As a US business owner, you’re eager to expand to Canada. Like many other American business leaders, you believe the Great White North is the best market for expansion as you continue to grow. After all, both countries have similarities in culture and a strong history of trade.
That said, you still have to carefully consider every aspect of your Canadian operations. That includes taxation of the business.
How do US companies pay taxes in Canada? The answer depends on different variables.
Before you know how you’ll pay Canadian taxes, you have to determine residency. Non-resident corporations are treated differently than Canadian corporations.
Generally speaking, if the company was incorporated in Canada and continues to be incorporated in Canada, it is resident. A resident corporation can be deemed non-resident, provided it's being taxed comprehensively in a tax treaty country.
A non-resident company is incorporated outside of Canada. This includes parent companies that operate Canadian branch offices. Subsidiaries are separate legal entities, so they’d be more likely to be incorporated in Canada and considered resident.
The General Rule for Permanent Establishments
If you create a permanent establishment in Canada, you’ll only pay Canadian tax on the income you generate in Canada. This follows the principle of eliminating double taxation for foreign entities.
A permanent establishment includes a branch office, a workshop, or a factory. A permanent establishment can also include employees or agents who may conclude contracts in your name.
Generally speaking, the tax rate is around 25 percent. There are ways to reduce how much tax you pay, such as through tax treaties.
Tax for Subsidiaries and Separate Legal Entities
If you create a separate legal entity for your Canadian expansion, your tax situation will change. How and what you pay depends on the business structure you adopt.
Subsidiaries are considered Canadian operations, and they’re taxed accordingly. If you pay non-residents, including investors, you’ll need to subject those payments to tax withholding.
If the subsidiary does business in other countries, then you can apply for tax relief through treaties in those countries.
Filing for Non-Resident Corporations
If your business is considered a non-resident corporation with a permanent establishment, you’ll need to file and pay taxes in Canada.
You’ll need to file a T2 corporation income tax return, along with Schedule 97 on additional information for non-resident corporations. You’ll also have to submit Schedule 20, Part XIV, Additional Taxes on Non-Resident Corporations.
If you have Canadian employees, you’ll need to register for a payroll deductions account. You must also withhold a percentage of payment for services you render in Canada, as well as withhold on passive income you receive.
Finally, you’ll need to file dispositions of taxable Canadian property if you happen to sell taxable property in Canada.
Payroll withholding will be remitted to your payroll account, and the GST/HST collected will be paid to your business’s GST/HST account. The Canada Revenue Agency (CRA) will collect payments for tax, GST/HST, and payroll withholdings through its different branches.
Filing for Resident Corporations
If you operate a subsidiary or are otherwise determined to be a resident corporation in Canada, you’ll pay tax the same way other Canadian corporations pay it. This means filing a T2, along with other relevant forms and schedules.
Like non-resident corporations, you may need to collect and remit GST/HST. If you have employees, you’ll need a payroll account so you can remit your withholdings to the CRA.
Get Help with Payroll
The best step to take is to consult with the professionals, such as a tax lawyer or a financial professional.
Another option you have to make paying Canadian taxes easier is to partner with a professional employer organization (PEO). We can help you look after payroll, which can make your taxes less confusing at the end of the year.