To determine the Canadian tax implications of activities undertaken in Canada, a non-resident should first determine whether their activities represent “carrying on business in Canada” under domestic law. The determination of whether a non-resident corporation is carrying on business in Canada is based on legislative authority as well as an analysis of the common law. This analysis requires consideration of all the relevant facts concerning the activities undertaken in Canada as well as relevant legislation, case law, and administrative positions of the CRA. The threshold for “carrying on business in Canada” is generally low. Generally, providing services in Canada in exchange for a fee would be considered “carrying on business in Canada” along with “soliciting orders or offering anything for sale in Canada.”
Generally, Canada's tax treaties provide that the business profits of a non-resident corporation are not subject to Canadian tax unless the non-resident corporation carries on business in Canada through a PE situated in Canada and the business profits are attributed to that PE. Canada’s extensive treaty network and the treaties are largely based on the OECD Model Tax Convention, with some variances depending on the relevant treaty. Where a tax treaty is applicable, we would generally expect Canada to follow OECD guidelines, but it should be verified with each treaty as the treatment may ultimately differ.
Canada’s tax treaties may also restrict 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 limit the applicable branch tax rate. While the wording of tax treaties varies, a PE generally is defined 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 authority to conclude contracts in the name of the non-resident corporation.
- In some circumstances, a Canadian PE may also arise where services are rendered in Canada and certain requirements (e.g., relating to the duration of the services) are met.
The Canadian domestic definition of PE (federal and provincial/territorial) generally mirrors the above.
Where a PE is established/constituted in Canada, income attributable to the PE shall be taxable at 26.5% on a net income basis (i.e., after deduction of expenses incurred by the PE, subject to compliance with withholding tax obligations by a foreign entity). An additional branch tax applies to non-residents’ after-tax profits not invested in qualifying property in Canada. It is intended to replicate the withholding tax that would have been due had a Canadian subsidiary paid its profits to its non-resident parent in the form of a dividend. This can may be reduced under the applicable tax treaties. An undertaking of profit attribution study should be conducted to determine the profits which can be said to be attributable to the PE in Canada.
Where there are non-resident employees physically located in Canada, regardless of whether the non-resident has a PE or not, and it is expected that their Canadian source compensation will constitute remuneration, the employee may be subject to personal income tax in Canada. Canada’s domestic law in this area applies from the first day a non-resident employee earns income from conducting employment duties in Canada.
Written by the Tax Team at Segal GCSE. This document was written for our quarterly bulletin, Canadian Overview, published by Canadian member-firms of Moore North America.