Doing Business in Canada - What you Need to Know

Welcome to Today’s Webinar

What you need to know

Questions

• Attendees are in listen-only mode• This webinar is being recorded for future on-demand playback• Your participation represents acknowledgement that we are recording• Tweet questions & comments to: #WelchCanada

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Ground Rules

Presenters

Mona Tessier, CPA, CASenior Manager, Indirect Taxmtessier@welchllp.comwww.welchllp.comca.linkedin.com/pub/mona-tessier/30/a3b/98

Jamie HollingworthAssociate of Gowlingsjamie.hollingworth@gowlings.com www.gowlings.comca.linkedin.com/in/jamiehollingworth

Don Scott, FCATax Partner, Director of Tax Servicesdscott@welchllp.comwww.welchllp.comca.linkedin.com/pub/don-scott-fca/24/714/256

What we will cover today

• Sales Tax Regimes in Canada

• Carrying on Business in Canada

• Corporate Income Tax

• Business Structures

• Sales Tax Considerations

• Employee Considerations

• Other Legal Issues

Sales Tax Regime in Canada

There are two levels of sales taxes:

Level OneNational sales tax called Goods & Services Tax or GST• applicable to most transactions

occurring within Canada• same rules regardless of where

the transaction occurs within Canada.

Sales Tax Regime in Canada

Level TwoProvincial Sales Tax• Applies to transactions that occur within specific

provinces in Canada.• Varies from province to province.• Some provinces have no provincial sales tax. • Other provinces have harmonized their provincial

sales tax with the federal GST. o The harmonized tax regime is called HST. o HST is exactly like GST except the rate is

higher to provide for a provincial component.

• QST is a provincial sales taxo Only applicable to transactions occurring in the

province of Quebec.

GST Registration Requirements

• Requirement to register and collect GST/HST if making taxable supplies in Canada while carrying on a business in Canada.

Carrying on business in Canada

• Canada Revenue Agency policy statement publication P-051R2.  • List of factors used to determine whether a non-resident person is carrying on business in

Canada for GST/HST purposes: 

the place where agents or employees of the non-resident are located; the place of delivery; the place of payment; the place where purchases are made or assets are acquired; the place from which transactions are solicited; the location of assets or an inventory of goods; the place where the business contracts are made; the location of a bank account; the place where the non-resident's name and business are listed in a directory; the location of a branch or office; the place where the service is performed; and the place of manufacture or production

Carrying on business in Canada

• If in doubt, voluntary registration is an option.

 • Risk associated with not registering

when required deemed to have collected the tax

even if not collected • Permanent establishment is not

necessary to be considered to be carrying on a business in Canada for GST/HST purposes.

Corporate Income Tax

• Carrying on business in Canada

• Tax treaty

• Physical Presence

• Permanent Establishment (P.E.)

• U.S. – “Services” Provisions

Corporate Income Tax

• No P.E. / Not taxable in Canada

• Must file tax return

• Annual Penalty - $2,500

• Regulation 105 withholding tax

Corporate Income Tax

• Yes P.E. / Taxable in Canada

• File tax return

• Tax rate 25-31% (Depending on Province)

• Lower tax rate if 50% Canadian ownership

1. Sole Proprietorship

2. Partnership

3. Corporation

4. Branch Operations

Business Structures

1. Sole Proprietorship• Simple, easy to establish

• Profits flow through to the

individual owner

• Liability of the Business is the

liability of the individual operating

the business

• Limited tax planning possibilities

Business Structures

2. Partnership• Two or more individuals or entities carrying on business together for profit

• Under provincial jurisdiction

• Partnership not a distinct entity for tax purposes

• 2 main types:

o General Partnership

o Each partner liable for the debts and obligations of the partnership (unlimited)

o Limited Partnership

o Composed of at least one general partner and any number of limited partners

o General partner manages affairs and has unlimited liability

o Liability of limited partners limited to amount of capital contribution

Business Structures

3. Corporation• Most common business structure

• Distinct legal entity with all legal abilities of a natural person

• Limited liability for shareholders, ease of transfer of assets,

and perpetual existence

• Incorporate Federally or Provincially

• Residency Requirements for Directors

o 25% Canadian for Federal and Ontario Corporations

Business Structures

3. Corporation (cont’d)• Director Liability

o Personal liability for unpaid employee wages and vacation pay, failure by corp. to remit

source deductions and EI/CPP contributions, misrepresentations in public disclosure

documents etc.

o Can limit liability using unanimous shareholder agreement (or shareholder declaration)

and indemnity agreements

• Director and Shareholder meetings

o In person or via written resolution (must be signed by all)

• Unlimited Liability Companies

o Alberta, BC and Nova Scotia only

o Shareholders personally liable for all liabilities of the company

Business Structures

4. Branch Operations• Foreign company can conduct business in Canada

through a branch operation (may require a license

or business registration)

• Not a distinct legal entity – parent company

exposed to debts, liabilities & obligations of

Canadian branch

Business Structures

Corporate Income Tax

• Branch (if no Canadian Sub.)

• Transfer pricing

• Repatriating profits

Branch

• Determine profit of branch

• Allocation of expenses

• Foreign entity registers with CRA / Files tax returns

• Branch Tax

Transfer Pricing

• Respective governments concerned

about shifting profits

• Various methods

• Contemporaneous documentation

• Transfer Pricing Study

• Management Fees

o Withholding tax – 25%

o Not if cost recovery

Repatriating Profits

• Branch tax

• Interest paid to foreign owner

o Thin Capitalization

o Withholding tax - 25% / 10% / 0%

• Dividends paid to foreign owner

o Withholding tax – 25% / 15% / 5%

Sales Tax Considerations

• GST/HST returns must be reported in Canadian currency

• Security requirements when no permanent establishment = one half of the net tax for a year.

Provincial sales tax considerations

• Four Canadian provinces have a separate provincial sales tax regime.

Quebec British Columbia Saskatchewan Manitoba

A National View – January 1, 2014

GST 5%

PST 7%

GST 5%

GST 5%PST 5%

GST 5%RST 8%

HST 13%

GST 5%QST 9.975%

HST 13%

HST 13%

HST 15%

HST 14%

GST 5%

Employee Considerations

General rule: employment income earned in Canada is taxable in Canada regardless of whether the person is employed by a Canadian employer or a non-resident employer. Tax treaty may override the general rule

Example:Canada US treaty – employment income will not be taxed in Canada if…a) Total earnings of the employee while in Canada does not exceed $10,000

per calendar year; orb) The employee does not spend more than a total of 183 days in Canada in

any twelve month period and whose remuneration is not paid by the Canadian subsidiary and the cost is not borne by any permanent establishment in Canada.

 Other treaties may also come into play for example social security agreements

Employment Relationship

• More favourable towards the employee

• Employment relationship based on contract (or assumed contract)

Termination of Employment

• No employment “at will” concept in Canada

• Termination Without Cause

o Must provide reasonable notice or pay in lieu

o statutory minimums

o common law

o contract

• Termination With Cause

o Difficult for employer to prove

• Resignation

• Resignation due to constructive dismissal

Employment Law

Restrictive Covenants

• Non-solicitation and Non-competition clauses

o Difficult to enforce in Canada (especially non-compete)

o Must be reasonable in terms of duration, scope and

geographical limits

o Strong public policy interest in Canada in permitting

individuals to work freely in the marketplace

Other Employment Issues:

• Employment Standards legislation

• Human rights codes

• Employment Equity legislation

• Public Health Insurance (medicare)

o Payroll tax in Ontario and Quebec

• Quebec Charter of the French language

Employment Law

Other legal issues to be aware of when doing business in Canada:• Immigration and Work Permit Considerations

• Advertising and Marketing (packaging and labelling)

• Competition and Anti-trust law

• Regulation of Foreign Investments

• International Trade (import/export, anti-dumping, controlled goods etc)

• Environmental Protection

• Intellectual Property

• Privacy Law

• Bankruptcy and Restructuring

• Franchise Law

Visit http://www.gowlings.com/Services/doing-business-in-canada for more information.

Other Legal Issues

Q & A

Mona Tessier, CPA, CASenior Manager, Indirect Taxmtessier@welchllp.comwww.welchllp.comca.linkedin.com/pub/mona-tessier/30/a3b/98

Jamie HollingworthAssociate of Gowlingsjamie.hollingworth@gowlings.com www.gowlings.comca.linkedin.com/in/jamiehollingworth

Don Scott, FCATax Partner, Director of Tax Servicesdscott@welchllp.comwww.welchllp.comca.linkedin.com/pub/don-scott-fca/24/714/256