There are various factors that Foreign companies love doing businesses in Canada. Factors like, economic and political stability, lower taxes, trade agreements, educated labour pool, government supports, and more.
A foreign corporation in Canada is a corporation that has been incorporated outside Canada. While also important to note that a non-resident corporation in Canada, which may have been incorporated in Canada or outside Canada. The residency status of a corporation has not been defined in the income tax act of Canada. It is usually determined by the Canada Revenue Agency (CRA) based on common-law principles.
The foreign corporation needs to file regulatory documents in Canadian currency only under section 261 of the income tax act. These flings include T2 return, related financial information, and different schedules. Although, financial information for business use can be prepared in any currency, called functional currency.
Foreign companies need to file income tax returns within Canada if following two circumstances,
Filing requirements stand true and need to comply irrespective of the fact that gain realized is exempt or not. The tax on gain/profit may be exempt on account of a tax treaty with a domiciled country of corporation. Hence, the same tax may be exempt for one corporation and payable for another.
The treaty exemption can be completed with schedule 91 (treaty-based exemption for information concerning claims). Further, it should be attached with the T2 return while filing.
Likewise, appropriate accounting and operational records must be kept to file an income tax return. Following are some of the information required to file an income tax return – T2.
Foreign companies need to file schedule 97 and tax returns (T2). Schedule 97 identifies the type of income foreign corporations have earned in Canada.
Under section 219 of income tax in conjunction with interpretation bulletin IT-137R3 needs to be complied with for calculating tax payable by foreign corporations in Canada. This section is accompanied by the special release that needs to be compiled as well.
Compliance certificated needs to be obtained if the corporation disposes of Canadian taxable property. This certificate is issued by the Canadian Revenue authority based on certain provisional compliance.
The certificate needs to be obtained under section 116 of income tax. Further information for certification can be obtained from circular IC72-17R6 (Procedural compliance for disposition of Canadian taxable property by foreign corporations).
15% withholding tax is applicable on services rendered in Canada. The person making payment needs to remit the tax amount to CRA. The basis of this tax is the same as POA – Payment on Account, and any difference of balance is adjusted in the T2 return filing.
A payrolls deduction account is needed for making payment to employees (resident and foreign) & foreign sub-contractor. Further, information on the subject can be found on the T4001 employer guide.
The foreign corporations in Canada may be required to withhold tax under the income tax act (part XIII). This requirement is applicable when it makes a payment or credits certain income to another foreign.
Further information on the subject can be obtained from IC77-16R4 (Paragraphs 10 and 11). Further, the T4601 guide is relevant to WHT remitting and reporting rules.
All foreign banks registered in Canada are required to comply with provisions of the XIII.1. The additional tax rate under these provisions is equal to 25% of its taxable expense. Further, information on the subject can be obtained from schedule 92. Likewise, section 218.2 of income tax is relevant for the same.
Once registered with CRA for harmonized sales tax/goods and service tax, the corporation will receive a business number. This number will be used for future correspondence with the CRA, including filing income tax return (T2).
So, If you are a foreign corporation in Canada and need additional information on income tax filing, computation, compliance, record keeping and any other aspect of tax process. Our team of professionally qualified accountants offer customized advice in areas including taxation, business, management, and accounting.
This article has discussed various regulations and procedural requirements for foreign companies in Canada. Overall, the Canadian revenue authority – CRA requires filing for the tax return called T2. This return needs to be filed if foreign corporations have carried business during the tax year or they’ve sold the taxable property in Canada.
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Disclaimer: Information in the post has been presented for a broad and straightforward understanding. This is not a legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situation. You need to contact your accountant or RKB Accounting for further information.