Doing Business And Investing In Canada - AGN International
Doing Business and Investing inCanadaThis document compiled in 2012 by theseAGN International member firms in Canada
Doing Business and Investing in CanadaAbout this GuideThis Guide has been prepared to assist those interested in investing or doingbusiness in Canada. It is intended to answer many of the questions you mayhave. Since tax rules change from time to time, you should always consult withprofessional advisors when considering investing or establishing businessoperations in Canada.Our offices in Canada and the many locations around the world are committed toresponsiveness and dedicated to 4.15.16.17.18.19.20.Profile of CanadaBusiness EnvironmentBanking and FinanceBusiness EntitiesLabour Law RequirementsAudit Requirements and PracticesAccounting Principles and PracticesTax SystemTax AdministrationTaxation of CorporationsTaxation of Foreign CorporationsTaxation of ShareholdersTaxation of Foreign OperationsPartnerships and Joint VenturesTaxation of IndividualsTaxation of Trusts and EstatesGoods and Services Tax / Harmonized Sales TaxOther Indirect TaxesTax TreatiesAppendix
Investor Considerations12Profile of Canada Canada has a stable government and currency. English and French are the official languages. The Canadian workforce is highly skilled and educated. The standard of living is among the highest in the world. As of 2012, thepopulation of Canada is approximately 35 million people. Inflation has been nominal. Natural resources are abundant. Canada is one of the world's major trading nations. Transportation is well developed. Canada is just under 10 million square kilometers and is divided into tenprovinces and three territories.Business Environment A free market economy and private enterprise predominate. Canada is receptive to foreign ideas and capital. Many industries formerly under government control have beenderegulated and privatized. Corporate income tax rates are on the decline. The recent recession experienced globally started later in Canada than inother countries and its effect has been more moderate than elsewhere. Government incentives are available, especially in less-developedregions. Commodity taxes are generally not applicable to exported goods. There are no foreign exchange controls. Canada has an open economy with relatively few import restrictions.2
34 Federal and provincial governments offer a wide range of tax incentivessuch as scientific research tax credits. Significant investments in Canada by non residents are reviewed underthe Investment Canada Act to ensure the investment will contribute toCanada's economic growth and employment opportunities. Canada has entered into free trade agreements with the US and Mexico(NAFTA), Chile, Costa Rica and Israel and has signed free tradeagreements with the European Free Trade Association (EFTA) countries(Iceland, Liechtenstein, Norway and Switzerland), Columbia and Peru.Banking and Finance Canada offers an efficient, well-developed and highly regulated bankingsystem. Canada's capital markets rank among the largest and most active in theworld. Most sectors in the industry are highly concentrated. Canadian financial institutions are among the most financially sound inthe world.Business Entities Businesses can be carried on in Canada through: a corporation,individual proprietor or a trust or by having several such entities workingin concert through a joint venture or partnership. Corporate formation is simple and inexpensive. Corporation may be created under either federal or provincial legislation. Considerable flexibility is permitted in the design of a corporation sharestructure under Canadian federal or provincial corporate statutes. Corporations, including foreign corporations, may be partners in aCanadian partnership.Corporation/subsidiary There are no minimum or maximum capital requirements, except forfinancial institutions such as banks. Each company is taxed as a separate entity. (ie: on a non-consolidatedbasis).3
The use of Canadian subsidiary generally limits the liability of a foreignparent corporation to its investment in the Canadian subsidiary. Non-capital losses can be carried back three tax years and forward 20years. Capital may be repatriated tax free in advance of earnings. Dividends, interest and other payments to non residents may be subjectto withholding tax.Branch of a foreign corporation5 Start-up losses are generally deductible against earnings from outsideCanada on the corporation’s local tax return. Head office records must be available to Canadian tax authorities. Transfer of branch profits to the head office is not subject to withholdingtax. However the repatriation of such profits outside Canada is normallysubject to a “Branch Tax” which mimics the withholding tax which wouldbe levied on a dividend paid by a Canadian subsidiary to its non-residentparent company. Branch losses cannot be carried forward on a subsequent incorporationof branch operations. It is possible to obtain a rollover on the disposition of assets when thebranch operation of a foreign corporation is incorporated in Canada. Payments from a Canadian resident to a non-resident for servicesprovided in Canada are subject to a 15% withholding tax. The withholdingtax is treated as a prepayment of the non resident's Canadian income taxliability on the income. The non-resident must file a Canadian tax return inrespect of its business activities in Canada. However, the provisions of anIncome Tax Treaty between Canada and the non-resident's country oforigin may allow a recovery of this Canadian tax prepayment.Labour Law Requirements Employer/employee relations are governed by federal and provinciallabour legislation. The Canada Labour Code is the federal law dealingwith such matters as fair employment practices, fair wages policy, safetyof employees and other labour standards. Compulsory employer social security costs include government pensionplan contributions up to 2,307 and employment insurance (El) up to 1,176 for 20124
67 Foreign personnel are eligible for social security benefits.All provincial governments have legislated minimum wage rates. For2012, provincial rates for adult workers vary from 9.40 to 11.00 perhour. Foreign workers working in Canada will need a temporary resident visa, awork permit and a labour market opinion that confirms your employer canhire a foreign worker.Audit Requirements and Practices Corporate law and tax regulations require that proper books and recordsbe kept. Corporate law requires an annual audit of financial statements ofnonpublic companies, unless the shareholders consent to waive an auditof the corporation. Audited financial statements are not required for tax purposes. Adoption of International Reporting Standards (IFRS) as CanadianGenerally Accepted Accounting Principles (GAAP) is mandatory for publiccompanies and elective for other enterprises. However the AccountingStandard Board has developed the simpler Accounting Standards forPrivate Enterprises (ASPE) for use by entities with less complexoperations which do not have rigorous reporting obligations.Accounting Principles and Practices Generally accepted accounting principles (GAAP), including requireddisclosures, apply to public and private companies. Limited exemptionsare available to private companies. Accounting requirements for corporations are generally to maintain booksand records to enable full and fair disclosure of the financial condition of abusiness in compliance with applicable accounting principles, laws, rulesand regulations. Financial instruments are classified in accordance with the substance ofthe instrument rather than the legal form. Foreign-currency exchange gains and losses on long-term monetaryitems are charged to income. Development costs meeting certain criteria are deferred and amortized. The purchase method of accounting is used for business acquisitions.5
In a parent/subsidiary relationship, consolidated financial statements arenormally required. Investments in joint ventures are accounted for by the proportionateconsolidation method. Related-party transactions are measured at carrying or exchangeamount, depending on the circumstances, and require full disclosure.Goodwill is not amortized. 89Tax System Canadian residents are subject to Canadian income taxes on worldwideincome. Non-residents are taxed on Canadian source income which generallyincludes income that arises from employment in Canada, a businesscarried on in Canada or capital gains realized on the disposition of“taxable Canadian property” (which includes assets used in a businesscarried on in Canada, Canadian real estate and resource properties, andinvestments in entities whose value is primarily derived from suchproperties). A tax credit and/or a deduction give relief for foreign taxes if excess taxwas paid. Non residents may also be subject to Canadian withholding tax on certaintypes of passive income including interest, dividends and rents. Policies strive to maintain an integrated tax system under which abusiness person will earn the same after tax income, irrespective of thelegal structure used to carry out the business (corporation, partnership orproprietorship).Tax Administration The Canada Revenue Agency (CRA) administers the federal tax systemand corporate provincial income taxes (except for Alberta, and Quebec). Corporate returns are prepared annually and are due within six months ofthe corporation's fiscal year end. Individuals file a return by April 30 for the previous calendar year;spouses file separate returns. No extensions of filing date are possible for corporate and individualreturns; there are penalties and interest charges for late filing but6
generally only if income taxes are owing on the due date.10 Consolidated returns are not permitted. In most cases monthly installment payments of corporate income tax arerequired. Individuals may be required to pay quarterly installments of tax on nonemployment income. Individual tax on employment income is withheld at source by theemployer.Taxation of Corporations A corporation can choose any date on which to end its fiscal year, butno fiscal year can exceed 53 weeks, and generally a corporationmust obtain approval from the tax authorities in order to change thedate of its fiscal year end. Resident individuals receiving dividends from Canadian residentcorporations claim a dividend tax credit against personal tax inrecognition of underlying corporate tax. The dividend tax regime distinguishes between eligible and non eligibledividends, and require Canadian resident corporations that pay dividendsto Canadian shareholders to track the source of income to which thesedividends relate. Corporations are taxed at a flat rate which varies based on the type ofincome earned (see Appendix). Any company incorporated or continued in Canada is considered residentin Canada. Fair-market-value (or arm's-length principle) rules apply to non-arm'slength transactions. Dividend payments are not tax deductible to the payer. Half-year depreciation rates apply in the year of acquisition of mostcapital assets. Maximum depreciation need not be claimed in any year. Depreciation on rental or leasing property may be restricted. 50% of capital gains and goodwill proceeds is taxable.7
1112 To be deductible, an expense must be reasonable and must be incurredfor the purpose of earning income. Most dividends received by a Canadian corporation from other Canadiancorporations are deductible in determining the recipient's taxable income,i.e intercompany dividends are generally tax-free facilitating the use ofholding companies although a fully refundable tax may apply. Thin Capitalization rules restrict the deductibility of interest on certainloans from foreign affiliates to the extent that the debt to equity ratioexceeds 2-to-1. Budget 2012 proposes to reduce the debt to equity ratiofrom 2-to-1 to 1.5-to-1, for taxations years beginning after 2012.Taxation of Foreign Corporations No special rules apply for computation of taxable income or tax payableby non-residents. Non resident corporations are subject to income tax on income derivedfrom carrying on a business in Canada and on capital gains arising on thedisposition of taxable Canadian property. The business profits article contained in the Canada's international taxtreaties generally provides that Canada may tax only the business profitsof a non-resident that are attributable to a Canadian permanentestablishment. Tax treaties generally provide that a person with authority to concludecontracts may constitute a permanent establishment, exposing relatedCanadian profits to Canadian taxation. Fees paid to non-residents that provide services in Canada are subject towithholding tax at the rate of 15%. There is a requirement to withhold Canadian payroll taxes for nonresident employees providing services in Canada Canadian withholding tax has been eliminated on most interest paid toarm's length non residents.Taxation of Shareholders Resident individual shareholders in receipt of dividends claim a creditagainst personal tax. 50% of capital gains is included in income.A lifetime capital gains exemption of 750,000 is available to residents fordispositions of shares of a qualified small business corporation and8
qualified farm and fishing property.1314 Non resident shareholders are not eligible for a dividend tax credit. Proper capital structure should be determined at the time of the initialinvestment. Various tax-free rollovers are available for asset transfers in exchange forshares, share-for share exchanges, liquidating distributions from whollyowned subsidiaries, and business combinations.Taxation of Foreign Operations Corporations resident in Canada are taxed on income from all sources,whether remitted to Canada or not. Relief from double taxation is provided through Canada's international taxtreaties with certain countries as well as foreign tax credits anddeductions for foreign taxes paid on income from non Canadian sources. Foreign branch losses can be offset against domestic profits. Foreign taxes paid on branch profits are creditable in Canada, subject tolimits. For individual taxpayers, the foreign tax credit is limited to 15% of thegross amount of foreign income from property (other than real property);foreign tax exceeding 15% is deductible from taxable income. Provisions in respect of foreign accrual property income (FAPI) preventCanadian residents from avoiding or deferring Canadian tax on passiveincome earned through foreign corporations. Active business income of foreign subsidiaries is not included in incomesubject to Canadian tax until repatriated to Canada by way of a dividend.Partnerships and Joint Ventures Treaty benefits are generally available for partnership activities. Limited partnerships have limited liability and are commonly used in realestate investments, oil and gas exploration investments. Certain asset transfers and other restructuring transactions may becarried out on a tax deferred basis by a Canadian partnership.Need to determine whether a particular arrangement is a partnership or ajoint venture. 9
15 Certain tax-deferred rollovers are available to partnerships, but not to jointventures. Partnerships are subject to specific tax rules; general principles apply tojoint ventures. Partnerships that carry on business in Canada are generally required tofile an Annual Information Return in order to compute its taxable incomeand to allocate that income between the various partners. Thisrequirement to file is based on financial thresholds and the nature of thepartners.Taxation of Individuals Individuals are subject to income taxes levied at marginal rates whichgradually increase with one’s annual income, with the top rates levied onincome in excess of approximately 132,000. Relief from double taxation is available to Canadian residents and nonresidents. Non residents are taxable in Canada if they are employed in Canada andtheir taxable income is attributable to the employment performed by themin Canada or if they carry on business in Canada, or realize a gain fromthe disposition of a Taxable Canadian Property (as defined). Special concessions may be available for foreigners working in Canadai.e. employment at special work site or remote location. Consider arranging receipt of payments from a former foreign employerbefore moving to Canada in order to reduce the risk that such income willbe subject to Canadian taxes. Consider terminating employee participation in foreign profit-sharing,retirement savings or other compensation plans before movingpermanently to Canada because of possible liability for Canadian tax. Business immigrants can set up a non resident trust, "an immigrationtrust" that can hold assets on a tax free basis for the first five years thatthe immigrant is in Canada. Since the Immigration Trust is not resident inCanada (and not deemed to be resident in Canada for 5 years), theincome of the Immigration Trust is generally not taxable in Canada. It isacceptable for income earned by the Immigration Trust in a year to be"capitalized" at the end of the year and then distribute to the beneficiariesas capital of the trust in the following year. Distributions of capital fromtrusts are always received tax free in Canada. As a result, provided theImmigration Trust gives the trustees the discretion to capitalize incomeand distribute capital, the beneficiaries should pay no Canadian incometax on any income earned by the assets during the 5-year period.10
161718Taxation of Trusts and Estates Trusts generally operate under common-law concepts. Trusts are commonly used as part of estate planning. Certain tax credits may flow through a trust to a beneficiary.Goods and Services Tax/ Harmonized Sales Tax A Federal value-added tax (“GST”) is applied at a rate of 5% to mostsupplies of goods and services made in Canada. Several provinces have harmonized the GST with their provincial salestax into a single tax (“HST”) which follows the same rules as the GST.One province (Quebec) has a separate provincial sales tax (“QST”) whichalso generally follows the same GST rules. Of the remaining provincesand territories, three have provincial sales taxes ranging from 5% to 10%which are generally levied on the sale of tangible goods within theirjurisdiction. Businesses providing taxable supplies are entitled to a refund ofGST/HST paid on inputs. Any non resident that makes a taxable supply in Canada and hasworldwide sales of 30,000 or more will generally be required to registerfor GST. Some supplies are zero-rated for the GST/HST; others are exempt.Other Indirect Taxes Federal excise taxes and duties are imposed on certain domestic andimported products. Exports are generally not subject to excise duties or taxes, or to federal orprovincial sales taxes. The provinces levy land transfer taxes. Property taxes are levied by municipalities on real property and byprovinces on real property not situated in a municipality. Several provinces impose payroll taxes for health and education.11
1920Tax Treaties Canada has a growing network of treaties. The provisions of the treaties take precedence over Canadian taxlegislation. Under most treaties, withholding tax is reduced to 15% or less.While technically, international income tax treaties only bind the federalgovernment, most of the provinces and territories have chosen to bebound by the terms of these treaties as well. Under many treaties, Canadian withholding tax on dividends is reduced to5% if paid to a corporation that owns at least 10% of the payer’s votingstock. Interest payments between arm’s length parties are generally exemptfrom withholding tax under domestic law. Treaties allow Canada to tax only those business profits attributable to apermanent establishment of a foreign enterprise in Canada. A non-resident is exempt from tax on Canad
Doing Business and Investing in Canada . About this Guide . This Guide has been prepared to assist those interested in investing or doing business in Canada. It is intended to answer many of the questions you may have. Since tax rules
Additional copies of Doing Business 2010: Reforming through Difficult Times, Doing Business 2009, Doing Business 2008, Doing Business 2007: How to Reform, Doing Business in 2006: Creating Jobs, Doing Business in 2005: Removing Obstacles to Growth and Doing Business in 2004: Understanding Regulations may be purchased at www.doingbusiness.org.
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