Worldwide Tax Settlement: Canada | Freeman Legislation

Short Summary. In 1867 the United Kingdom passed parliamentary law establishing what is now Canada. Today Canada, the largest country in the western hemisphere, is an amalgamation of ten provinces and three territories.

Founded in 1867, the new Canadian government was empowered to raise money through taxes. In addition, the new government was split between the federal government and the state governments. In general, the federal government was given the task of providing railways, roads, bridges and ports. Conversely, the provincial governments were responsible for providing education, health and welfare to their citizens.

The Canadian federal government did not introduce a formal income tax until World War I. Because of its involvement in the war and the need for war resources, the Canadian federal government introduced a corporation tax in 1916. A year later, the federal government led the income war through a tax law that introduced an income tax system for individuals. In 1948 the Income Tax Act was replaced by the Income Tax Act. Today the Canada Revenue Agency and various provincial governments administer the federal and other tax laws in Canada.

Under the Canadian system of government, tax laws are created through the enactment of laws and laws of Parliament and the provinces, tax treaties, ordinances and jurisdiction. Its primary tax laws are derived from the Income Tax Act (RSC 1985, approx. 1, 5th Supp.), The Consumption Tax Act (RSC 1985, approx. E-15) and other federal and state laws.

Recent tax measures include a 100% deduction in the first year (flat rate capital cost) for certain manufacturing and processing equipment, changes in the treatment of derivatives futures, dumping rules for foreign subsidiaries, transfer pricing rules and rules for cross-border stock lending agreements, employee stock options and redemptions of Investment funds.

With effect from July 1, 2020, Canada is a member of the Agreement between the United States, Mexico and Canada (CUSMA).


currency. The official currency of Canada is the Canadian dollar (CAD). It is a free floating currency.

Joint legal persons. Canadian law allows various forms of business organization. These include sole proprietorships, partnerships, joint ventures, limited partnerships, corporations, limited companies, and trusts.

Particular attention is required when formally organizing a business in Canada, especially given the requirements that may apply at the federal and provincial levels. For example, the federal government and various state governments have enacted separate laws that provide for the establishment and regulation of companies.

Tax authorities.

On April 29, 1999, the Canadian Parliament passed the Canadian Customs and Taxes Act that created the Canadian Customs and Taxes Authority (now referred to as the Canadian Taxation Authority). The Canada Revenue Agency is responsible for administering various tax programs and providing economic and social benefits to Canada's citizens. It also helps manage certain provincial and territorial tax programs. In addition, certain provinces have separate tax authorities that manage their provincial tax systems.

Tax treaty.

  • Canada is a signatory to 93 income tax treaties and the OECD-MLI.
  • Tax treaty between the United States and Canada. The United States and the Federal Government of Canada have signed a tax treaty and five amendments known as the "Protocols" (collectively, the "US-C Treaty"). The last protocol came into effect on December 15, 2008 and generally came into effect on January 1, 2009. Significantly, under the Canadian legal system, the federal government cannot enter into international treaties for or on behalf of provincial governments. Accordingly, the provinces can collect taxes independently of the provisions of the US-C treaty. Therefore, special attention may be required when analyzing the contractual benefits under the US-C Treaty. Some of the benefits of the US-C treaty are discussed below.
    • Dividends. Under the US-C treaty, dividends are generally subject to a reduced withholding tax rate of 15 percent. However, the withholding tax rate can be reduced to 5 percent if the beneficial owner is a company that owns 10 percent or more of the voting rights of the company making the dividend payment. interest. Under the Fifth Protocol, interest payments between residents of Canada and the United States are generally not subject to withholding tax.

      License fees. If royalties are incurred in one country and paid to a resident of the other country, the royalties are typically subject to a reduced withholding tax rate of 10 percent. However, certain types of license fees are excluded from the reduced withholding tax rate.

      Business profits. In general, corporate profits of a company resident in a contracting state are not taxable in the other contracting state, unless the company resident in that contracting state conducts business in that contracting state through a permanent establishment. In this case, the resident can be taxed in the latter state, provided that corporate profits accrue to the permanent establishment.

      Personal services. Independent income from personal services obtained by a resident of a contracting state may be taxed in the other contracting state provided that person regularly has a permanent establishment in the latter contracting state and the income from independent personal services is attributable to the permanent establishment. With the exception of a few exceptions, a resident of a contracting state may be taxed on income from work in the other contracting state, provided that employment is carried out in the other state.

      Real estate profits. If a resident of one contracting state makes a profit from the sale or alienation of real estate in the other contracting state, this may be taxed by the latter contracting state.

Corporate tax rate. In general, the Canadian corporate tax rate is 15%. However, the rate may be reduced for certain Canadian-controlled private companies applying for a small business allowance. In these cases, the federal net tax rate will be 9% from January 1, 2019.

Provinces and territories impose additional corporate taxes on businesses. Currently these can range from just 0% (Manitoba) to 16% (Prince Edward Island).

Individual tax rate. Similar to the United States, the Canadian federal government has tiered tax rates on the taxable income of individuals. For 2020, these graduation rates are between 15% and 33%.

Provinces and territories also have separate tiered tax rates for individuals. Currently these can range from as little as 4% (Nunavut) to 21% (Nova Scotia).

Capital gains tax rate. Canada offers a 50% capital gain exclusion. In addition, taxpayers can claim permissible capital losses. However, capital gains are subject to normal income tax rates. In certain cases, Canadian tax law allows an exemption from capturing capital gains, e.g. B. the sale or alienation of a person's primary residence.

residence. Unlike the United States, Canada does not tax on citizenship. Rather, an individual is subject to Canadian taxation based on their place of residence. In making this decision, Canada is considering whether the individual has a home or personal property in Canada, a spouse or partner under general law, and dependents in Canada, and other social or economic relationships with Canada. Regardless, an unrestricted Canadian resident will be treated as a resident if they have been in Canada for 183 days or more in a given tax year. If an individual is a Canadian resident, they are subject to tax on worldwide income from all sources.

Similarly, Canada based companies are subject to taxation on their worldwide income. In general, a company is resident in Canada if it is incorporated in Canada or if its administration and control is in Canada.

Withholding tax. Canada has a 25 percent withholding tax on dividends, interest, and royalties paid to non-residents. In addition, Canada levies a 15% withholding tax on services provided by non-residents in Canada. Canada also has other withholding taxes, such as withholding taxes on payments from certain pension plans.

Industry profit tax. Canada has an industry profit tax of 25 percent.

Transfer pricing.

Canada uses a market standard with a "Reasonable Effort Exemption". Canada has introduced country-by-country reporting (CbCR) for certain multinational groups of companies (MNE), generally following BEPS Action 13.

CFC rules. Canadian residents are subject to ongoing tax on an Allocatable Share of Foreign Assets (FAPI) earned by a controlled overseas subsidiary. Anti-avoidance rules may apply.

Thin capitalization. Canada imposes restrictions on certain non-residents on capitalization of interest deductions.

Inheritance / inheritance tax. Canada generally has no inheritance or estate taxes. However, certain gifts can be considered sales. It is also assumed that a deceased taxpayer sold property at fair value prior to death.

Overview of the Canadian Income Tax System. Canada levies federal income tax on the income of individuals and businesses based on residence. In addition, provincial taxes are levied on income from activities in the provinces. Nonresidents are generally subject to tax on Canadian source income and gains on the sale of taxable Canadian property. The Canadian corporate tax system seeks to reduce double taxation of income by introducing a modified imputation system that provides a tax credit for dividends paid to individuals by domestic corporations.

Individuals. Canada residents are subject to income tax on their worldwide income. Each individual must calculate their tax liability separately, and family members are not allowed to submit joint income tax returns. Gross income is divided into several categories including labor income, business income, real estate income, and capital gains.

Real estate income consists of passive income from investment activities. When calculating gross income, resident taxpayers determine their income and losses for each category separately. All sources of income are then aggregated before the taxpayer calculates the taxable income. Individuals are also subject to an alternative minimum income tax.

Individual taxpayers are entitled to deductions for a limited number of personal expenses, including childcare costs, incurred in order for the individual to work or receive an education. Individuals can also apply for a range of credits calculated by multiplying an allowance by the lowest tax rate.

Dividends, interest, and royalties are subject to tax, and the cost of generating investment income are generally deductible. Dividends paid by domestic companies are taxable at a reduced rate. A person's effective tax rate on dividends varies by province and is generally the same as that on capital gains. The interest rate is reduced by means of a tax credit, after which a shareholder is granted a credit on the extrapolated dividend.

The gross amount corresponds to a quarter of the dividend and theoretically corresponds to corporation tax. The dividend loan amount, which is based on the gross amount of the dividend, is the corporation tax paid on the dividend paid. Half of the capital gains are included in income, and a Canadian resident is entitled to an exemption from the gain on the sale of a qualifying farm or shares in a Canadian-controlled private company that carries substantially all of their assets for life used to having an active business especially in Canada.

Companies. Canada-based companies are taxable on their worldwide business, property and capital gains. Real estate income consists of passive income from investment activities. Business income is taxable at full rates, real estate income is generally taxable at full rate, with certain exceptions for dividends, and 50 percent of capital gains are included in income.

Expenses are generally deductible to the extent that they are reasonable and incurred for the purpose of obtaining or obtaining income and if they are related to the structure of capital (i.e. an amount deducted from capital in relation to expenses, losses or replacements is), to the extent that the deduction is expressly permitted under the Income Tax Act. Expenses are not deductible if they are incurred for the purpose of obtaining or obtaining tax-exempt income or exclusively for the purpose of realizing capital gains. Financing costs, license fees and intragroup dividends are generally deductible. Interest expenses on the capital account are only deductible in accordance with the statutory provisions.

Canada levies taxes at both the individual and shareholder level, although double taxation is partially eliminated through a modified imputation system. A fictitious dividend tax credit provides tax relief for domestic dividends paid to individuals. This credit does not fully offset corporate income tax incurred on active business income from a Canadian controlled private company in excess of an annual limit, income from a publicly traded domestic company, income from a non-resident controlled company, or income paid by a publicly traded company domestic enterprise deserves.

Canada-based companies are generally subject to taxation on their worldwide income at rates that depend on the status of the company and the type and location of income earned. A company is resident in Canada if it was incorporated in Canada, or if it was incorporated outside of Canada, its central administration and control is in Canada.

Corporate groups are not allowed to submit consolidated tax returns, but special rules regulate the treatment of group-internal income. Dividends are included in income and a company can generally require an offsetting if it receives dividends from a taxable resident company. The deduction is not available for preferred stocks that are more similar to debt than equity. Tax may be levied on dividends on preferred stocks if the company paying the dividend has not paid a minimum tax on the income that generates the dividend.

Partnerships. Similar to US tax law, Canadian tax law does not recognize a partnership as a separate taxpayer. Accordingly, each partner in a Canadian partnership is subject to tax each year on that partner's share of the partnership's income, regardless of whether or not the partnership distributes to the partner.

Since the Income Tax Act does not provide a definition of partnership, the Canadian courts and the Canada Revenue Agency will review the rights and obligations between the parties under applicable provincial jurisdiction.

Other taxes. Each province has a provincial corporate income tax. Canadian municipalities may levy business license fees but do not levy income taxes. The province levies royalties or taxes on income from oil, gas, and mining operations. The federal government imposes capital taxes on capital institutions and life insurance companies. Capital taxes are effectively a form of minimum tax against which income taxes and corporation taxes can be credited. Companies can generally carry over unused loans from other years to lower capital taxes due.

Canadian provinces also levy property taxes, typically at the municipal level, and capital taxes for companies that are permanently located in the province.

Inheritance and gift taxes. Although Canada does not impose inheritance or gift taxes on its residents, its current disposal regulations effectively impose taxation on such transfers. In particular, when an individual donates property to another person, the Canadian tax system assumes that the donor received proceeds equal to the fair market value of the gifted property. This can result in the donor recording income, recovered depreciation, or capital gains. Similar rules apply to dispositions about death. Significantly, however, spouses can transfer property to one another either by gift or death without triggering any presumed receipt of the proceeds.

income tax. Several Canadian provinces levy wage taxes that are used to fund social security programs. Employees must contribute to federal unemployment insurance and pension plans that offer old-age, disability and certain other benefits up to the annual limit. Employers are responsible each month for collecting and remitting the workers' parts as well as their own parts.

The provinces each have their own general health insurance and accident plans to help residents with health care costs and to compensate employees injured at work.

Indirect tax. Canada levies a form of value-added tax known as goods and services tax (GST). The tax generally applies to all domestic transactions, including certain property transfers. The tax also applies to imported goods; Imported services are subject to tax if the recipient is not registered for GST purposes. GST is calculated at every stage of the economic chain and sellers can request refunds in the form of pre-tax credits for taxes paid.

Since the end consumer cannot request an input tax credit for the GST paid, the tax is ultimately borne by the end customer. The standard rate is six percent. Certain goods and services such as food, medical devices, some agricultural and fishing products, housing rentals, most health and dental services, certain educational services, domestic financial services and sales of previously owned residential properties are exempt. Goods and services exported outside of Canada are also excluded.