Tax Issues When Doing Business in Canada

Tax Professionals' Resource
April 2, 2013 — 1,360 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

If you are doing business in Canada, then there are many tax issues that you should take care of. The Canadian tax system for business is governed largely by the Federal Income Tax Act. The Sales Tax Act and Corporate Tax Act also play an important role in this matter. The tax rules will apply if you are shipping your products to Canada or if you are expanding your business activities in the country.

You should also take care of the tax issues when the employees of your organization are involved in providing services to the citizens of Canada. In such cases, you should have a clear idea about the income tax and transactional tax laws that are applicable to the country. The following are some of the tax issues regarding the establishment and running of businesses in Canada.

The Income Tax

If you are a non-Canadian resident who is doing business in Canada, then you are liable to pay income tax for the profits obtained in the business. This is in accordance with the income tax treaty established between the Governments of Canada and many other industrialized countries. This applies to all businesses which have a permanent establishment in Canada.

A permanent establishment is defined as a fixed setup where the business activities are carried on partially or fully. This can include a place of management, its branches, a factory, or an office. This can also include extended physical presence in the country by employees of the foreign business establishment. Failure to pay taxes on time can lead to the cessation of the business property and closing down of the business. However, a foreign establishment’s income sources from outside Canada will not be subjected to Canada tax regulations.

Canadian Withholding Tax

Even if you qualify for the provisions under the income tax treaty, you may still be subjected to the payment of Canadian withholding tax; A tax at the rate of 2% should be paid for certain sources of Canadian income like the dividends, interests, management fees, distribution from trusts, and rent royalties. However, the organizations which qualify for the provisions of the treaty have to pay only a reduced percentage of their income as withholding tax.

The Federal Goods and Services Taxes

Business organizations should pay around 5 percent tax for the total amount of sales and purchases done in Canada. Businesses with a permanent establishment in Canada are supposed to follow this rule thoroughly. Non-residents without a permanent establishment in Canada should post security with the Revenue Agency of Canada, for remittance and collection obligations.

Provincial and Territorial Income Tax

A foreign business establishment in Canada is also required to pay provincial and territorial income taxes. This type of Canada tax will vary from 10 percent to 16 percent of the income. A foreign business establishment should file both the provincial and federal income tax returns within the prescribed time limit and should also pay the income tax in installments throughout the year.

Branch Tax

In order to equate the position of Canadian non-residents who carry business through branch operations and the non-residents who conduct their business operations through a Canadian subsidiary cooperation, the government has introduced the Branch Tax Act. Failure to pay the taxes or filing wrong information can lead to the levying of severe penalties.

Tax Professionals' Resource