By Howard Wasserman, Principal—Taxation at Segal GCSE LLP
Any non-resident that has sales in Canada is taxable in Canada on the profit on those sales.
A number of treaties state that a non-resident corporation is only taxable in Canada if the non-resident corporation has a permanent establishment in Canada: a fixed place of business through which the business of a resident of one country is carried on.
In the Canada-US tax treaty, a permanent establishment is defined to be a place of management, a branch, an office, a factory or a workshop. Building sites or installation projects are also considered permanent establishments if they last more than 12 months. So too are people in Canada habitually exercising the authority to conclude contracts in the name of the non-resident.
And what’s not a permanent establishment?
1. The use of facilities for storage display or delivery of goods.
2. The maintenance of a stock of goods.
3. The purchase of goods or merchandise or the collection of information.
5. The use of a broker commission agent or any other independent agent.
Once a permanent establishment has been created, the non-resident is taxable only on the profits earned in Canada, not the revenues. This can be calculated using foreign expenses that relate to the activity in Canada. For example, a non-resident corporation could allocate some management or administration costs if they can be clearly tied to the activities in Canada.
Additionally, the non-resident corporation must meet Canadian filing requirements even if no taxes are payable. More specifically, the foreign corporation should file schedule 91 and schedule 97 that would be attached to the jacket of a T2 corporate tax return. In this filing, the non-resident corporation is stating that the corporation earns Canadian revenue but is not taxable in Canada because there is no permanent establishment.
All payments to the non-resident corporation doing business in Canada are subject to 15% withholding tax on the work done in Canada. If it has been determined that the non-resident corporation is not taxable in Canada, then the non-resident corporation can file the treaty-based tax return and request a refund of the withholding taxes.
There is an opportunity to request a waiver for the 15% withholding tax on work done in Canada before the work commences. In order to get a waiver, a submission must be made to CRA, which often includes the contract related to the work being done in Canada. This gives CRA an opportunity to examine the situation to determine if the foreign corporation is taxable in Canada.
If the non-resident corporation receives a waiver, the corporation can give this waiver to its customers to ensure the no withholding tax is payable. Even if a waiver is received, the non-resident corporation must still file a treaty-based Canadian income tax return because of the Canadian revenues earned.
There are a number of issues to be dealt with on carrying on business in Canada, but the first one is always the determination of whether the company owes Canadian corporate income taxes. For help or advice, you can contact me directly.