Under Canadian tax law, a corporation is deemed to be a resident in Canada for tax purposes if it was incorporated in Canada. Canadian resident corporations are taxed on their global income from every source, including business income, property income and capital gains arising on the sale of capital property. Non-Resident corporations are only subject to Canadian income tax on their Canadian source income. Here, Income Tax is levied both federally and provincially along with other taxes like federal and provincial value-added and sales taxes. (For Steps to incorporate a company in Canada federally– Click Here)
In general, every corporation which is taxable in Canada must file an annual Canadian income tax return within six months after the fiscal year end whether or not the corporation has made a profit or its income is exempt from Canadian tax pursuant to the terms of a tax treaty. The Income Tax Law will levy penalties for not filing or for providing incorrect or incomplete information in the return. A provincial tax return must also be filed for each province in which the corporation has a permanent establishment. In all provinces other than Alberta and Québec, the provincial tax return forms part of the federal return.
Non-residents who were employed or carried on business through some commercial activities in Canada during the year or disposed of “taxable Canadian property” needs to pay income tax on their income from these three sources earned in Canada. They have to file T2 corporate tax return for their corporation in Canada.
A Canadian-controlled private corporation (CCPC) receives preferential tax treatment, including reduced tax rates on a specified amount of its active business income. A private corporation which is not controlled directly or indirectly by non-residents, public corporations or any combination of the two is called as a CCPC. In determining whether there is control by a non-resident or a public corporation, all shares held by non-residents and public corporations are aggregated. A “private corporation” is a corporation which is run by residents of Canada and which is not a public corporation. These tax advantages are offered to encourage Canadian residents to establish businesses and corporations.
The Federal Tax system in Canada is directed by the Canada Revenue Agency (CRA). The CRA also controls provincial income tax and/or sales tax in some provinces. For example, in Ontario, the CRA collects both provincial income tax and sales tax, Each Canadian province has its own statutes governing corporations operating in that particular province. Canadian corporations will have to pay the corporate tax rate set by the province and federal government.
Federal Tax Rates: The General Corporate Federal Tax rate is 38%, with a 10% federal tax abatement and a 13% general tax reduction, which comes at a total of 15% for general corporations. Provincial and territorial income taxes are not deductible for federal income tax purposes and range from 11% to 16%. For example, the provincial rate for Ontario is 11.5% making the combined federal and provincial effective tax rate 26.5%. (For Steps to incorporate a company in Ontario– Click Here)
Canadian Controlled Private Corporation (CPCC) enjoy a rate of 9% (for income up to $ 500,000). Provincial small business rates range between 2.0% to 4.5%. They must satisfy certain requirements to receive this corporate tax rate. The business of a non-resident running through a corporation might be subject to a higher tax in Canada. A non-resident will be liable for 38% federal tax for business income- that will result in an additional federal tax liability before provincial tax is imposed.
Non-residents are also liable for 25% withholding tax on passive income such as dividends, rent and royalties from Canadian sources. A non-resident of Canada who resides in a country which has a tax treaty with Canada may benefit from exemptions or reduced rates of withholding tax in Canada under that treaty.
For the purpose of Income Tax, a non-resident will be deemed to be carrying on business in Canada if the non-resident:
In addition to income tax, certain value-added taxes (VAT) would also apply to business operations in Canada.
The federal goods and services tax and harmonized sales tax (GST/HST) applies to most supplies of property, services made in Canada, and in case of import of goods into Canada. The GST applies at a rate of 5%. Exported goods and services, prescription drugs, medical devices and basic groceries are zero rated supplies. Health care services, educational services and most financial services are exempt supplies and not subject to the GST at all. The HST is at 13% or 15%, depending on the province in which a supply is made or deemed to be made. The HST is federally administrated and has the same basic operating rules as the GST, with certain exceptions. However, each participating province to the HST regime (referred to as “participating provinces”) has the ability to decrease or increase the provincial component of the tax. The current list of participating provinces includes Ontario, Nova Scotia, Newfoundland and Labrador, New Brunswick and Prince Edward Island
The GST/HST is levied if the business is registered for GST/HST purposes and makes GST/HST-taxable supplies. Businesses that make exempt supplies may not be permitted to recover GST/HST paid or payable on property and services acquired for related purposes and, therefore, will bear the burden of the tax as a cost of their business activities.
A non-resident that carries on business in Canada may be required to register for GST/HST purposes and be liable to collect and remit the GST/HST. A non-resident that is required to register, but that does not have a permanent establishment in Canada, is required to deposit a recoverable security with the Canada Revenue Agency (CRA) on registering for GST/HST purposes.
Even if a non-resident does not carry-on business in Canada, he may be required to register under a simplified GST/HST regime, and to collect GST/HST on sales of intangible personal property and services made to non-GST/HST registered recipients in Canada. Mandatory registration is needed if such sales to non-GST/HST registered recipients is expected to exceed $30,000 per year. There is no security requirement under the simplified regime, nor is any GST/HST recoverable by the non-resident.
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Canada’s tax treaties generally provide that the business profits of a corporation run by non-residents are not subject to Canadian tax unless the corporation carries on business in Canada through a PE situated in Canada and the business profits are attributed to that PE. As per India- Canada Tax Treaty, a Permanent Establishment (PE) is defined as:
The Treaty comprises provisions to cover the growing services sector. A services PE is deemed to exist if a non-resident person provides services in Canada in certain circumstances. Even if there is no fixed place of business, a services PE could still be formed if:
Employers paying remuneration to employees are liable to make contributions under the Canada Pension Plan (CPP). Employees are also liable to make matching CPP contributions. The employer is responsible for withholding the employees’ CPP contributions at source and remitting this amount to the CRA. Some provinces may also impose various payroll taxes.
Persons carrying on business in Canada must maintain books and records at a Canadian place of business or otherwise make them available for audit by the CRA. The CRA has the power to make broad and probing requests for documents and information in the context of an audit. If not provided, CRA may seek a compliance order from the Federal Court, and failing to comply with such an order may result in a conviction for contempt of court. As well, failing to supply requested documents and information may result in such documents and information being disallowed in the defence of an assessment for tax in certain circumstances.
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