Many U.S. companies are doing business in Canada and as a result could be subject to Canadian taxes (along with certain tax withholding requirements). U.S. incorporated companies are subject to U.S. taxes on their worldwide income which includes Canadian income. Thankfully the U.S. – Canada Tax Treaty addresses many situations in which corporations would normally be double taxed (taxed in both jurisdictions on the same income), and provides for ways to reduce or completely eliminate any double taxation that may occur. In fact at AG Tax, some of our new U.S. corporate clients doing business in Canada are amazed at how useful a treaty based filing turns out to be, in some cases recovering all of the Canadian taxes withheld. In this article, we have outlined the tax laws that a U.S. company is subject to for doing business in Canada, and the scenarios in which a company could pursue a treaty based filing.
Canadian Tax Laws & Withholding Requirement for U.S. Businesses
The Canada Revenue Agency (CRA) requires the Canadian customer of a U.S. company rendering services in Canada to withhold 15% on the invoice under ITA Regulation 105 (For more details: Using Non-Resident Company and Individual Services in Canada, Beware of ITA Regulation 105), remit it to the CRA, and file Form T4A-NR to report the withholding.
U.S. companies should be aware that this 15% tax withholding does not necessarily account for the entire tax liability. For instance if the income is subject to a higher tax rate, they would need to pay the excess, or likewise may be subject to a lesser rate or no taxes, and claim a refund.
U.S. – Canada Tax Treaty – What is a Permanent Establishment?
As per the Canada-U.S. Tax Treaty (the “Treaty”), a U.S. corporation carrying on business in Canada is only subject to taxation on income earned in Canada through a fixed place of business or permanent establishment. Therefore, if a U.S. company does not have a permanent establishment (PE) in Canada then their Canadian source business income is not subject to Canadian federal tax. Note that a physical permanent establishment such as an office or warehouse is easy to identify; however, the Treaty includes other types of “deemed” permanent establishments. Here are a few examples of “deemed” permanent establishments under the Treaty that may apply to U.S. businesses:
- A person or agent acting on behalf of the U.S. business who has, and habitually exercises in Canada an authority to conclude contracts in the name of the U.S. business.
- A U.S. business which provides services in Canada for an aggregate of 183 days or more in any twelve-month period for the same or connected project/customers who are either residents of Canada or who maintain a permanent establishment in Canada and the services are provided in respect of that permanent establishment.
- A U.S. individual who is present in Canada for 183 days or more in any twelve-month period, and, during that period, more than 50 percent of the gross active business revenues of the U.S. business consists of income derived from the services performed in Canada by that individual.
If the U.S. business is able to substantiate that it does not have a physical or deemed PE in Canada, it can file a Treaty based exemption claim with its Canadian corporate tax return in order to obtain a refund of the Canadian federal tax withheld on its invoices.
Can the Mandatory Canadian Tax Withholdings for Foreign Corporations be Waived? Introducing the Regulation 105 and Regulation 102 Waiver
Additionally, a U.S company without a permanent establishment in Canada (actual or deemed) may apply for a Regulation 105 waiver to waive the 15% withholding tax, before it begins providing its services in Canada.
Likewise, a Regulation 102 waiver may be obtained from the CRA for foreign employees working in Canada to avoid withholding taxes on the Canadian source employment income received, and filing of the foreign employee’s Canadian income tax return. However, this waiver can be obtained only if the Canadian source remuneration is less than $10,000, or the employee is present in Canada for less than 183 days in any 12 month period, and the remuneration is not paid by or on behalf of a person who is a resident of Canada and is not borne by a PE in Canada. Additionally, a Regulation 105 waiver must be obtained beforehand by the foreign business to qualify for a Regulation 102 waiver.
Process for Filing a Treaty Based Return in Canada
U.S. companies must file a Canadian corporate income tax return along with Schedule 91, Treaty-based exemption form, and Schedule 97 within six months of the corporation’s year end.
Tax situations can be complicated, and paying unnecessary taxes and incurring an additional expense should be avoided when there could be an exemption under a tax treaty. Proper tax planning and strategizing will help minimize the tax burden of your business. Especially when entering into the realm of international operations be it between the U.S. and Canada or anywhere around the world. Therefore, it is advisable that as a U.S. business or any other foreign business operating in Canada consult a cross-border tax professional before proceeding with the cross-border business activities. Being proactive in this regard will allow the corporation to manage their tax affairs and avoid the risk of running into any tax compliance issues.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.