Canadian Corporate Tax Rates
A Canadian resident corporation is generally liable for both federal income tax at a rate of 15%, and provincial income tax in those provinces in which it has a permanent establishment (as defined in the ITA and the applicable provincial tax statute). For example, a Canadian corporation that carries on business in the province of Ontario through a permanent establishment is generally liable for income tax at a combined rate of 26.5%, consisting of federal tax levied at a rate of 15% and Ontario tax levied at a rate of 11.5%. A lower rate applies in respect of certain manufacturing and processing income.
Each of Canada’s other provinces similarly levy income tax on business income attributable to permanent establishments in the particular province. For example, the provincial income tax rates in the provinces of Quebec, Alberta and British Columbia are currently 11.9%, 12% and 11%, respectively.
Losses
In computing taxable income, a corporation may generally carry unused business losses back three years and forward twenty years and apply such losses to reduce taxable income earned in a particular taxation year in accordance with the detailed rules in the ITA.
Canada does not have a consolidated tax reporting system. As a result, losses incurred by a Canadian corporation cannot be applied to reduce the taxable income of affiliated Canadian corporations. Subject to certain restrictions, however, historical business losses may generally be assumed by a Canadian successor corporation following an amalgamation, or by a Canadian parent corporation after its wholly-owned subsidiary is wound-up.
Where control of a corporation has been acquired, use of business losses is restricted to prevent trading in losses.
Thin Capitalization Rules
If a Canadian subsidiary borrows from its non-resident parent corporation or from other specified non-residents, the ability of the subsidiary to deduct interest is subject to limitations imposed under the thin capitalization rules contained in the ITA. The thin capitalization rules provide that interest on indebtedness payable to specified non-residents is not deductible to the extent that the aggregate amount of such indebtedness exceeds 1.5 times the “equity amount” of the subsidiary.
Interest, in respect of which a deduction is disallowed under the thin capitalization rules, may be recharacterized as a dividend for the purposes of the ITA and subject to non-resident withholding tax (as described below).
Non-Resident Withholding Tax
Amounts paid or credited by a Canadian subsidiary to a non-resident parent on account of dividends, certain royalties, and certain interest payments are subject to Canadian withholding tax levied at a statutory rate of 25%.
However, the applicable rate of withholding tax may be reduced by treaty. For example, the Canada-United States Income Tax Convention (1980), as amended (the “US Treaty”) reduces the applicable rate of withholding tax on dividends to 5% where the beneficial owner of the dividends (i) is a US resident corporation entitled to claim the benefit of the US Treaty (a “US Resident Corporation”), and (ii) owns at least 10% of the Canadian subsidiary’s voting stock (otherwise, the applicable US Treaty reduced rate is 15%). The US Treaty also reduces the withholding tax rate in respect of royalties to 10%.
Conventional interest payments made to “arm’s length” non-resident lenders are generally not subject to Canadian withholding tax. The US Treaty also generally eliminates Canadian withholding tax on conventional interest payments made to “non-arm’s length” US resident lenders (assuming they are entitled to the benefits of the US Treaty).
Transfer Pricing
Transfers of goods or services between a Canadian corporation and a non-arm’s length non-resident must be effected at an arm’s length price and on arm’s length terms and conditions. Where the terms and conditions of such transactions are not reflective of those that would be agreed to by parties dealing with one another at arm’s length, the Canadian tax authorities may recharacterize the transaction as having been effected at an arm’s length price pursuant to the Canadian transfer pricing rules, resulting in potentially adverse tax consequences for both the Canadian corporation and the non- resident.
In connection with such non-arm’s length transactions, Canadian corporations should prepare contemporaneous documentation to document the basis for the terms and conditions of such transactions. The failure to do so may result in the imposition of penalties if such transactions are subsequently determined not to be consistent with the applicable arm’s length standard.
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Company Formations provides fast and easy Company Registration in Canada for foreign companies wishing to operate in Canada and provides all the documents your new Canada corporation will need to stay up-to-date and in compliance with your province of registration corporations law.
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Name Search Report
Preparation of Articles of Incorporation and Incorporation Documents
Incorporation Agreement
By-Laws, Company Minute Book, Share Certificates
Canada Registered Agent Service for 1 year
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