Are You A Non-Resident Entity Carrying on Business in Canada?
A non-resident corporation is taxable on its income generated from a business carried on in Canada and from the disposition of taxable Canadian property. This article focuses on business income.
Where a non-resident corporation is a resident in a country with whom Canada has entered a tax treaty, the non-resident corporation is generally only taxable by Canada on its business profits earned in Canada through a permanent establishment in Canada. Where a business is carried in Canada but not through a permanent establishment then it is a treaty-protected business.
Where a non-resident corporation carried on a treaty-protected business in Canada, there is no tax and no requirement to report any income from the business generated in Canada on the Canadian Corporate Tax Return (T2 return), however, the corporation is still required to file a T2 return to support the claim for exemption under the tax treaty by completing Schedule 91.
Carrying on business
The Income Tax Act of Canada “The ACT” defines the meaning of business in ITA 248(1) and an extended meaning of carrying on business in Canada is provided in ITA 253.
Pursuant to ITA 253, a non-resident corporation is deemed to be carrying on business in Canada if the non-resident corporation:
- produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs, in whole or in part, anything in Canada whether or not the person exports that thing without selling it before exportation,
- solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada, or
- disposes of
- Canadian resource property (with few exceptions)
- property (other than depreciable property) that is a timber resource property, an option in respect of a timber resource property or an interest in, or for civil law a right in, a timber resource property, or
- property (other than capital property) that is real or immovable property situated in Canada, including an option in respect of such property or an interest in, or for civil law a real right in, such property, whether or not the property is in existence.
Where the above deeming rules do not apply, the determination of whether a non-resident corporation is carrying on business in Canada is made by reference to the common law principles.
The definition under the deeming rules and common law is broad and it is easy for any business to meet the criteria of carrying on business in Canada.
As discussed, carrying on business in Canada without a permanent establishment doesn’t result in any tax payable, if the non-resident corporation is a resident of tax treaty country. However, there is an annual tax compliance requirement to claim the treaty benefits by filing the schedule 91 (treaty-based exemption form) with the T2 return within 6 months of year-end. If not filed on time, there is a late filing penalty of $2,500 per year per entity.
Regulation 105 and waiver
The non-resident corporation carrying on business in Canada may be subject to other filing requirements in Canada. These filings are subject to large penalties if not filed on time.
A non-resident corporation is subject to 15% Federal and 9% Quebec withholding tax pursuant to ITA 153(1)(g) and Income Tax Regulation (“ITR”) 105 on any amount paid (with few exceptions) to it for services rendered in Canada. It is regardless of whether the services are provided by an employee of the corporation or are subcontracted. This withholding tax does not represent a final tax and can be claimed back as a refund. However, it must be remitted in all situations to the Canada Revenue Agency (“CRA”) unless the corporation is eligible for a treaty protection and a waiver is obtained.
Generally, to be eligible for a waiver, the non-resident must demonstrate that it does not have a permanent establishment in Canada and is eligible for treaty protection.
A waiver must be applied for 30 days before the earlier of the date the services begin in Canada or the date the first payment is made. Until the waiver is approved and obtained, you must continue to withhold the tax under Regulation 105 and remit to the CRA. The withholding tax must be remitted by the 15th of the following month to avoid penalties and interest.
Whether or not a waiver is obtained, a form T4A-NR information return reporting all amounts paid to non-residents for services in Canada is required to be filed with the CRA by the end of February in the year following the year in which amounts were paid. The T4A-NR is required for each non-resident and is subject to penalties for not filing on time.
If a non-resident received a payment net of ITR 105 withholding for services rendered in Canada and is subject to treaty protection, the CRA allows claiming the refund of these withholding taxes on filing of a treaty-based T2 return.
Regulation 102 and waiver
Non-resident employees providing employment services in Canada are subject to the same withholding, remitting and reporting obligations as those for Canadian resident employees. Therefore, any employer, including a non-resident employer, is required to withhold employee’s income tax liability amounts in Canada pursuant to ITR 102 even if the employee is likely to be exempt from tax because of a tax treaty.
In certain situations, employees’ resident in countries having a tax treaty with Canada will be exempt from individual tax in Canada. However, the employers are obligated to withhold under ITR 102 unless they have applied and approved for a waiver of withholding tax.
There are significant penalties and interest associated with not filing the treaty-based filings in Canada and not withholding and remitting the tax under ITR 105 and 102. There is an option to get a waiver from the penalties and interest under the Voluntary Disclosures Program (VDP).
The VDP gives the taxpayer a second chance to correct a tax return they previously filed or to file a return that they should have filed. If they file a VDP application and it is accepted by the Canada Revenue Agency (CRA) they will have to pay the taxes owing, plus interest in part or in full. However, they would be eligible for relief from prosecution and from penalties that they would otherwise be required to pay.