DOING BUSINESS IN CANADA. Tax Overview

Transcription

1 DOING BUSINESS IN CANADA Tax Overview

2 Why do business in Canada Market Integrated modern G8 economy Population over 35 million most within 200 miles of border Population concentrated over 44% in 6 largest cities GDP per capita $52,000 comparable to US (World Bank) English is standard business language (even Quebec)

3 Why do business In Canada Trade NAFTA most US manufactured goods can be imported duty free Land border - transport by road or rail for tangible goods Large stable national banks (last regional bank failure 1985) Low corporate tax rate of 25% to 27% in large provinces No withholding tax on Canada / US interest payments

4 Regional Business Centers Toronto Population over 5,500,000 (Atlanta) National banking centre / largest stock exchange Large immigrant / minority population Montreal Population 3,800,000 (Seattle) Bilingual / multicultural, second largest French city in world World renowned for festivals and culture Vancouver Population 2,300,000 (Pittsburgh) Major port gateway to Asian markets One of the world s most livable cities high quality of life

5 Carrying on business in Canada Income Tax: Carrying on business in Canada Business defined in 248(1) very broadly to include a profession, calling, trade, manufacture, or undertaking of any kind whatever and an adventure or concern in the nature of trade Jurisprudence, Extended definition of carrying on business in Canada CRA s Interpretation ( IT ) Bulletins and Technical interpretations ( TI )

6 Carrying on business in Canada Canada-US Tax Treaty Key to avoiding double taxation Article VII Business Profits Article V - Permanent Establishment in Canada Permanent Establishment factors: Fixed place of business Dependent agent who has ability to enter into contracts and habitually concludes contracts on behalf of US Company Building site, construction, or installation if > 12 months Inventory for more than display and delivery Service PE If no PE exists the taxpayer may be able to avoid Cdn income tax Article XXIX-A Limitation on Benefits

7 Carrying on business in Canada Summary of Canadian income tax rates: 2015 Federal: 15% Provinces: Ontario 11.5% Quebec 11.9% British Columbia 11.0% Alberta 10.0% 25% Branch Profits (Part XIV) Tax Article X(6) Treaty: Rate reduced to 5% / $500,000 CDN cumulative exemption

8 Cross-Border Business Branch Operations Canadian Taxation Compliance: Canadian Branch profits are subject to Canadian income taxes at the ordinary tax rates, Compliance issues are more complex compared to a domestic entity, GST the US entity may have to provide a deposit to the CRA for GST, Benefits: Branch losses deductible against USCo s profits, Exemption from Branch Profits Tax, Drawbacks: A sale of business assets could attract Canadian income taxes, If Branch is later incorporated consider Canadian rollover (US taxation?), CRA frequently challenges expenses allocated by USCo to the Canadian Branch (e.g.: management fees, accounting function, etc.), Regulation 105 may require payers (customers) to withhold tax,

9 Cross-Border Business Branch Operations Canadian Taxation C-corp and S-corp: If these entities are QP, then they qualify for treaty relief on their own, LLC s: Unlike C-corps and S-corps, Canada considers an LLC to be a corporation that is not liable to tax in the USA (unless it elects to be taxed as a corporation), Before 2010, LLC s were generally not eligible for treaty benefit, The 5 th protocol provided some relief through article IV(6), IV(6) extends treaty benefits to US-resident members of the LLC, NB: The US resident member must also be a QP,

10 Cross-Border Business Export/Import Goods and Services - Canada Example 1: US-LLC carries on a business in Canada through a PE, US-LLC is owned 33% by each a US individual, a US C-corp, and a UK company, What are the Canadian income tax consequences of this structure (i.e.: income tax and branch profits tax)?

11 Cross-Border Business Export/Import Goods and Services - Canada Example 1: Answer: The LLC is subject to Canadian income tax on its profits attributable to its Canadian PE, The LLC s branch tax is computed as follows: Re: US individual 25%, Re: US company 500k exemption/5%, Re: UK company 25%, It would have been more tax efficient to have the UK company carry on the business in Canada directly rather than through the LLC

12 Cross-Border Business Export/Import Goods and Services - Canada Example 2: US-LLC carries on a business in Canada but it does not have a PE, US-LLC is owned 33% by each a US individual, US C-corp, and a UK company, What are the Canadian tax consequences of this structure?

13 Cross-Border Business Export/Import Goods and Services - Canada Example 2: Answer: The LLC is subject to Canadian income tax on its profits as follows: Re: US individual exempt no PE, Re: US company exempt no PE, Re: UK company - taxable, The LLC s branch tax is computed as follows: Re: US individual - exempt no PE, Re: US company exempt no PE, Re: UK company BPT 25%, It would have been more tax efficient to have the UK company carry on the business in Canada directly rather than through the LLC

14 Corporations & Individuals Canadian withholding can apply regardless of Canadian tax liability. Regulation 105 Services; and Regulation Employed

15 Employee Non-resident individual employed in Canada Did the employee receive remuneration for employment services performed in Canada?

16 Employee or Contractor Different requirements for employees vs. independent contractors. Control Ownership of tools and equipment Chance of profit/risk of loss Integration

17 Tax Treaties Canada & USA Exemption from Canadian taxes available if: Treaty between Canada and transacting country exists; and Conditions of exemption per treaty are met, i.e. no P.E.

18 Tax Treaties Possible exemptions from standard taxation: Corporations: The business was not carried on through a permanent establishment ( PE ) in Canada Individual: Remuneration does not exceed $10,000; The recipient is not present in Canada for 183 days or more in a taxation year and is not paid by, or on behalf of a Canadian resident entity, i.e. not deductible as an expense of a Canadian resident entity, or borne by a P.E. in Canada

19 Corporations & Individuals Payers to non-residents Withholding requirements at source Remitting requirements Reporting requirements What penalties can apply Non-resident Recipients Waivers in withholding requirements Filing requirements Penalties

20 Payers to non-residents Reg Services If a non-resident entity receives a fee of any sort in return for services, the payer (resident or not) is generally required to withhold and remit 15% of gross to the CRA.

21 Payers to non-residents Reg. 105 Services Reimbursement for out of pocket costs and expenses are excluded Must have all supporting documentation, invoices etc.

22 Payers to non-residents Reg. 105 Bundled Services Who performs the services; Where they were prepared; What exactly was disclosed on the invoice Reg. 105 Multiple 105 withholdings required

23 Payers to non-residents

24 Payers to non-residents

25 Payers to non-residents Reg. 102 Employment If physically employed in Canada: The payer is generally required to withhold normal Canadian employee payroll deductions (Taxes, EI and CPP) on all taxable benefits and remit to CRA

26 Reg. 105 & 102 Amounts withheld at source must be remitted: To the CRA; Through a Canadian financial institution; No later than the 15 th day of the month following payment, and potentially sooner for employment if a large employer

27 Reg. 105 & 102 A waiver from withholding can be available if applied for and approved by the CRA in advance of payment. Reg 105 waiver application; R102-J waiver application; R102-R waiver application

28 Non-resident Recipients Treaty Based Waivers Regulation (service payments) 105 Waiver CRA Administrative Policy waiver granted: 1. Non-resident is an individual earning less than $5,000 CAD for the current calendar year; 2. Non-recurring presence in Canada and service performed is for less than 180 days under the contract; or 3. Recurring presence but cumulative presence in Canada is less than 240 days during the period and less than 180 days under the contract.

29 Non-resident Recipients Treaty Based Waivers Regulation (payroll) 102 Waiver May request a waiver if the employee qualifies for a treaty exemption: 1. Remuneration doesn t exceed a de minimus amount (i.e. $10,000 CAD under the Canada USA tax convention); or 2. Recipient is present in Canada for fewer than 184 days in any 12 month period beginning or ending in the tax year and the remuneration is not paid by or on behalf of a Canadian resident person and is not borne by a permanent establishment in Canada.

30 Payers to non-residents Information return requirements: All payers must: Complete an information return containing a separate slip for each recipient plus summary; File the return with the CRA; and Provide recipients with a copy

31 Payers to non-residents Information return requirements: Type of payment Slips and returns required Non-employment services T4A NR slips and information return Employment related services T4 Slips and information return Other related payments NR4 slips and information return

32 Payers to non-residents Failure to comply will possibly result in penalties for: Failure to withhold; Failure to remit % of withholding; and Failure to file an information return Max $7,500 for the T4A-NR; and Any applicable interest

33 Non-resident Recipients Income Tax Return Filing Requirements Both non-resident individuals and corporations receiving income from either employment or nonemployment related services performed in Canada are required to file Canadian income tax returns.

34 Non-resident Recipients Income Tax Return Filing Requirements Individuals: Must apply for Individual Tax Number (ITN) T1261 Application T1 income tax return is due on April 30 th of the following year For self-employed individuals the T1 return is due June 15 th, however any balance of tax payable is due by April 30 th

35 Non-resident Recipients Income Tax Return Filing Requirements - Individuals If a waiver is received from withholding for the employment income in question, generally an income tax return is not required unless: The facts have changed; Other Canadian tax liabilities exist; or So requested by the CRA

36 Non-resident Recipients Filing Requirements Failure to Comply Individual: 5% of tax payable late payment penalty Plus 1% of tax payable times number of complete months past due to a max. 12

37 Additional Considerations Voluntary Disclosure Program Four requirements Voluntary Complete Penalty applicable At least one year past due

38 Additional Considerations Other Timing, tax planning and execution takes time! Extra-provincial registration requirements Workers compensation insurance requirements if employees/contractors on Canadian soil Additional withholding tax and registration requirements if in Quebec

39 Income Taxes Summary Treaty exemptions apply to assessed tax only Returns need to be filed to claim treaty benefits All Canadian provinces recognize the Treaty Significant risk/traps on withholding taxes Waivers may be granted on prospective basis Employee / contractor payments subject to reporting even if waivers have been approved S Corporations / Q Subs and LLCs are considered to be regular corporations for CDN tax i.e. not disregarded entities

40 Sales & Use Tax GST/HST/QST GST is Goods and Services Tax Federal sales tax applicable everywhere in Canada GST rate is 5% GST paid to clear taxable goods into country Similar to Europe / Australia value added tax system Registrant can claim input tax credits (ITC) for GST paid Net remittance is GST billed to customers less GST invoiced from suppliers Reporting on an accrual basis

41 Sales & Use Tax GST/HST/QST HST is Harmonized Sales Tax HST adds a provincial component (8 to 10%) to the GST with identical rules for total rate of 13% to 15% Rate varies by province 5 participating provinces HST paid also qualifies as an ITC QST is Quebec Sales tax QST is a separate tax of 9.975% with same rules for Quebec Combined with GST filings if head office is in Quebec Separate return and filings for Quebec portion for businesses outside Quebec

42 Sales & Use Tax GST/HST/QST GST / HST / QST Basics Some goods and services are exempt Medically necessary services (doctor, dentist, hospital) Residential rent and sale of used residential property Financial transactions interest, securities, insurance, and commissions charged on these transactions Businesses with most or all revenue exempt from GST can not claim input tax credits and normally will not be registered

43 Sales & Use Tax GST/HST/QST Basics continued Taxable Goods: rate based on place of delivery Shipped to customer on own truck, courier, post or common carrier taxed at rate of customer location Customer pickup taxed at rate of vendor location Taxable Services: rate based on customer address Billing address of customer used if located in Canada Services related to real property taxed based on location of property regardless of billing address Services related to tangible property based on location of property based on location of property when service performed

44 Sales & Use Tax GST/HST/QST Zero Rated Sales Goods and services that are taxable at a rate of 0% Exported goods / services to non-residents Basic groceries Prescriptions and prescription eyewear Business may have all revenue zero-rated sales, or have both taxable and zero rated sales Business with taxable sales (even at 0%) are entitled to claim ITC s

45 Sales & Use Tax GST/HST/QST Registration Carrying on business in Canada: Different definition than for income taxes Common law/question of fact Regular or continuous supply of goods or services in Canada Single contract / occasional transactions not required Voluntary registration permitted if necessary to recover input tax credits on costs / subcontracts Non-resident without a PE is technically required to post a bond or cash security payment - What if not posted?

46 Sales & Use Tax GST/HST/QST GST/HST Return Business outside Quebec Total revenue (both taxable and exempt) Total tax collected (GST and HST all combined into a single reporting number) Total input tax credits claimed (GST and HST all combined into a single reporting number) Net tax payable or refundable Other reporting required for special transactions

47 Sales & Use Tax GST/HST/QST QST Return Quebec Business Single return for GST/HST and QST reporting Total revenue (both taxable and exempt) Tax collected (GST / HST ) in one column, QST in the other column Total input tax credits claimed (GST and HST all combined into a single reporting number), QST Input Tax Refunds in the other column Net tax payable or refundable for each tax Other reporting required for special transactions Single remittance for all amounts combined

48 Sales & Use Tax GST/HST/QST QST Return Business outside Quebec Only Quebec sales and taxes reported Tax collected (QST only) Total input tax refunds claimed (QST only) Net tax payable Other reporting required for special transactions Filing and remittance separate from GST/HST return Business without a Quebec PE is not required to register for QST, but will not be able to claim ITR s if QST paid.

49 Sales & Use Tax British Columbia Provincial Sales Tax Retail sales tax similar to sales tax in US Applies to tangible goods and software Legal fees, accommodations, repairs and telecommunication services are taxable Exemption for food, books, prescriptions, other items Exemption for purchases of goods or taxable services for resale Standard rate is 7%, some items have higher rates Canadian businesses outside BC must register if soliciting and selling/delivering to BC customers. No requirement for a business located outside Canada to register.

50 GST/HST Shipments by non-resident Division III (import) GST payable by importer of record If sales are FOB dock in US then customer is importer of record, pays GST to clear goods through border and claims ITC. If sales are FOB customer then US company must pay GST to clear goods through border. Can t claim ITC s unless registered. Section 180 allows assignment of Division III GST to customer. Unusual, normally would have customer act as importer Not possible for bulk/break shipments

51 GST/HST Drop Shipments Special rule zero-rating sales when non-resident involved in sale of goods between Canadian businesses Need three participants to transaction: Registered Canadian vendor Non-registered foreign middleman Registered Canadian consignee/buyer The consignee issues a certificate to the vendor certifying the goods are for commercial use, and commits to paying any assessable tax Both sales are deemed to be zero rated

52 Cross-Border Business Export/Import Goods and Services - Canada USCo, a C-corp, sells USmanufactured goods into Canada, USCo solicits orders for the supply of goods in Canada through advertising directed at the Canadian market, Contract is concluded outside of Canada, Goods delivered to customer in Canada, Payment made outside of Canada, USCo has no bank account, no employees, and no inventory in Canada

53 Cross-Border Business Export/Import Goods and Services - Canada Income tax: USCo would not be considered to be carrying on business within Canada, No need to go to the Canada-US tax treaty, GST Selling goods into Canada does not constitute carrying on business in Canada Not subject to GST

54 Cross-Border Business Export/Import Goods and Services - Canada USCo, a C-corp, sells non- Canadian-manufactured goods into Canada, US solicits orders through advertising directed at the Canadian market, Contract is concluded outside of Canada, USCo maintains an inventory of goods in Canada, When an order is received, the goods are shipped from the Canadian warehouse to the customer in Canada, Payment made outside of Canada, USCo has no bank account, no employees, Cdn warehouse

55 Cross-Border Business Export/Import Goods and Services - Canada Income Tax: Maintaining an inventory of goods for sale in Canada would constitute carrying on business in Canada Under Treaty, the maintenance of a stock of goods or merchandise for the purpose of storage, display, or delivery not a PE. GST USCo would be required to register for GST under the policy statement, Cdn warehouse

56 Cross-Border Business Export/Import Goods and Services - Canada CanCo hires USCo to paint a building in Canada, USCo fully subcontracts out the work to another Canadian company ( SubcontractCo ), USCo s involvement will be limited to contacting CanCo & SubcontractCo to monitor work, CanCo and USCo contract completed outside of Canada, USCo/Subcontractco contract concluded inside of Canada, USCo does not solicit business, has no equipment, address, or telephone listing in Canada, USCo has no bank account or employees in Canada,

57 Cross-Border Business Export/Import Goods and Services - Canada Income Tax: USCo may not be viewed as carrying on business in Canada because contract with CanCo was concluded outside of Canada, the company has no physical presence or employees in Canada, USCo should not be subject to Cdn income taxation, GST: USCo is not required to register for GST, SubcontractCo must charge USCo GST because the taxable supply is rendered in Canada. USCo may wish to voluntarily register to claim the ITC,

58 Cross-Border Investment Business expansion into Canada Issues relating to incorporation of a subsidiary Entity selection: Per se corporation Unlimited Liability Company (a hybrid entity) BC, Alberta, and Nova Scotia all have ULC s All have different characteristics For Canadian tax purposes a corporation, For US tax purposes a disregarded entity or partnership Consolidation of losses Ability to claim a FTC for the ULC s Cdn taxes, Can Check the Box to treat it as a corporation Beware of traps (e.g.: article IV(7)),

59 Cross-Border Investment The Cdn Per Se corporation pays tax in Canada on its world wide income Can repatriate profits by paying management fees, interest, royalties, and/or dividends (generally 25% WHT under domestic law) In order to benefit from treaty reduced rates the recipient must be a QP Dividends (Article X): Where the beneficial owner of the dividends is a US resident: a) That is a US Corp that has at least 10% of the voting stock (WHT is 5%), b) WHT is shall be 15% in all other cases USA Canada C-corp or S-corp Canadian Per Se Corporation

60 Cross-Border Investment The Cdn ULC pays tax in Canada on its world wide income, Can repatriate profits by paying management fees, interest, royalties, and/or dividends (generally 25% WHT under domestic law) In order to benefit from treaty reduced rates the recipient must be a QP Trap: Article IV(7)(b): In short, because the recipient does not see the payment for US purposes because the ULC is fiscally transparent (for US purposes only) and the tax treatment would be different if the ULC were not fiscally transparent then a reduced WHT is not available However, there is a technical solution to this problem for dividends USA Canada C-corp or S-corp Canadian ULC

61 Cross-Border Investment The Cdn Per Se corporation pays tax in Canada on its world wide income Can repatriate profits by paying management fees, interest, royalties, and/or dividends (generally 25% WHT under domestic law) In order to benefit from treaty reduced rates one must look through the LLC to its members and determine their proportionate interest Dividends (Article X): Where the beneficial owner of the dividends is a US resident: a) That is a US Corp that has at least 10% of the voting stock (WHT is 5%), b) WHT is shall be 15% in all other cases S-corp USA Canada German individual Canadian Per Se Corporation C-corp 40% 50% 10% Canadians LLC 50%

62 Cross-Border Investment Dividend WHT is as follows: Re: German S/H 25% (b/c this owner is not a resident of the US), Re: C-corp 15% (b/c the C-corp has less than 10% of the votes 10% x 50% = 5%), Re: S-corp 5% (b/c its owns at least 10% of the voting stock (i.e.: 40% x 50% = 20%)

63 Cross-Border Investment This structure may be the worst structure for an American who wishes to invest in Canada The reason is due to the interaction between IV(6) and IV(7)(b) Rule of thumb: If the taxpayer and the FTE reside in the same country then treaty benefits may generally apply (e.g.: LLC is carrying on business in Canada). If the taxpayer and the FTE reside in different countries then treaty benefits are generally denied (e.g.: a ULC paying a dividend to its US shareholder

64 QUESTIONS?