Cross-border Canadian Tax

Consider whether you need to register with Canadian sales tax authorities and charge Canadian sales tax. Ensure that your activities are structured such that they do not cause you to be “carrying on business in Canada” or have a “permanent establishment” in Canada. If your employees might be coming to Canada, either as part of the marketing process or for post-sale service, consider whether they will be subject to Canadian income tax and whether you (as their employer) will thereby have a Canadian withholding and remittance obligation. To the extent that your customers are paying you in respect of services rendered in Canada (even if not rendered by you), they will have a 15% withholding obligation on payments to you as a non-resident.

The presence of employees in Canada can create Canadian tax obligations for them and for you as their employer. An extended stay in Canada could cause them to be considered “resident in Canada” for Canadian tax purposes. Depending on the facts, their presence in Canada could cause you to have a taxable nexus in Canada, by virtue of your being considered to “carry on business in Canada” or have a “permanent establishment” in Canada.

There are a variety of Canadian tax issues to consider when making an acquisition in Canada, including whether to buy assets directly or buy the entity that owns them, whether to create and use a Canadian corporation to act as the direct purchaser, and how to structure the purchase price. These are covered in depth here. If purchasing assets rather than equity interests, another key element will be Canadian sales tax.

Canadian subsidiaries pose a number of potential tax issues. It is important to structure investments in such a way as to be able to extract funds from Canada with the least possible Canadian tax, which typically means maximizing the “paid-up capital”  of the subsidiary’s shares. Loans to a Canadian subsidiary should be structured to maximize interest deductibility in Canada: in particular, Canada has thin capitalization limitations on debt owed by a Canadian to non-arm’s-length non-residents. Transfer pricing rules ensure that Canadians do not receive less than an arm’s-length price on amounts owing from non-arm’s-length non-residents, and do not pay more than an arm’s-length price on amounts owed to non-arm’s-length non-residents. There are various considerations involved in receiving loans from Canadian subsidiaries, as well as other forms of repatriating funds from Canadian subsidiaries 

A non-resident earning business income will be subject to Canadian income tax on it if it is “carrying on business in Canada”, unless they are resident in a country that has a tax treaty with Canada, in which case they will be subject to Canadian tax if they have a “permanent establishment” in Canada Other forms of Canadian-source income such as interest, dividends, rents and royalties are typically subject to Part XIII withholding tax, subject to potential relief for residents of a country that has a Canadian tax treaty. Payments to a non-resident in respect of services rendered “in Canada” are subject to a 15% withholding tax. Capital gains are subject to Canadian income tax only where the property disposed of is “taxable Canadian property”.

Sales of Canadian-situs property are addressed here.

There are a number of features of the Canada-U.S. Tax Treaty that are unique. This is the only Canadian tax treaty with a “limitation on benefits” article governing who is entitled to receive benefits under the treaty. U.S. residents that are entitled to claim benefits under the Canada-U.S. Tax Treaty are entitled to a 0% interest withholding rate, this being the only Canadian tax treaty with a 0% interest withholding rate on interest payable to non-arm’s-length non-residents. The Canada-U.S. Tax Treaty has a special rule creating a “permanent establishment” in Canada if services are provided here for more than a prescribed number of days. There are also specific anti-hybrid rules potentially applicable to LLCs, unlimited liability companies and other entities that are treated as transparent in one country for tax purposes and not in the other.

While Canada’s leading tax advisors include both lawyers and accountants, it is important to be aware that lawyer-client privilege is the only reliable basis on which you can count on to resist a demand from the Canada Revenue Agency to see communications, memos, opinions and other sensitive tax documents. Unlike the U.S., there is no “tax preparer privilege” in Canada, so the CRA can review communications between accountants and clients at any time upon demand. In fact, the CRA is well aware of this, and is very aggressive in seeking to force taxpayers to turn over planning memos, tax diligence reports, tax working papers and other sensitive tax materials prepared by accountants. If you obtain tax advice from a non-lawyer, understand that tax authorities can demand to see it at any time.