many industries are closely controlled or regulated by federal and provincial legislation. These include: Broadcasting and telecommunications Aviation Public utilities Book publishing and selling Collection agencies Engineering Farming Fisheries Sale of alcohol Mining Oil and gas provision and exploration Optometry Pharmacies and pharmaceutical research Securities dealers. 9

10 The federal Broadcasting Act states that broadcasting licenses may not be issued to non-canadians or to companies that are effectively owned or controlled (directly or indirectly) by non-canadians. Furthermore, the federal Telecommunications Act restricts foreign ownership to 20% of the shares of a telecommunications common carrier. Ownership requirements for banks and other federally regulated financial institutions vary. Through the ICA, the federal government has the authority to review proposed investments and, under certain circumstances, may deny the investment or put in place investment terms and conditions. 10

11 3. Government incentives In addition to federal and provincial tax incentives for business investment, enterprises may benefit from a large number of federal, provincial, and territorial government assistance programmes. Government employment programmes and financial assistance are available to foreign as well as domestic investors, subject to eligibility requirements. Applications for assistance will often require the disclosure of a substantial amount of information about the investor, the proposed venture and its expected economic and environmental impact. 3.1 Federal incentive programmes A number of federal programmes provide support for foreign investors: The Export Development Corporation (EDC) provides trade finance and risk management services to Canadian exporters and foreign investors. The EDC also offers financial support for inbound foreign investment, offering competitive rates to borrowers based on credit quality, general market conditions and the length of repayment terms being considered. The Business Immigration Program encourages immigration for experienced business people to Canada, particularly those who will support the development of a strong and prosperous Canadian economy. Applications are available to potential immigrants belonging to one of three classes: investors, entrepreneurs or the selfemployed. The Canada Small Business Financing Program (CSBFP) works with financial institutions to provide up to C$500,000 in loans to eligible small businesses operating for profit in Canada, with annual gross revenues less than C$5 million. Western Economic Diversification Canada (WD) makes strategic investments in initiatives that enhance and strengthen the economy of Western Canada. Funding is available to not-for-profit organisations through the Western Diversification Program. The WD also partners with commercial lenders to offer loan programmes to rural entrepreneurs, entrepreneurs with disabilities, female entrepreneurs and Manitoba businesses owned by French-speaking Canadians. The Atlantic Canada Opportunities Agency promotes economic growth in Atlantic Canada by providing funding and training opportunities for various commercial and not-for-profit organisations. The National Research Council Canada provides technical and business advisory services from technology advisors to small and medium-sized foreign subsidiaries incorporated in Canada. The Business Development Bank of Canada offers funding, venture capital and consultancy services to predominantly small to medium-sized enterprises (SMEs). Turnkey financing is available for all sorts of projects, including supporting technology projects to help companies with a sustainable, market-oriented business plan to grow. 11

12 The Canada Revenue Agency (CRA) administers the Scientific Research and Experimental Development Program (SR&ED) to provide tax credits on specified expenditures for businesses involved in research and development. The CRA also administers two film tax credit programmes to help support the film industry in Canada. 3.2 Provincial and local investment incentives Provincial and territorial incentives vary in scope among each jurisdiction. Some have established grant programmes and funds to provide qualifying businesses with funds not otherwise obtainable. Some provincial foundations provide financial assistance on projects carried out in partnership with universities, colleges, research hospitals and not-for-profit research institutions. Some municipalities offer financial assistance to businesses that are being established or relocated to their locality. 12

13 4. Business organisations available to foreigners Canadian laws recognise several forms of business entities, including these, which may interest foreign investors: Corporation Partnership Sole proprietorship Unlimited liability company Joint venture Trusts Each is subject to the applicable provincial or territorial law. 4.1 Corporation A corporation is a legal entity separate from the shareholders who created it. Because a corporation is an independent entity, its shareholders are not generally liable for corporate debts. Other shareholder benefits include the ease with which ownership in the corporation may be transferred, through sale or gift of corporate stock, and a centralised form of management for corporate business. A board of directors elected by the shareholders governs corporate business. Corporate officers, who are appointed by the board of directors, manage the operational business activities. 4.2 Partnership A partnership in Canada is not recognised as a legal entity, but rather as a relationship or agreement between two or more parties who carry on business with a common view to profit. Partnerships are not subject to income tax. Rather, the profits and losses earned by a partnership are personally subject to tax by each partner. Division of partnership profits and losses is made according to the terms of the partnership agreement. Profits, losses and net proceeds are generally shared amongst partners on dissolution. No minimum capital contribution is required, and it is not unusual for one partner to contribute capital and another to contribute only his/her services. There are two types of partnerships, general and limited. General partners are jointly and severally liable for all partnership debts. Limited partners are not liable beyond the extent of their investment in the partnership. A limited partnership must have at least one general partner whose liability is unlimited and one limited partner whose liability is limited. Limited partnership interests are ordinarily acquired for investment purposes, and the holders of such interests have no participation in the management of the partnership business. 13

14 Some provinces allow certain types of professionals to form limited liability partnerships (LLPs). LLPs are general partnerships that provide limited protection for partners from liability caused by acts of the other partners. 4.3 Sole proprietorship A sole proprietorship is an unincorporated business, and is usually small, owned and operated by a single individual. The management and control in a sole proprietorship is carried out entirely by the owner or a designated agent. The liability of the owner is both unshared and unlimited. Consequently, available credit for the business is directly tied to the owner s personal wealth. Liability of sole proprietors may be limited or capped through contracts or purchasing insurance. Sole proprietors pay taxes on all business income, including business profits, on their personal tax return. 4.4 Unlimited liability company Alberta, Nova Scotia and British Columbia permit the incorporation of unlimited liability companies (ULCs). Unlike corporations, the shareholders of a ULC have unlimited liability. The degree of liability differs between provincial jurisdictions and should be considered by investors when determining whether to incorporate a ULC. 4.5 Joint venture A joint venture describes a relationship between parties who agree to work together towards a specific business objective. A joint venture is not recognised as a separate legal entity and is not subject to income tax. Rather, the profits of the joint venture pass to the co-investors and are taxed according to its business structure. A joint venture may exist between two or more corporations, partnerships, trusts and individuals, or any combination of each. 4.6 Trusts A trust is a relationship between a person (known as a settlor) transfers property to another person or persons (the trustees), to be held in trust for the named property beneficiaries. The terms and nature of the trust relationship are based on written trust indenture, as well as applicable statutory and common laws. 14

15 5. Setting up and running business organisations 5.1 Incorporation Canada allows for corporations to be incorporated under various jurisdictions. Certain businesses may be required to be incorporated specifically under federal, provincial or territorial law. If not incorporated under a jurisdiction, other businesses may be incorporated under the federal laws of Canada or under the laws of any province or territory. A corporation incorporated in a particular province or territory can conduct business in another province or territory, but it must become registered in that other province or territory. How to establish a corporation A corporation is formed by filing articles of incorporation with the chosen jurisdiction, along with the applicable filing fees. The articles are prepared by, or for, the individuals forming the corporation. The articles generally list the corporation s registered office, list the minimum and maximum number of directors and describe its business purpose, proposed capital structure, shareholder rights and rules governing stock issue (issuance). A corporation generally has an existence of perpetual duration until it is dissolved by judicial act or a majority vote of the shareholders. In Canada, corporate law generally does not specify minimum capital requirements to form a corporation. The rules which govern the internal operations of a corporation are known as the by-laws. By-laws may contain certain rules that are not dealt with in the Canada Business Corporations Act (CBCA), for entities incorporated federally or other provincial corporate legislation. Upon incorporation, the corporation is generally required to provide details of the board of directors through a prescribed form. The board of directors, elected by the shareholders, set corporate policies, make business and investment decisions and appoint corporate officers. Directors are generally subject to personal liabilities and obligations listed under corporate law, in addition to federal and provincial laws relating to environment, tax, securities, pensions and employment matters. Major alterations in corporate structure, such as mergers or liquidation of corporation assets, can only be undertaken with shareholder approval. It should be noted that different incorporating jurisdictions may have different director requirements. For example, under the CBCA 25% of the directors in a Canadian corporation must be resident Canadians (individuals people residing in Canada who are either permanent residents of Canada or Canadian citizens). Conversely, some provinces and territories have no residency requirements for directors. Forming a ULC would follow similar procedures, with some variance between the provincial legislation and procedures in Nova Scotia, Alberta and British Columbia. 15

16 Foreign investors may not choose to incorporate a Canadian subsidiary in order to carry out business in Canada. It is possible to conduct business in Canada through a branch office. The tax implications of doing so are covered in more detail in Section 6. Corporations are subject to annual or other corporate and tax filing requirements and are required to obtain a business number from the CRA prior to commencing business activities. Additional CRA accounts for payroll taxes and excise taxes may be required. 5.2 Partnership formation In Canada, provinces have exclusive jurisdiction over business partnerships. Partnership legislation is administered by each province, and partnerships are generally required to be registered with the provincial authorities. When forming and registering a limited liability partnership in a province, an extra-provincial registration is required in order to conduct business in another province. Certain provinces, for example New Brunswick, require limited partnerships to undergo extra-provincial registration prior to commencing business in that province. How to establish a partnership General partnerships may be formed informally, even by oral agreement, anytime two or more persons agree to engage jointly in a business enterprise. In many instances, however, partnerships are formed when the partners enter into a formal partnership agreement. Mandatory statutes of the governing jurisdiction will override any contrary provision in the partnership agreement. For partnerships other than general partnerships, such as limited partnerships or limited liability partnerships, the partnership agreement must generally be in writing. These partnerships are required to register with the province in which it will conduct business. The partnership agreement should formally set out management arrangements, including how ownership will be shared, how decisions will be made, how profits and losses will be divided, how a partner may withdraw from the partnership, the duration of the partnership and what events will lead to the dissolution of the partnership. Certain partnerships are subject to annual or other corporate and tax filing requirements. Partnerships are required to obtain a business number from the CRA prior to commencing business activities. Additional CRA accounts for payroll taxes and excise taxes may be required. 5.3 Labour laws Employment in Canada is regulated by either federal or provincial legislation. The majority of employers operating in Canada are governed by the legislation of the province in which they operate. Employers relating to federal works or undertakings, which include banks, telecommunications, broadcasting businesses or inter-provincial transportation businesses, are subject to federal employment legislation. Each jurisdiction has enacted legislation to govern minimum employment standards. These include minimum wages, maximum hours of work, overtime hours and wages, rest and meal 16

17 periods, statutory holidays, vacation periods and pay, termination and severance pay and leaves of absence for medical or non-medical reasons. Human rights legislation is also enacted in each jurisdiction, which serves to protect an individual from discrimination in the workplace. Prohibited grounds of discrimination vary between jurisdictions. But they commonly include gender, age, national or ethnic origin, marital status, disability, political beliefs, family status and sexual orientation. Occupational health and safety legislation and workers compensation legislation also exist to protect the rights of individuals. In addition, Canada and each of the provinces has enacted labour legislation. This generally states that employees have the right to be members of a trade union to engage in collective bargaining with employers. Certain collective agreements between unions and employers require all employees in a particular job classification to be a part of the union. 5.4 Protection of intellectual property Five types of intellectual property (IP) rights are protected in Canada: Patents Trademarks Copyrights Industrial designs Integrated circuit topographies Canada is a member of the World Trade Organization s (WTO) treaty on Trade-Related Aspects of Intellectual Property, and enforces minimum standards of protection as outlined in the treaty. The Canadian Intellectual Property Office (CIPO) is the federal agency has administrative responsible for the majority of IP in Canada. Patents Patents are granted by CIPO for products or processes that are new, useful, and inventive. In Canada, patent protection extends for 20 years from the date of filing. Filing and maintenance fees throughout the life of the patent are required to keep the patent in force. Eighteen months after a patent application is filed, the document is made public, in order to promote the sharing of knowledge. Non-residents of Canada may also apply for patent protection in Canada. As obtaining a patent is often complicated, costly and time consuming, some IP applicants prefer to retain the services of a patent agent to assist with the application process, as they are experienced in drafting applications and navigating the patent process. 17

18 Trademarks Through the Trade-marks Act, trademark registration provides exclusive ownership of a word, symbol, design, or any combination, across Canada. Once the trademark or trade name is registered, it is protected for 15 years and is renewable every 15 years thereafter with the payment of specified fees. The CIPO distinguishes between three types of trademarks: 1. Ordinary marks words and/or symbols that distinguish the goods or services of a specific firm 2. Certification marks identifying goods or services that meet a standard set by a governing organisation 3. Distinguishing guise identifying the shape of goods or their containers, or a mode of wrapping and packaging goods. Copyrights Copyright protection under the Copyright Act is obtained by publishing the work with the prescribed statutory notice of copyright affixed to each copy. Copyright protection can be obtained for all original literary, dramatic, musical and artistic works. Copyright in an original work exists automatically when the work is created. While the CIPO recommends registering a piece of copyrighted work with the Copyright Office, doing so does not preclude or enhance protection. Fees are required upon registration, but there are no maintenance fees. Generally, copyright in Canada exists for the life of the author plus 50 years following the author s death, although there are some exceptions. After this period, the work becomes part of the public domain. Industrial designs Industrial designs registered with the CIPO provide exclusive rights to the registrant for five years, with a possible extension up to an additional 10 years with fees. Once registered, however, industrial designs become available for public inspection. Integrated circuit topographies Registered integrated circuit topographies provide exclusive rights over the copying of the topography and the commercialization of circuits that contain the topography. The protection lasts for 10 years from either the protection application filing date or the date of the first commercial exploitation of the topography, which ever is earliest. 5.5 Accounting and auditing Federal and provincial laws generally have specific requirements for the maintenance of corporate books and records. However, the Income Tax Act requires books and records to be maintained by those who are subject to its provisions, including corporations, partnerships and sole proprietors. Publicly-held companies, banks, broker-dealers, insurance companies and the various utility companies are subject to more specific requirements, including filing detailed financial statements with securities commissions. Chief officers of publicly-held companies 18

19 (generally, the chief executive officer and chief financial officer) are required to sign off on financial statements to acknowledge that management has evaluated internal controls relating to the production of such statements and that the statements are fairly presented. While Canadian businesses historically followed the basic accounting principles, referred to as Canadian generally accepted accounting principles (CGAAP), recent decisions by regulatory bodies have resulted in different accounting standards being applied to different businesses. The International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board (IASB) are becoming the global standard for preparation of public company financial statements. As a result, publicly-accountable enterprises, with some exceptions, were required to adopt IFRS in Certain publicly-accountable enterprises were allowed an exemption to implement IFRS until a later date. Private enterprises previously reporting under CGAAP had the option of adopting either IFRS or Accounting Standards for Private Enterprises (ASPE) for their fiscal year beginning in Federal and provincial corporate laws generally require shareholders to appoint auditors to report on the corporation s financial statements. Public companies are required to file annual audited financial statements with the securities commissions, stock exchanges where such stocks are listed and, in certain cases, with the federal government. Banks, institutional investors, and other business governed by specialist legislation are often also required to provide audited financial statements annually. In Canada, most provinces restrict the practice of public accounting to licensed professionals, specifically chartered professional accountants. In addition to audits, public accounting firms in Canada perform reviews and compilations of financial statements and provide tax, management consulting and business advisory services. 19

20 6. Corporate taxes and social charges Income tax planning is an important part of the Canadian investment strategy. The complex and far-reaching provisions of the Income Tax Act, under which all federal taxes are levied, call for careful consideration of the income tax consequences of any proposed investment if an investor is to maximise investment returns. Taxes are also imposed by provincial and territorial governments, differing in every jurisdiction. Although a detailed discussion of all tax laws that affect the business investor is beyond the scope of this guide, the more important income tax matters are outlined here. 6.1 Incorporation No federal tax is normally levied on a corporation or its shareholders when capital contributions of cash or other monetary property are made to a new corporation in exchange for capital stock in the corporation. Gains on certain appreciated property transferred to a corporation in exchange for capital stock in the corporation may be deferred, by filing an election, until a later time when the capital stock is disposed of by the corporation to a third party. Generally, investments of after-tax proceeds in a corporation can be extracted from the corporation without incurring additional tax liability for the shareholder. 6.2 Partnership formation No federal tax is normally levied on a partnership or its partners when capital contributions of cash or other property are made to a new partnership in exchange for a partnership interest. Similar to corporations, gains on certain appreciated property transferred to a partnership in exchange for interest in the partnership may be deferred, by filing an election, until a later time when the interest is disposed of by the partnership to a third party or the partnership ceases to exist. 6.3 Federal corporate income tax Federal income tax is levied on the worldwide income of every Canadian resident and, subject to applicable double taxation agreements (see section 8), on Canadian-source income of non-resident corporations that either: Carried on business in Canada, or Realised a gain on the disposition of certain types of Canadian property. Taxable corporate entities The taxation of a corporation depends on how the corporation is classified. For tax purposes, Canadian corporations are divided into several categories and different tax rates apply for: Public corporations Corporations controlled by a public corporation Canadian-controlled private corporations (CCPC) Other private corporations or other corporations (that do not fit into the preceding categories). 20

21 Generally, Canadian corporation tax applies to all corporate entities that are resident in Canada. There are specific exemptions available to certain government-controlled entities, charitable organisations, certain other non-profit corporations, designated tax-exempt corporations and inactive corporations. Canadian corporations will be resident in Canada and will be subject to Canadian tax on worldwide income. As a general rule, a corporation is considered resident in Canada if its central management and control (commonly referred to as mind and management) are exercised in Canada. In addition, almost all corporations incorporated in Canada are considered to be resident in Canada, with some exceptions for those incorporated prior to June 18, Canadian subsidiaries of a foreign corporation will be taxed in the same manner as domestic corporations, as outlined below. Non-resident corporation not engaged in a trade or business in Canada A non-resident corporation not actively engaged in a trade or conducting business in Canada is subject to tax on its passive investment income derived from Canadian sources. This income is subject to tax at either a flat rate of 25%, or a lower rate if a double taxation agreement applies (see section 8). The payer of the income withholds the tax before payment is made to the nonresident corporation and remits the amount withheld to the CRA. No income deductions are allowed, so the gross amount is taxed at the applicable rate. Income subject to the 25% withholding tax includes interest, dividends, rents, royalties, management fees, annuities and certain fixed or determinable annual or periodic gains, profits or income. Interest that is earned by a non-resident from third parties is generally excluded from taxation. In addition, Canadian income tax is levied on non-residents for capital gains from dispositions of certain Canadian capital property (generally real property and resource properties situated in Canada, but it can also include other specific types of property). Dispositions of such property by non-residents of Canada may be subject to special tax reporting requirements. Foreign corporation conducting business in Canada through a branch the determination of whether or not a foreign corporation is conducting business in Canada is generally based on English common law principles. The main factors include the location where: A contract was made A decision to purchase and sell property was made The delivery of goods is made A payment is made A bank account of branch office, and the place from which transactions are solicited. In addition to common law principles, there are also certain factors in Canadian federal tax legislation that, if present, deem a non-resident to be conducting business in Canada. If a non-resident corporation is conducting business in Canada, income earned in Canada through such a business would be subject to Canadian income tax. However, double taxation agreements between Canada and certain jurisdictions may result in no Canadian income tax or a portion of tax relief, for instance, where the non-resident does not have a 21

22 permanent establishment generally described as an office, branch, factory, warehouse or other fixed facility for the foreign corporation in Canada. As an example, under the Canada- US tax treaty, the first C$500,000 of income earned by a non-canadian resident conducting business in Canada through a branch is exempt from Canadian income tax. Domestic corporation The major components of taxable income for Canadian purposes are gross profits from sales or services, dividends, interest, rents and royalties and capital gains and losses. Taxable income is gross income less all allowable deductions, credits and losses carried forward or back from other taxation years. Federal tax rates Federal tax is calculated on the annual taxable income of a corporation at the rates illustrated in the table below. These rates are re-evaluated frequently and may change. Certain Canadian controlled private corporations (CCPCs), which are essentially small business corporations, qualify for the small business deduction, which levies a reduced rate of tax on the first C$500,000 of income earned by such corporations each year, resulting in a lower effective tax rate. The benefits of the small business deduction are phased out for larger CCPCs. An associated group of small corporations must share the benefits of the small business deduction. A deduction is available to Canadian manufacturing and processing businesses taxable in Canada, that are carrying on eligible activities. Profits that are eligible for the small business deduction are not eligible for the manufacturing and processing deduction. Year General Small Business Corporations Mfg. & Processing % 11.00% 16.50% % 11.00% 15.00% % 11.00% 15.00% % 11.00% 15.00% Sales of capital assets Gains from corporate sales of capital assets are subject to a 50% income inclusion at the normal corporate tax rate. However, a net capital loss is not deductible from business income. Instead, an unused net capital loss can be carried back to the preceding three years or carried forward to future years to offset capital gains in these years. Depreciation or amortization An allowance for depreciation, referred to as capital cost allowance (CCA) may be deducted each year from gross income for capital property used in a trade or business or held for the purpose of earning income. Land is not depreciable, although the costs incurred for landscaping may be deducted when incurred. No depreciation is allowed for property held for personal use or as inventory. Depreciation begins when the asset is placed in service and ends when the asset is retired from service. CCA is applied at various rates to different classes of assets as determined in 22

23 the Canadian Federal Income Tax Regulations. The CCA rates apply on a declining balance basis. New additions (with some exceptions) are generally subject to a half-year rule. This means only half the annual CCA is allowed to be deducted by the acquiring taxpayer, regardless of when in a year an asset is acquired or placed in service. Some of the more common CCA classes are listed here: Class Description 1 Most buildings acquired after Buildings acquired before Furniture, fixtures, equipment 12 Tools, instruments, computer software 13 Leasehold interests 14 Patents, franchises, licenses for a limited period 50 General data processing and computer equipment Certain intangible property, including purchased goodwill, franchise costs with an indefinite life and certain incorporation costs are classified as eligible capital property. Generally, 75% of such costs are amortized on a declining balance basis at a rate of 7% per year. Losses A corporation s ordinary deductions include amounts expended for employee wages, rent on business property, repairs to business premises or equipment, bad debts, loan interest, taxes (excluding federal and provincial income taxes), CCA, depletion and advertising and contributions to pension and profit sharing plans. Business losses can be carried back to the preceding three years or carried forward to the following 20 years. Thin capitalisation rules A deductible interest payment made by a corporation to a related non-resident person, who does not pay any Canadian tax on the corresponding interest income, is generally referred to as earnings stripping. To prevent earnings stripping, the Income Tax Act imposes restrictions on the deductibility of such interest payments by a Canadian corporation, known as the thin capitalisation rules. A corporation s interest deduction on outstanding debts to specified non-residents is limited when the corporation s debt-to-equity ratio exceeds 1.5-to-1. Intercompany dividends Dividends received by a Canadian corporation from other Canadian taxable corporations are generally deductible when computing the taxable income of the recipient corporation, such that the dividends have no effect on the taxable income of that corporation. The purpose of the deduction is to prevent the double taxation of corporate income. Payment of tax and filing returns Every corporation conducting business in Canada is required to file an annual income tax return. The federal corporation income tax return is the T2. It is important to note that the provinces of Alberta and Quebec have separate provincial tax returns to be filed as well. Provinces and territories other than Alberta and Quebec are known as the agreeing 23

24 provinces, and the tax reporting and administration of these jurisdictions are administered by the CRA. Returns must be filed within 180 days of a corporation s tax year end. Unlike the U.S. tax reporting system, the Canadian tax system does not allow for extensions of the filing due date. Estimated taxes payable for the year are generally required to be paid within two months following the corporation s tax year end (CCPCs are allowed three months following their tax year end providing certain conditions are met). A corporation is also required to make estimated tax payments, or instalments, which may be based on the lowest amount computed under any of the three methods: 1. Current year s projected tax liability 2. The prior year s income tax liability or 3. A combination of the prior two years tax liability. Interest is charged on any tax not paid by the due date. Related or associated companies Unlike the U.S., Canada does not allow for the filing of a consolidated income tax return. Each legal entity is required to file its own Canadian income tax return. However, each company is required to identify any related or associated companies in its tax return, as certain deductions must be shared among the group. Transactions between the Canadian company and any related or associated non-resident entities must also be disclosed annually. Foreign tax credits As residents of Canada are required to pay Canadian tax on worldwide income, this may result in Canadian tax being levied on income that has already been subject to tax in a foreign country. Corporations are allowed a deduction from Canadian tax otherwise payable on all or a part of the foreign tax paid. Canadian tax otherwise payable attempts to determine the Canadian tax liability if that foreign income had been earned from a Canadian source. For non-business income, the taxpayer may take a deduction from Canadian tax equal to the lesser of: (i) (ii) The foreign non-business income tax paid in respect of the foreign income in question Foreign non-business income Income for the year from all sources x Tax otherwise payable (plus/minus certain amounts) It should be noted that unused non-business income deductions cannot be carried forward. Where a resident of Canada carries on business in a foreign country, a deduction for tax paid on income earned from the foreign country paid to the foreign country is allowed, equal to the least of: 24

25 (i) (ii) (iii) The total business income tax paid for the year to a particular country Foreign business income Income for the year x Tax otherwise payable (plus/minus certain amounts) The tax otherwise payable for the year after deducting any non-business income tax deduction Excess foreign tax credits may be carried back three years or carried forward up to 10 years. Scientific research and experimental development (SR&ED) SR&ED activities generally include engineering or design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research. Generally, research and development expenditures incurred in a year are fully deductible. This includes most capital expenditures. Any allowable expenditure that is not deducted in a year is placed in a pool and may be deducted in a future year during which a taxpayer conducts business in Canada. As a further incentive to invest in SR&ED activities, an investment tax credit is also available. This is applied as a direct reduction of a taxpayer s tax liability. Partnerships A partnership itself is not subject to taxation. Meaning income or loss generated by a partnership is allocated among the partners. A Canadian partnership is one where all partners are residents of Canada. Certain partnerships that conduct business in Canada are required to file an annual information return. Other tax aspects of a partnership are dealt with in the Personal Taxation in section Provincial and territorial taxes Canadian corporations and subsidiaries or branches of foreign corporations are also subject to provincial and territorial taxes. In general, a formula (gross revenue and salaries divided by wages paid in each jurisdiction) is used to allocate a portion of total taxable income to a given province or territory. Similar to the federal tax system, the provinces and territories allow some tax relief for small business corporations as well as those that are engaged in manufacturing and processing activities. The applicable 2014 tax provincial and territorial tax rates, as well as the small business deduction threshold, are illustrated on the following page. 25