Doing Business & Investing In...

Chris Munn Tax Partner

Hogg, Shain & Scheck Web: www.hss-ca.com

2014 is approximately 55% while the lowest top marginal rate is approximately 39%.

The rate of taxes incurred by corporations depends on the nature and size of the business activity carried on, location and other factors. In 2014, the highest rate of tax applicable to ordinary business profits of a non- Canadian-controlled private corporation is 31%, while the lowest rate is 25%.

Withholding tax of 25% applies to certain types of Canadian source income paid to non-residents. The withholding rate may be reduced or eliminated by the respective tax treaty/convention. The necessary withholding taxes are the responsibility of the payer.

Carrying On Business Through a Canadian Subsidiary: A corporation incorporated in Canada will be subject to tax on its worldwide income. Transactions with any person not at arm’s length (parent corporation) generally takes place at fair market value. Canada’s transfer pricing rules will require contemporaneous documentation.

Non-resident owned corporations are subject to special rules which place limits on the deductibility of interest expenses. These thin capitalization rules provide that the interest deduction will be proportionately limited where the debt to equity ratio exceeds 2 to 1.

Carrying On Business In Canada Through A Branch Operation: A non-resident corporation carrying on business in Canada will be subject to the corporate tax rates as noted above as well as branch tax.

Sales & Other Taxes: Canada applies a 5% value- added tax called the goods and service tax (GST) which applies to taxable supplies made in Canada. GST is also charged on taxable goods imported into Canada.

Every business involved in a commercial

activity is entitled to claim an input tax credit to recover the GST paid.

Currently there are five provinces (New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island and Ontario) that have harmonized their provincial tax system with the GST. harmonized sales tax (HST) applies to the same

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transactions as the GST and the rates vary between 13% and 15%.

Provincial Sales Taxes: British Columbia, Saskatchewan and Manitoba levy provincial sales tax (PST) to the end-user of most tangible personal property and certain services.

Payroll Taxes: Manitoba, Ontario and Newfoundland and Labrador assess an employer payroll tax that is based on the gross remuneration paid in the Province. Quebec charges a similar tax in the form of contributions to the provincial health services fund.

Other Taxes: Customs duties and excise tax;

Provincial capital taxes; Land transfer tax; Annual taxes on the ownership of real estate.

Q

What are the various forms of business organizations available to carry on business in Canada?

Some common arrangements are partnerships (general and limited), corporations, branch operation, trusts, co-ownerships, joint ventures, unlimited liability companies (ULC) and proprietorships.

The business structure to be implemented will depend on the circumstances of the investor, the nature of the business activity, the method of financing, income tax ramifications and any potential liabilities.

The most common business organization is a corporation with share capital. A corporation is a separate legal entity from its owners and differs in this respect from partnerships, trusts, co-ownerships and joint ventures. The corporation can be incorporated Federally or under Provincial law.

A partnership is not a separate legal entity and each partner will share in the profits and losses. The Canadian Income Tax Act provides certain rules that allow the “flow through” of losses to the partners which then can be deducted from their other income. Each partner is exposed to the liabilities of the partnership. This exposure can be reduced by forming a limited partnership which essentially limits the partners’ risk to its investment in the partnership.

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Since a corporation is the most popular vehicle to carry on business in Canada, the foreign investor must be cognizant of the following aspects of Canadian corporate legislation:

• If Federally incorporated, 25% of the corporation’s directors must be Canadian.

This requirement

differs if incorporated under provincial legislation. Some provinces and territories have no residency requirements

• Each director must be an individual

• Directors are responsible for a number of liabilities and obligations

• Directors do not have to be shareholders • Minority shareholders have significant rights

• Corporation is not obligated to file financial statements with governments

• Shareholders’ identity is not a matter of public record

• Books and records of the corporation must be kept in Canada.

A United States entity wishing to carry on business in Canada may consider using an unlimited liability company (“ULC”). This vehicle allows for favourable treatment as “flow-through” entities for U.S. tax law. Recent changes to the Canada-US Tax Treaty should be considered before using an ULC.