Carrying On Business in Canada
The mere fact that Forco is not resident in Canada will not, in and of itself, ensure that Forco’s income is not subject to Canadian tax.
Care must also be taken that none of Forco’s income is derived from carrying on business in Canada. To the extent that it is, Forco may be subject to Canadian tax [1], and, in fact, these taxes may well be higher than if the income had been earned by Canco [2].
To determine whether Forco is carrying on business in Canada, one must consider the nature of Forco’s income earning activities.
If its income is derived from providing services, its business will generally be considered to be carried on where those services are provided.
If its income is derived from selling goods, common law rules generally indicate that its business is carried on where the contract for the sale of goods is completed (generally where the offer is accepted).
However, Section 253 contains an extended definition of what constitutes carrying on business in Canada for the purposes of the Act. Of particular significance is paragraph 253(b), which provides that:
“For the purposes of this Act, where in a taxation year a person who is a non-resident person or a trust to which Part XII.2 applies…..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,….the person shall be deemed, in respect of the activity or disposition, to have been carrying on business in Canada in the year.”
Thus, for example, if Forco solicits orders or offers anything for sale in Canada through an agent or employee, it can be considered to be carrying on business in Canada, even if the contract is completed outside of Canada.
In the next article in this series, I will discuss the concepts of active business income, and “foreign accrual property income” (“FAPI”) and their significance in relation to Forco’s income.
Footnotes
[1] As per paragraph 2(3)(b) and subparagraph 115(1)(a)(ii), and subject to the application of a tax treaty applying. If Forco is resident in a country with which Canada has a tax treaty, Canada will generally be precluded from levying tax unless Forco has a “permanent establishment”(“PE”) in Canada. However, in certain cases, Canco may be viewed as an agent for Forco that would create a deemed PE under that treaty. In addition, it should be noted that under Canada’s tax treaty with Barbados, which is one of the most popular locations for forming an offshore subsidiary, a Barbados “International Business Corporation” (“IBC”), which is the commonly used type of entity, is denied any protection from Canadian tax.
[2] A foreign corporation earning income from carrying on business in Canada will be subject to Federal Income Tax under Part I of the Act, as would Canco. However, a foreign corporation will also be subject to an additional tax (“branch tax”) under Part XIV of the Act that, in the absence of a reduced rate under a tax treaty applying, can be equal to 25% of the profit, minus Part I tax and provincial income tax.
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