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Business Taxation for Expats in Canada

Submitted: October 2014

The authority responsible for Canadian Tax is the Canadian Revenue Agency (CRA).

Registration

The most common form of business structure in Canada is the corporation. A corporation can be private, and can be established under either federal or provincial legislation. Under federal legislation (Canada Business Corporations Act (CBCA)), the corporation can trade in any province, though you may have to register in some of them. Under provincial legislation, the corporation must register in each province in which it wishes to do business. Common examples of provincial legislation are the Ontario Business Corporations Act (OCBA) and the Quebec Companies Act (QCA). Forming a corporation means that your liabilities are limited to your equity in the company. The business income is taxed at the corporate tax rate.

Under the CBCA, 25% of the directors must be Canadian residents, or at least one must be if there are less than four directors. All issued shares must be fully paid up, and none can be issued at par value. Registration online is possible (and cheaper). There is a guide to registration here, and the access point for registration is here.

Under the OCBA, the majority of the directors must be Canadian residents, or at least one must be if there are only two directors. All issued shares must be fully paid up, and none can be issued at par value. There is an entry point to OCBA incorporation here under ‘Services for businesses’. You will also have to obtain a Master Business Licence to obtain a Business Identification Number (BIN).

QCA does not require any directors to be resident, shares do not have to be fully paid up, and shares can be issued at par value. There is an entry point to OCBA incorporation (English version) here.

Corporations must also register with the CRA. Another possible choice is a sole proprietorship, although with these your liability extends to your personal assets, and the business income is subject to personal income tax.

 

Corporate Income Tax

The Canadian tax year runs from 1 January to 31 December. A corporation’s tax year can end on any day, but must be no longer than 53 weeks. A corporation’s accounting year is 12 months. Special permission must be obtained to change the tax year once it has been chosen. Canadian resident companies are liable for corporate income tax on their worldwide income and capital gains. Non-resident companies are generally liable for corporate income tax on their Canadian source income; and for capital gains tax on income from the sale of taxable Canadian property.

The headline corporate income tax rate is 38%. This is reduced by 10% for taxable income earned in a province (provincial abatement), which is more or less equal to the provincial tax rate charged. There is a further General Rate Reduction, currently 13%, which if taken with the provincial abatement, leads to a net tax rate of 15%. Small businesses can claim the small business deduction on the first C$500,000 of taxable income which further reduces the tax rate to 11%. There is also a tax rate reduction of 7% on corporate income from manufacturing and processing which is available to corporations not eligible for the small business deduction.

All corporations in Canada are also required to pay provincial tax, generally at a rate of between 10% and 16% depending on the province. However there are lower rates for small businesses. Expats looking to set up a business in Canada that is not location dependant can generally shop around the provinces to reduce their overall tax rate. Some provinces offer additional incentives to start-up businesses. Corporate investment income is taxed at full federal and provincial rates.

Only 50% of corporate taxable capital gains income is taxed at the ordinary corporate tax rate. 50% of the amount of capital losses can be used to reduce taxable capital gains, and net capital losses in any given year can be carried back three years, or carried forward indefinitely, to offset capital gains.

Corporations must file their Canadian corporate income tax returns within six months of the end of its tax year-end. Returns may generally be filed electronically. Penalties apply for late filing.

Advance payments of corporate tax must be made in instalments monthly. The amount payable is based on the lesser of the previous year’s assessment, or an estimate of the current year’s tax liability. There is also a final balancing tax payment (if applicable), which must be made by the end of the second month following the year end.

 

 

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