Doing Business in Canada
Many companies do not realize that venturing into Canada to do business may result in some unexpected tax consequences. Long before you commit to that first customer contract, here are some things to think about:
Do you have a permanent establishment?
If so, your company will be responsible for paying income taxes on your earnings from activities in Canada. This is the case whether or not you have a company in Canada.
What if I want a subsidiary in Canada?
Many U.S. companies establish subsidiaries in Canada. Most companies establish a regular corporation under the laws of Canada. Some companies have found it beneficial to select entities that can be recognized as flow through entities for U.S. income tax purposes. These are Unlimited Liablity Corporations (ULC) that are established either under the laws of Alberta or Nova Scotia.
It is important to note that Canada does not extend treaty benefits to U.S. LLCs. Therefore, if treaty benefits are important to your decisions regarding Canada, you must consider this issue.
What if my company just performs services in Canada?
By just performing services in Canada, you may have inadvertently created a permanent establishment. Even if this is not the case, you may find your customer is required to withhold tax on your payments at the rate of 15 percent for the services performed in Canada.
What is the impact on my U.S. employees I send to Canada to perform services?
It is likely these individuals are responsible for payment of Canadian taxes on the income they earn while providing services in Canada, and your company is responsible for withholding those taxes.
Any other taxes?
Yes. Canada has a Goods and Services Tax, a Provincial Sales Tax, and a Retail Sales Tax. Companies that sell in Canada may be responsible for collecting and remitting these taxes to the Canadian Government, even if they do not have a permanent establishment in Canada.
Where do I get more information?
Your accountants, lawyers, the U.S. Income Tax Treaty with Canada, and the Canadian Revenue Agency should all be consulted if you are planning to do business in Canada.