Canada Corporate Taxation

As a general rule, corporations resident in Canada are subjected to Canadian corporate income tax (CIT) on worldwide income. Non-resident corporations are subjected to CIT on the basis of the income derived from working on a business in Canada and on capital gains which stand upon the disposition of taxable Canadian property. The purchaser of the taxable Canadian property is required to withhold tax from the amount paid unless the non-resident vendor has obtained a clearance certificate.Canadian CIT and WHT can be reduced or eliminated if a treaty is signed between the applicant (non resident) and the country (Canada).

Contents

  • Federal Income Tax
  • Corporate Residence
  • Permanent Residence (PE)
  • Other Taxes
  • India-Canada Double Taxation Treaty

Federal Rates

The rates mentioned below, apply for a 12-month taxation year which ends on 31 December 2020. For non-resident corporations, the rates apply to business income designated to the Permanent Establishment (PE) in Canada. Rates may vary according to non-resident corporations in different circumstances. Non-resident corporations may also be subjected to branch tax.

Federal Rate (%)
Basic Rate38
Less: Provincial abatement10
Federal Rate28
Less: General rate reduction or manufacturing and processing deduction13
Net federal tax rate15
  1. The basic rate of federal tax is reduced by a 10% abatement to give the provinces and territories room to impose CITs. The subsiding is available for taxable income allocated to Canadian provinces and territories. Taxable income allocable to a foreign jurisdiction is not eligible for the abatement and normally is not subject to provincial or territorial taxes.
  2. The general rate of reduction, manufacturing and processing deduction are not applicable to the first CAD 500,000 of active business income earned in Canada by Canadian-controlled private corporations (CCPCs), income from investment of CCPCs, and income from certain other corporations (e.g. mutual fund corporations, mortgage investment corporations, and investment corporations) that may benefit from preferential tax treatment.
  3. Provincial or territorial taxes  can be applied in addition to the federal taxes. 
  4. For small CCPCs, the net federal tax rate is imposed on the active business income above CAD 500,000; a federal rate of 9% applies to the first CAD 500,000 of active business income. Investment income (other than most dividends) of CCPCs is subject to the federal rate, 28%, along with refundable federal tax of 10⅔%, for a total federal rate of 38⅔%. Access to the reduced federal tax rate on active business income of 9% is limited for CCPCs that earn passive investment income which is more than CAD 50,000 in the previous taxation year and is not available  at CAD 150,000 of investment income.

Corporate Residence

Under the Income Tax Act, a corporation incorporated in Canada (federally or provincially/territorially) will be deemed to be resident in Canada. A corporation which is  not incorporated in Canada will be considered to be resident in Canada and under the Canadian common law if its central management and control is exerted in Canada. Where a corporation’s central management and control is exercised is a question of fact, but typically it is where the board of directors meets and makes decisions, provided the board takes action.

A corporation incorporated outside of Canada but with its central management and control situated both in and outside Canada will be considered to be a non-resident of Canada if it qualifies as a non-resident of Canada under treaty tie-breaker rules.

If a company incorporated in Canada is granted Articles of Continuance in another jurisdiction, the corporation is deemed to have been consolidated in the other jurisdiction and not to have been incorporated in Canada. However, a company incorporated in Canada which is continued into a foreign jurisdiction may still maintain residency in Canada under the common law principles for the confirmation of the residency (i.e., central management and control discussed above). Similarly, a foreign corporation will become resident in Canada if it continues in Canada or is a predecessor corporation of a consolidated corporation that is resident in Canada.[1]

Permanent Residence (PE)

According to Canada tax treaties, the business profits of a non-resident corporation are not entitled to Canadian tax unless the non-resident corporation maintains a business in Canada through a PE situated in Canada and the business profits are allocated to PE. Canada’s tax treaties may also limit the imposition of branch tax to situations where the non-resident corporation carries on business in Canada through a PE situated in Canada and/or limits the applicable branch tax rate. While the wording of tax treaties varies, a PE generally is understood as:

  • a fixed place of business through which the business of the non-resident corporation is wholly or partly carried on
  • a place of management, a branch, an office, a factory, and a workshop; a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources; a building site, construction, or assembly project that exists for a specified period, and
  • a dependent agent or employee who has and habitually exercises an authority to conclude contracts in the name of the non-resident corporation.

In some circumstances, a Canadian PE may also arise where services are contributed in Canada and certain requirements (e.g. relating to the duration of the services) are fulfilled.

The Canadian domestic definition of PE (federal and provincial/territorial) generally mirrors the above.

The interpretation of what constitutes a PE is expected to be re-evaluated in light of the final report issued in 2015 by the Organisation for Economic Co-operation and Development (OECD) and Group of 20 (G20) on Action 7, which is focused on preventing the artificial avoidance of PE status.[2]

Corporate- Other Taxes

Federal Goods and Services Tax (GST)

The GST is a federal tax levied at a rate of 5% on the supply of most property and services made in Canada. It is a value-added tax (VAT) applied at each level in the manufacturing and marketing chain. However, the tax does not apply to supplies that are zero-rated (i.e. taxed at 0%) or exempt (e.g. used residential real property and most health care, educational, and financial services).  The zero-rated supplies are the basic groceries, medical and assistive devices, prescription drugs, feminine hygiene products, agriculture and fishing, and most international freight and passenger transportation services.

Generally, registrants charge GST on their sales and pay GST on their purchases, and either remit or claim a refund for the amount of net tax reported (i.e. the difference between the GST charged and the GST paid). Suppliers are entitled to claim input tax credits for the GST paid or payable on expenses incurred relating to making fully taxable and zero-rated supplies (i.e. commercial activity), but not on expenses relating to the making of tax-exempt supplies.[3]

Harmonised Sales Tax (HST)

Five provinces have fully harmonised their sales tax systems with the GST and impose a single HST, which includes the 5% GST and a provincial component. HST applies to the same tax base and under the same rules as the GST. There is no need to register separately for GST and HST because both taxes are accounted for under one tax return and are jointly administered by the CRA.  The HST rates are given below:

ProvinceHST Rate (%)
New Brunswick15
Newfoundland and Labrador15
Nova Scotia15
Ontario13
Prince Edward Island15

Provincial Rate Sales Tax (PST)

PST generally does not apply to purchases of taxable goods, software, and services acquired for resale; registered vendors can claim this resale exemption by providing to their suppliers either their PST number or a purchase exemption certificate. Certain exemptions also exist for use in manufacturing, farming, and fisheries. PST is administered by each province’s tax authority, separate from the CRA. Unlike GST/HST, PST is not a VAT and could apply to a business’ inputs that are not acquired for resale (e.g. charges for telecommunications services). Therefore, any PST paid on purchases by a business cannot generally be claimed as a credit or otherwise offset against PST charged on sales. Alberta and the three territories (the Northwest Territories, Nunavut, and the Yukon) do not impose a retail sales tax. However, the GST applies in those jurisdictions.

Quebec’s sales tax is a VAT structured in the same manner as the GST/HST. The QST is charged in addition to the 5% GST and is levied at the rate of 9.975% on the supply of most property and services made in the province of Quebec, resulting in an effective combined rate of 14.975%. Registrants charge QST on taxable supplies (that are not zero-rated) and can claim input tax refunds for QST paid or payable on their expenses incurred and/or purchases made in the course of their commercial activity. The resulting net tax is reported to Revenu Québec (Quebec’s tax authority) and is either remitted or claimed as a refund. Revenu Québec also administers the GST/HST on behalf of the CRA for most registrants that are resident in the province. 

The mandatory QST registration rules were recently expanded to non-residents of Quebec. Suppliers that are not residents of, and have no physical or significant presence in, Quebec, and that make digital and certain other supplies to ‘specified Quebec consumers’ may be required to register for QST under a new specified registration system, starting:

  • 1 January 2019, for non-residents of Canada that make supplies of incorporeal moveable property (IPP) and services, and
  • 1 September 2019, for residents of Canada that reside outside Quebec and make supplies of corporeal moveable property, IPP, and services.

The requirement to register also applies to digital property and services distribution platforms in regards to taxable supplies of IPP or services received by specified Quebec consumers if these digital platforms control the key elements of the transaction.[4]

India-Canada Double Taxation Treaty

Where a resident of Canada owns capital which, according to the provisions of the Agreement may be taxed in India, Canada shall allow as a deduction from the tax on capital of that resident an amount equal to the capital tax paid in India. Such deduction shall not, however, exceed that part of the capital tax (as computed before the deduction is given) which is attributable to the capital which may be taxed in India. Where in accordance with any provision of the Agreement income derived or capital owned by a resident of Canada is exempt from tax in Canada, Canada may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital. The amount of Canadian tax paid, under the laws of Canada and in accordance with the provisions of the Agreement, whether directly or by deduction, by a resident of India, in respect of income from sources within Canada which has been subjected to tax both in India and Canada shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax. Where a resident of India owns capital, which, in accordance with the provisions of the Agreement, may be taxed in Canada, India shall allow as a deduction from the tax on the capital of that resident an amount equal to the capital tax paid in Canada. Such deduction shall not, however, exceed that part of the capital tax (as computed before the deduction is given) which is attributable to the capital which may be taxed in Canada.

Reference:

  1. https://www.fin.gov.on.ca/en/tax/cit/index.html
  2. https://www.canada.ca/en/services/taxes/income-tax/corporation-income-tax.html
  3. https://www.canada.ca/en/revenue-agency.html
  4. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations.html

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