Canada has been a very attractive country for foreign investment for a long time. There are many reasons for this including, a very stable political system, successive governments that encourage foreign investments, a stable banking system that weathered the financial crisis of 2008 exceptionally well, a skilled and educated work force, among other factors.
When deciding how best to enter the Canadian marketplace, there are multiple factors that a foreign business should consider. Due to the limited scope of this commentary, our comments will simply highlight those areas that warrant a closer look before taking the leap. We hope to offer future commentaries that will take a closer look at the individual issues that should be addressed.
Income Tax Considerations
A foreign business can operate in Canada in several different ways. These include:
Incorporating a new company, either federally or in one of the Canadian provinces or territories.
Operate directly through the foreign company by way of a branch.
A partnership or joint venture arrangement.
The use of a hybrid entity that shares certain attributes of a corporation and some flow through aspects.
In 1, 2 and 4 above, the entity is taxed at corporate rates ranging from 26.5% to 31% depending on the province of taxation. There may be opportunities to lower these rates to as low as 11% on income up to $500,000, but this would require significant Canadian ownership in the corporation. Income of a partnership is taxed at the partnerʼs tax rate. Therefore, the tax rate will depend on the nature of the partner.
Canada has entered into Income Tax Treaties with most countries. These treaties set out many of the rules that might otherwise result in double taxation.
Sales Tax Considerations
Canada has a number of potential sales tax issues. At a federal level, there is a value added tax similar to the VAT in Europe. In Canada this federal tax is either a Goods and Services Tax (“GST”) or a Harmonized Sales Tax (“HST”) depending on the applicable province. The GST is always 5%, whereas the HST differs depending on the province, but ranges from 11% to 15%. Depending on the nature of the business, GST and HST paid may be fully recoverable.
Employee and Payroll Considerations
The form of operations will not have any bearing on an employerʼs payroll obligations. All employees of a business that work in Canada are subject to various payroll deductions, including income tax, pension and employment insurance that the employer must remit, including some employer matching contributions, at prescribed dates. There are also any number of employer / employee rules and regulations, including Workersʼ Compensation legislation.
The preceding comments touch briefly on the three areas of income tax, sales taxes and payroll matters. Each of these should be examined in far more detail before any definitive action is undertaken. There are certainly other regulatory considerations that may be applicable and require further investigation. Also, one should not lose sight of the interaction of Canadian issues with those in the home country of the prospective business.