2.10 Filing Requirements 7
3 Finance and Investment 8
3.1 Exchange Control 8
3.2 Banking and Sources of Finance 8
3.3 Investment Incentives and Restrictions 9
3.4 Research and Development (R&D) 9
3.5 Tariffs 9
4 Employment Regulations 10
4.1 General Employment Matters 10
4.2 Visas and Permits 11
5 Taxation 12
5.1 Corporate Income Taxes 12
5.2 Personal Taxes 13
5.3 Employment Related Costs and Taxes 14
5.4 Withholding Taxes 15
5.5 Goods and Services / Sales Taxes 15
5.6 Other Taxes 16
5.7 Tax Incentives for Businesses 17
1 Fact Sheet
Geography
Location: Northern North America, with the exception of Alaska
Area: 9,984,670km2
Land boundaries: United States of America
Coastline: Atlantic Ocean, Pacific Ocean, Arctic Ocean
Climate: Varies considerably. Northern Canada has low precipitation and low temperatures; the Pacific coast has high rainfall and mild temperatures throughout the year; the prairies in central Canada have short, warm summers and long, cold winters; the Atlantic coast sees moderate temperatures resulting in long and mild winters and short, cool summers; the Great Lakes regions have relatively warm summers and cool winters
Terrain: Diverse, with tundra in the north and a variety of forests and grasslands from west to east
Time zone: Canada spans six time zones: GMT –4-8 (Newfoundland and Labrador: ½ hour ahead of GMT –4)
People
Population: 34.88m (2012)
Ethnic groups: Over 200 ethnic groups. The largest three groups are Canadian, British and French
Religion: Christianity, Islam, Hinduism, Sikhism and Buddhism
Language: English and French
Government
Country name: Canada
Government type: Federal parliamentary democracy and a Commonwealth realm
Capital: Ottawa, Ontario
Administrative divisions: There are 10 provinces, three territories and 308 federal electoral districts (known as ridings)
Political situation
The Head of State is the Queen of the United Kingdom, as head of the Commonwealth. The Governor General is appointed by the monarch for a five-year term on the advice of the head of government. The Canadian head of government is the Prime Minister. The legislative structure of Parliament is bicameral comprising the House of Commons and the Senate. The government is formed in the House of Commons by the political party winning the most seats in a general election.
Economy
GDP – per capita: US$52,219 (2012)
GDP – real growth rate: 1.7% (2012)
Unemployment: 6.9% (Sep 2013)
2 Business Entities and Accounting
2.1 Corporations
A corporation is a distinct legal entity that has rights and obligations. It can acquire assets, enter into contracts and carry on business.
Corporations may be formed under the federal Canada Business Corporations Act (CBCA) or provincial statutes. The jurisdiction of incorporation does not ordinarily prevent the corporation from carrying on business throughout Canada. The corporation may, however, be required to obtain additional provincial registration to operate in provinces other than that of incorporation. There are notable distinctions between the CBCA and provincial statutes, such as the number of directors required.
Pursuant to the CBCA, at least 25% of a corporation’s directors must be Canadian residents; if there are fewer than four directors, at least one must be a Canadian resident. Some provinces have less onerous residency requirements, including British Columbia, New Brunswick, Nova Scotia, Quebec and the Yukon Territory, where it may be more convenient to incorporate and then register extra-provincially in the province where the business of the corporation is to be conducted.
There are several types of corporate forms: public corporations, private corporations, and Canadian-controlled private corporations (CCPCs). Public corporations issue shares or securities that are listed on prescribed Canadian stock exchanges. The shares are typically widely held by the general public. Private corporations, on the other hand, are not publicly traded or controlled. CCPCs must not be controlled, directly or indirectly, by public corporations, non-residents or a combination of the two.
2.2 Unlimited Liability
Corporations (ULCs)
Three provinces recognise the ULC as a business structure: Nova Scotia, Alberta and British Columbia. The ULC is a type of corporation that provides shareholders with unlimited liability. For Canadian income tax purposes, the ULC is treated as a corporation but its principle advantage is that it can be treated as a flow-through entity for United States income tax purposes, as either a partnership or disregarded entity. Its closest counterpart under US law is the limited liability company (LLC).
The Fifth Protocol to the Canada–US Tax Convention introduced changes aimed at certain structures relying on ULCs that were deemed offensive by Canadian tax authorities. Unfortunately, the changes also adversely affected many acceptable uses of ULCs, although certain problems can be alleviated through planning techniques.
Although the ULC legislation in each province is similar, there are certain
differences in corporate registration costs, and subtle differences in the liability of members in certain circumstances. Professional legal and tax advice should be sought prior to utilising a ULC.
2.3 Partnerships
A partnership is formed when two or more persons carry on a business for profit. Unlike corporations, partnerships are not separate legal entities for tax and legal purposes. Partnership income is allocated to the partners who then report their share of the income for tax purposes. Partnerships can take several forms. In a general partnership, the partners are jointly and severally liable for the debts and obligations of the partnership. In a limited partnership, one or more general partners have unlimited liability and the limited partners, who are generally not directly engaged in carrying on the partnership business, have liability only to the extent of their investment in the partnership.
A limited liability partnership (LLP) is typically available only to professionals and the partnership agreements are governed by provincial legislation. LLPs provide partners with personal liability protection from negligent acts of other partners or employees who work for those partners, but do not exonerate the partners from liability caused by their own actions or the actions of those they directly supervise or control. Partnership assets remain exposed, generally, to actions in respect of the negligence of partners, associates and employees. A “Canadian partnership” is defined under the federal Income Tax Act as one where all the partners are resident in Canada. In a Canadian partnership, partners are eligible to transfer property to the partnership on a tax-deferred basis. If a partnership is not considered to be a Canadian partnership (ie it has a non-resident partner), it is treated as a separate non-resident person for the purposes of the non-resident withholding tax regime.
2.4 Sole Proprietorships
A sole proprietorship is an unincorporated business entity owned by an individual. The sole proprietor is generally personally liable for the debts and obligations of the business. The profits and losses of the business are included in the sole proprietor’s annual tax return; therefore, most proprietorships have a calendar fiscal year, but fiscal years other than the calendar year may be elected, in which case special adjustments must be made for tax reporting purposes to bring the proprietorship’s income and expenses in line with the calendar year. Unless the business uses the name of the sole proprietor alone, the business name must typically be registered.
2.5 Trusts
Certain businesses choose to operate in Canada through commercial trusts. Trusts operating in Canada are governed by the applicable provincial Trustee Act. Trusts are generally created by a trust indenture that identifies trust assets, the settlor, trustees, and beneficiaries. Since trusts are not subject to entity taxation on distributions to beneficiaries, they are commonly used for investment purposes. “Specified investment flow-through” (SIFTs) entities are publicly traded trusts and limited partnerships which are subject to entity-level taxation; before these were introduced, such entities flowed taxable income entirely to unit-holders or partners.
2.6 Co-operatives
A co-operative is a structure jointly owned by an association of members who pool their resources to satisfy their common needs and interests. Typical members are consumers, producers, workers, or a combination of the three. Co-operatives are governed under the Canada Co-Co-operatives Act and may need to be incorporated or registered in the province in which they operate.
2.7 Joint Ventures
A joint venture is a business arrangement between two or more parties that is not strictly defined in law and is usually considered a co-ownership of property, and/or sharing of revenues and expenses from a business undertaking that does not meet the definition of a partnership in law. Typically, the duration of the project distinguishes the partnership form from that of a joint venture, in that a joint venture is usually formed for a particular project and then disbanded once that project is complete.
A joint venture is not a separate entity for tax purposes. Revenues and expenses of the joint venture are shared directly by participants who individually report their proportionate share. The joint venture participants generally remain liable for their proportionate share of the venture’s debts and obligations.
2.8 Branches
A foreign corporation may choose to carry on business directly in Canada through a branch, rather than a subsidiary. Branch income is subject to tax in Canada and may be subject to tax in the foreign corporation’s home country. A branch is an extension of the foreign parent corporation, which remains liable for debts and obligations arising from the business.
A foreign entity operating a Canadian branch must generally obtain provincial registration or a licence from the province where it will operate. The branch may involve a permanent establishment, which under most of Canada’s tax treaties will result in taxation of business profits connected with the branch operations.
2.9 Audit and Accounting
Requirements
Under the Federal Income Tax Act, all businesses must maintain proper books of accounts that must be kept for a minimum of six years from the day the tax return for the year to which the records relate is filed. However, some documentation related to events such as liquidation or winding-up must be kept indefinitely. A public corporation must have audited financial statements, file annual reports and advise of any changes in business location or directors.
A private corporation may generally waive the statutory requirement for a financial statement audit with the unanimous consent of the shareholders. There are two other levels of financial statements available to private corporations: review engagements and compilation engagements. External parties (ie banks) may require the entity to have audited or review
engagement financial statements because they offer more disclosure than compilation engagement statements.
Canada has converted from Canadian Generally Accepted Accounting Principles (CA GAAP) to International Financial Reporting Standards (IFRS). All publicly accountable entities (PAEs) must use IFRS. Mandatory adoption of IFRS for investment companies and certain insurance firms has been deferred until 2014. Companies that are not PAEs, such as private corporations, can adopt either IFRS or the Private Enterprise Generally Accepted Accounting Principles (PE GAAP) to prepare annual financial statements.
2.10 Filing Requirements
Public corporations listed on the Toronto Stock Exchange (TSX) must file their annual report and financial statements with the exchange within 90 days of the financial year-end. The filings are made via SEDAR or pursuant to mail or electronic delivery. Quarterly financial statements must be filed within 45 days of the first, second, and third financial quarter.
Public corporations listed on the TSX Venture Exchange (TSXV) must file their annual financial statement within 120 days of the financial year-end. Listed issuers on TSXV are not subject to deadlines with respect to filing an annual report, but typically file it with their annual financial statement. Quarterly financial statements must be filed within 60 days of the end of the first, second, and third quarter, except with respect to investment funds.
All corporations must file an annual return containing up-to-date information with Corporations Canada, within 60 days of the anniversary of the company’s incorporation or amalgamation. Provinces and territories also have annual reporting requirements for companies registered in their region.
3 Finance and Investment
3.1 Exchange Control
Canada has no exchange controls and Canadian currency is freely convertible to other currencies. However, single cash transfers in excess of CA$10,000 are reported to FINTRAC, the Financial Transactions and Reports Analysis Centre of Canada.
3.2 Banking and Sources
of Finance
The Bank of Canada is primarily responsible for the administration of Canada’s monetary policy. Canada’s banking and financial system includes national banks, international banks, various provincial credit unions and other loan companies, and a variety of merchant banks.
Businesses may obtain financing in a variety of other ways including private equity and venture capital investment and through various lending products such as subordinated and mezzanine debt, factoring, and leasing.
The Business Development Bank of Canada (BDC) is a financial institution owned by the Government of Canada which helps create and develop Canadian businesses through financing, venture capital and consulting services, and has a focus on small and medium sized businesses.
The Canadian Deposit Insurance Corporation (CDIC) is a federal corporation that insures up to CA$100,000 of Canadians’ savings in case a bank or other CDIC member institution fails or goes bankrupt.
There are four primary securities exchanges in Canada:
• The Toronto Stock Exchange (TSE) for medium to large cap stocks • The TSX Venture Exchange (TSX) for small to medium cap stocks • The Montreal Exchange (MX) for financial derivatives
3.3 Investment Incentives
and Restrictions
The Investment Canada Act reviews significant business investments in Canada by non-Canadians. Unless specifically exempted, foreign investments in Canada are subject to either a notification requirement or an application and review process. The process used is determined by the size and type of transaction and whether the non-Canadian investor is a member of the World Trade Organisation (WTO). For the purposes of the Act, non-Canadian includes any entity that is not controlled or beneficially owned by Canadians.
There are a number of investment incentives offered at the federal, provincial and local levels.
3.4 Research and
Development (R&D)
The federal Scientific Research and Experimental Development (SR&ED) programme provides tax incentives to Canadian businesses that conduct SR&ED in Canada (see 5.7.1).
3.5 Tariffs
Customs tariffs fall into a number of categories. Canada also has industry specific tariffs which cover some of the more highly regulated industries such as dairy, eggs and poultry.
Canada has a General Preferential Tariff that covers most products and offers preferential tariff treatment for imported goods from over 180 developing countries and customs territories.
Additionally, Canada is a member of the World Trade Organisation (WTO) and has undertaken not to raise tariffs above levels agreed in trade discussions.
4 Employment Regulations
For employment tax considerations, see 5.3.4.1 General Employment
Matters
4.1.1 Employment law
Businesses operating in Canada must adhere to labour laws which are legislated both federally (under the Canada Labour Code) and provincially, depending on the provinces in which the business operates. The Code applies to federally regulated employers in sectors such as banking, transport, telecommunications and national infrastructure.
There are a number of labour standards which employers must follow, some of which include dealing with:
• Employment contracts • Termination of employment
• Vacation and bereavement entitlement • Hours of work
• Minimum wage
• Maternity and parental leave • Employment equity.
Canada has an employment insurance (EI) programme which is funded through employer and employee contributions (see 5.3.2) and provides short-term benefits to employees who lose employment.
4.1.2 Trade unions
Canadian labour law gives employees the right to collective bargaining with their employers. The Canada Labour Code guarantees this right and establishes methods for employees to choose trade union representation and describes how employers and trade unions will bargain to arrive at a collective agreement. The 2007 Supreme Court of Canada decision, Health Services and Support – Facilities Subsector Bargaining Assn v British Columbia (2007 SCC 27), recognised the constitutional right to collective bargaining on the grounds of freedom of association.
4.2 Visas and Permits
Generally, foreign workers coming to Canada for work related purposes require a work permit as administered through Citizenship and Immigration Canada (see http://www.cic.gc.ca/english/visit/index.asp).
There is an extensive list of countries whose citizens who do not require a visa to visit Canada; these include the US and most EU/EEA countries. Visas are available for tourists and business visitors.
“Business visitors”, defined as foreign nationals who plan to visit Canada temporarily to look for new business opportunities, to invest, or to advance existing business relationships, do not require a work permit unless they are from a country which requires a visa to visit Canada. To be considered a business visitor, the foreign national must demonstrate:
• Their intention to stay less than six months and not plan to enter the Canadian labour market
• That their main place of business and source of income is outside of Canada, and • That the profits from their business will accrue outside of Canada.
The Temporary Foreign Worker Program (TFWP) enables employers to hire foreign workers on a temporary basis when Canadian citizens and permanent residents are not available to do the work. The TFWP is administered by the Human Resources and Skills Development Canada (HRSDC)/Service Canada, which is responsible for assessing applications from employers requesting to hire temporary foreign workers and issues a labour market opinion on the likely impact that the foreign workers would have on the Canadian job market. Study permits are also available.
5 Taxation
5.1 Corporate Income
Taxes
Corporate taxation is administered at both federal and provincial levels. Resident corporations are subject to federal income tax on their worldwide income. There is no legislative definition for “resident corporation”, but under common law a corporation is generally regarded as resident in Canada if it has its central management and control there.
Non-resident corporations are generally taxed on their Canadian-source income, including on gains arising from disposals of assets located in Canada.
The federal corporate income tax rate is 38%. However, the rate is reduced by a “provincial abatement” of 10% on taxable income earned in a province, and then reduced again for non-investment income by a general abatement of 13%. This results in an effective corporate income tax rate of 28% for investment income (other than most dividends), and 15% for non-investment income.
Canada imposes a branch tax on assets repatriated to a foreign corporation’s home country. The branch tax is similar to non-resident withholding taxes on dividend distributions made by corporations. Both the branch tax rate of 25% and the amount on which the tax is calculated may be reduced by tax treaty provisions.
Provinces and territories impose their own corporate income tax on business income. The combined rates of federal and provincial income taxes vary depending on the province concerned. In general, the combined rates range from 25% to 31%. The small business deduction, applicable to Canadian-controlled private corporations (CCPCs), reduces the federal corporate income tax rate to 11%, subject to a maximum allowable limit of CA$500,000 active business income and various other conditions. At provincial level, the first CA$500,000 (CA$400,000 in the case of Manitoba and Nova Scotia) are taxed at rates of between 0% and 8%. Taxable capital gains are one-half of total capital gains, reduced by allowable capital losses realised in the same year. They are taxed at the regular corporate tax rates. Trading losses can be carried back for three years for relief against earlier profits, and carried forward for up to 20 years for relief against later profits. Restrictions apply if there is change of ownership of a corporation.
There is no tax consolidation facility for groups of corporations.
The standard tax year generally corresponds to the calendar year, although corporations can choose an alternative fiscal period. Tax returns must be filed within six months of the end of the fiscal period, but the filing date can be extended. Generally a combined federal and provincial return may be filed, but separate provincial returns are required in Alberta and Quebec.
5.2 Personal Taxes
Resident individuals are subject to federal income tax on their worldwide income and to provincial income tax on their income from activities within individual provinces. Non-resident individuals are subject to federal and provincial income taxes on their income from sources in Canada, subject to the terms of any relevant double tax treaty. Federal income tax on individuals is levied at graduated rates. For 2013, the rates are as follows:
Taxable Income Tax Rate
Up to CA$43,561 15%
CA$43,562 – CA$87,123 22%
CA$87,124 – CA$135,054 26%
Over CA$135,054 29%
Provincial income tax rates vary; the maximum rates in provinces and territories for 2013 are as follows:
Province or Territory Tax Rate
Alberta 10%
British Columbia 14.7%1
Manitoba 17.4%
New Brunswick 17.84%2
Newfoundland and Labrador 13.3%
Northwest Territories 14.05%
Nova Scotia 21%
Nunavut 11.5%
Ontario 13.16%
Prince Edward Island 16.7%
Quebec 25.75%
Saskatchewan 15%
Yukon 12.76%
1 A new top rate of 16.8% will apply to tax years 2014 and 2015 only. 2 With effect from 1 July 2013; previously, the rate was 14.3%. The effective
rate for 2013 is therefore 16.07%.
Tax credits based on marital status may be claimed against federal income tax liabilities; further deductions and rebates are available for dependants.
One-half of capital gains are included in taxable income (subject to several exemptions), giving an effective marginal rate of tax of 50% of the rates generally applicable.
There are no inheritance, gift or wealth taxes, although a tax liability on one-half of any gain may arise on the transfer of certain inheritance assets.
Individuals generally file combined federal and provincial tax returns, but in Quebec a separate provincial tax return is required.
5.3 Employment Related
Costs and Taxes
5.3.1 Fringe benefits
Fringe benefits are usually subject to the personal tax rates outlined above. Most benefits are calculated based on their fair market value. Benefits not taxable include reimbursement of relocation costs, business-related tuition fees, and limited contributions to a registered pension plan.
5.3.2 Social security costs
For 2013, employers must pay federal contributions (1) to an employment insurance fund up to maximum earnings of CA$47,400 per employee if the province does not have a provincial plan, at 1.4 times the contribution made by the employee (see below); and (2) 4.95% of an employee’s earnings in excess of CA$3,500 and up to a maximum of CA$51,100 (maximum pensionable earnings) to the Canada Pension Plan.
Some employers must also contribute to industrial accident funds administered by the provinces. The rates vary depending on the industry and the province. Employees must pay federal contributions (1) to the employment insurance fund of 1.88% of their earnings up to maximum earnings of CA$47,400 if the province does not have a provincial plan; and (2) 4.95% of an employee’s earnings in excess of CA$3,500 and up to a maximum of CA$51,100 to the Canada Pension Plan.
Federal tax credits may be claimed in respect of contributions.
Employees must also contribute to medical insurance plans administered by the provinces. The rates vary depending on the province.
5.4 Withholding Taxes
5.4.1 Domestic payments
There is no withholding tax on domestic dividend, interest, royalty or other payments. An exception arises when a non-resident individual renders services in Canada, other than in the course of regular and continuous employment, in which case the payer must withhold 15% from payments made to that individual.
5.4.2 Payments abroad
A 25% withholding tax applies to the following payments abroad: • Dividends
• Interest paid to a related party abroad • Royalties (but excluding copyright royalties)
• Gross rental payments (although the recipient may elect instead to file a tax return and pay income tax at the general rates on income less expenses) • Management fees paid to a related party abroad.
For payments made to recipients in countries with which Canada has a double tax treaty, the rate of withholding tax may be reduced under the terms of the treaty.
5.5 Goods and Services /
Sales Taxes
5.5.1 Goods and services tax (GST)
GST is levied on the supply of goods and services in Canada and on the
importation of goods and services into Canada. Trading entities that are required to be registered for GST must generally charge their customers GST of 5% on the value of their supplies. Some supplies are not taxable, including basic foodstuffs and medical products. Registered traders can generally recover the GST with which they themselves are charged on their purchases of goods and services, though there are exceptions. On importations, GST must be paid on the value of the goods or services, including any customs duties.
5.5.2 Provincial sales tax (PST)
Some provinces charge PST on the sale of tangible property and some services at varying rates.
5.5.3 Harmonised sales tax (HST)
HST is a combined federal and provincial value added tax that is administered in participating provinces under the same reporting and collection system as GST, and generally applies to the same tax base (with certain variations by province), but is levied at a higher rate to reflect the provincial component.
5.5.4 Quebec sales tax (QST)
Quebec administers a separate provincial sales tax. The province has converted to a system similar to HST from 1 April 2013, although the QST is collected and accounted for separately from the federal GST component.
5.5.5 Rules for non-residents
Non-residents carrying on business in Canada are generally required to register for, and collect, the GST and PST, or the HST, as appropriate, on supplies of goods and services made in Canada. Where the non-resident does not have a permanent establishment in Canada, they are required to post security with the Canada Revenue Agency against their GST/PST/HST obligations.
5.6 Other Taxes
5.6.1 Capital taxes
Financial institutions, trust and loan corporations, and life insurance
corporations are subject to a 1.25% federal capital tax where taxable capital employed in Canada exceeds CA$1bn. Income taxes paid are creditable against the capital tax and may eliminate the liability. Unused federal income tax liability can be applied to reduce the tax, carried back three years and carried forward for seven years.
5.6.2 Business licence fees
Business licence fees may be charged at municipal level, with the amounts varying depending on the location. The fees are deductible in computing taxable income for income tax purposes.
5.6.3 Real estate tax
Municipalities levy property taxes, impose land transfer taxes or registration fees on the purchase of real property, and charge an annual real estate tax based on the assessed value of properties. The tax is generally deductible for income tax purposes, though with restrictions in the case of unoccupied property.
5.7 Tax Incentives for
Businesses
5.7.1 Research and development (R&D) expenditure
The federal Scientific Research and Experimental Development (SR&ED) programme provides tax incentives to Canadian businesses that conduct SR&ED in Canada. It allows for the deduction of SR&ED expenditures and provides an investment tax credit (ITC) that can be used to reduce payable taxes.
CCPCs can earn a refundable ITC of 35% that is fully refundable on qualified SR&ED current expenditures and 40% refundable on qualified SR&ED capital expenditures up to CA$3m of qualified expenditures. The CCPC can also earn a 20% non-refundable ITC on any amount that exceeds the CA$3m threshold. For other corporations, the ITC is 20% of qualifying SR&ED expenditures. The 20% ITC rate also applies to individuals and trusts, although it is only 40% refundable. The 20% ITC rate will be reduced to 15% for tax years commencing in 2014 onwards.
Some provinces also grant R&D tax credits.
5.7.2 Other incentives
There are tax incentives in some of the provinces for specified business activities, such as film production.
