DOING BUSINESS IN CANADA 2017

Transcription

1 DOING BUSINESS IN CANADA 2017

2 Editors: Africa: Ridha Hamzaoui, Emily Muyaa, Mei-June Soo Asia-Pacific: Mei-June Soo, Nina Umar, Ying Zhang Caribbean: Priscilla Lachman, Sandy van Thol Europe: Khadija Baggerman, Larisa Gerzova, Adrián Grant Hap, Marjolein Kinds, Ivana Kireta, Magdalena Olejnicka, Andreas Perdelwitz, Marnix Schellekens, Kristina Trouch, Ruxandra Vlasceanu Middle East: Ridha Hamzaoui, Mei-June Soo Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Diana Calderon Manrique, Lydia Ogazón Juárez North America: John Rienstra, Julie Rogers-Glabush IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Tel.: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on IBFD s part. In no event shall IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher.

3 DOING BUSINESS IN ARGENTINA CANADA JANUARY

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5 DOING BUSINESS IN CANADA 2017 INTRODUCTION This publication has been prepared by the International Bureau of Fiscal Documentation (IBFD) on behalf of BDO Member Firms and their clients and prospective clients. Its aim is to provide the essential background information on the taxation aspects of setting up and running a business in this country. It is of use to anyone who is thinking of establishing a business in this country as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or live permanently in this country. This publication covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. We have endeavoured to include the most important issues, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO Member Firm(s) with which you normally deal. Your adviser will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned at the heading of each chapter. About BDO BDO is an international network of public accounting, tax and advisory firms which perform professional services under the name of BDO. The fee income of the member firms in the BDO network, including the members of their exclusive alliances, was US$7.6 billion in These firms have representation in 158 countries and territories, with over 67,700 people working out of 1,401 offices worldwide. BDO s brand promise is built upon our vision, to be the leader for exceptional client service always, and everywhere. When you choose to work with BDO you quickly discover why we re different from the rest. BDO offers a comprehensive collection of high quality tax services and assets designed to support exceptional performance, and all our tax engagements benefit from the hands-on involvement of experienced professionals, backed by world-class resources. We are agile enough to handle the biggest and the smallest names in the industries we serve, and our relationship-driven culture means that we can provide responsive and personalised advice to all our clients. We work hard to understand our clients businesses and ensure that we match both our service offering and our people to their complex individual needs. We believe that providing our clients with access to experienced professionals who are actively engaged in addressing their tax and business issues is the most reliable way to provide exceptional service, always with a strong focus on trust and transparency. Regardless of your location, size or international ambitions we can provide effective support as you expand into new areas of the world. In an ever-evolving economic environment, businesses need a global network that provides exceptional, bespoke service combined with local knowledge and expertise. BDO is uniquely positioned to serve this demand, providing effective support and a truly global integrated global footprint. 3

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7 DOING BUSINESS IN CANADA 2017 TABLE OF CONTENTS CORPORATE TAXATION... 9 INTRODUCTION CORPORATE INCOME TAX TYPE OF TAX SYSTEM TAXABLE PERSONS Residence TAXABLE INCOME General Exempt income Deductions Deductible expenses Non-deductible expenses Depreciation and amortization Capital cost allowance The eligible capital expenditure system Reserves and provisions CAPITAL GAINS LOSSES Ordinary losses Capital losses RATES Income and capital gains Withholding taxes on domestic payments INCENTIVES ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings TRANSACTIONS BETWEEN RESIDENT COMPANIES GROUP TREATMENT INTERCOMPANY DIVIDENDS OTHER TAXES ON INCOME TAXES ON PAYROLL PAYROLL TAX SOCIAL SECURITY CONTRIBUTIONS OTHER TAXES Provincial medical insurance Workers compensation TAXES ON CAPITAL NET WORTH TAX Federal taxes Provincial taxes REAL ESTATE TAX INTERNATIONAL ASPECTS RESIDENT COMPANIES Foreign income and capital gains Foreign losses Foreign capital Double taxation relief

8 DOING BUSINESS IN CANADA 2017 TABLE OF CONTENTS 6.2. NON-RESIDENT COMPANIES Taxes on income and capital gains Taxes on capital Administration WITHHOLDING TAXES ON PAYMENTS TO NON-RESIDENT COMPANIES Dividends Interest Royalties Other Withholding tax rates chart ANTI-AVOIDANCE GENERAL TRANSFER PRICING THIN CAPITALIZATION CONTROLLED FOREIGN COMPANY OTHER ANTI-AVOIDANCE RULES VALUE ADDED TAX GENERAL TAXABLE PERSONS TAXABLE EVENTS TAXABLE AMOUNT RATES EXEMPTIONS NON-RESIDENTS OTHER MISCELLANEOUS TAXES CAPITAL DUTY TRANSFER TAX Immovable property Shares, bonds and other securities STAMP DUTY CUSTOMS DUTY EXCISE DUTY INDIVIDUAL TAXATION INTRODUCTION INDIVIDUAL INCOME TAX TAXABLE PERSONS TAXABLE INCOME General Exempt income EMPLOYMENT INCOME Salary Benefits in kind Pension income Directors remuneration BUSINESS AND PROFESSIONAL INCOME INVESTMENT INCOME CAPITAL GAINS PERSONAL DEDUCTIONS, ALLOWANCES AND CREDITS Deductions Allowances Credits LOSSES

9 TABLE OF CONTENTS DOING BUSINESS IN CANADA RATES Income and capital gains Withholding taxes ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings OTHER TAXES ON INCOME SOCIAL SECURITY CONTRIBUTIONS EMPLOYED SELF-EMPLOYED OTHER TAXES ON CAPITAL NET WEALTH TAX REAL ESTATE TAX INHERITANCE AND GIFT TAXES TAXABLE PERSONS TAXABLE BASE PERSONAL ALLOWANCES RATES DOUBLE TAXATION RELIEF INTERNATIONAL ASPECTS RESIDENT INDIVIDUALS Foreign income and capital gains Foreign capital Double taxation relief EXPATRIATE INDIVIDUALS Inward expatriates Outward expatriates NON-RESIDENT INDIVIDUALS Taxes on income and capital gains Employment income Business and professional income Investment income Capital gains Taxes on capital Inheritance and gift taxes Administration KEY FEATURES

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11 CORPORATE TAXATION DOING BUSINESS IN CANADA 2017 CANADA This chapter is based on information available up to 1 January Introduction Canada is a federation made up of ten provinces and three territories. In this commentary, a reference to a province includes the territories. The federal and provincial governments each have taxing jurisdiction. Federal tax applies throughout Canada. The Canada Revenue Agency (CRA) is responsible for administering and collecting federal taxes. Provincial taxes are imposed on activity within the province. Most provinces have entered into a collection agreement with the federal government, and accordingly, the federal government, through the CRA, administers both the federal and the provincial corporate income tax systems. All taxes imposed by the province are remitted to the federal government. Corporations need file only a single corporate income tax return. The provinces of Quebec and Alberta administer their own provincial corporate income tax systems. Corporations are subject to Canadian federal income tax, federal goods and services tax (a VAT-style tax), social security taxes and capital taxes. The provinces also levy a range of taxes including income taxes, capital taxes, resources taxes, payroll taxes, health taxes, insurance premium taxes and tobacco taxes. Not all provinces levy all of these taxes. The currency is the Canadian dollar (CAD). 1. Corporate Income Tax 1.1. Type of tax system Companies are subject to corporate income tax, which is levied on taxable income. Taxable income is calculated by first determining business income, i.e. the profit realized from the business. Then income based on the profit and loss statement is computed to determine net income. The taxpayer then computes taxable income by claiming specific deductions. The appropriate tax rate is then applied to taxable income. The Canadian corporate tax system attempts to achieve integration between corporations and their shareholders, meaning that income passing through a corporation should not attract any additional taxation than income received by an individual directly. As taxes are levied at both the individual and shareholder level, double taxation is partially eliminated through a modified imputation system. The system uses a notional dividend tax credit to provide tax relief in respect of domestic dividends paid to individuals. The dividend tax credit is provided at a fixed rate irrespective of the actual corporate tax rate that may have applied to the corporate income out of which the dividends were generated. For purposes of calculating the credit, the corporation is considered to have paid the dividend out of one of two pools: the low-rate income pool; this is after-tax profit paid out of income that was eligible for the small business rate; and the general-rate income pool; this is after-tax profit paid out of income that was not eligible for the small business rate. 9

12 DOING BUSINESS IN CANADA 2017 CORPORATE TAXATION If the dividend is paid out of the low-rate income pool, a gross-up of 17% of the dividend is applied. If the dividend is paid out of the general-rate income pool, the grossup is 38% of the dividend (a higher gross-up because the corporation is assumed to have paid a higher rate of corporate tax). After grossing up the dividend, the individual calculates the individual s federal income tax liability on the grossed-up amount of the dividend (not on the actual amount of the dividend). When the individual calculates the actual amount of federal income tax owing by the individual, however, the individual deducts a dividend tax credit of 21/29 of the 17% gross-up amount if the dividend has been paid out of the low-rate income pool and 6/11 of the 38% gross-up amount if the dividend has been paid out of the general-rate income pool. Example Paid out of low-rate income pool Paid out of generalrate income pool Actual dividend received Dividend as grossed up by 17% or 38% Basic federal income tax (at 33%) Federal dividend tax credit (12.31) (20.72) Net federal income tax The above is a theoretical illustration only. Provincial tax rates vary, and the provinces provide their own dividend tax credit. Various federal and provincial surtaxes cause further distortions. Subject to certain exceptions, resident corporations may deduct dividends received from another resident corporation. As a result, no additional tax is imposed on dividends that are paid through a chain of resident corporations. In certain cases, private corporations must pay a refundable tax equal to one third of dividends received from taxable resident corporations; however, this tax is refunded when the recipient corporation in turn pays a dividend to its shareholders. Corporations resident in Canada are taxable on their worldwide income. Non-resident corporations are taxable only on certain types of Canadian-source income Taxable persons Legal entities subject to corporate income tax include the following: all corporations resident in Canada; and non-resident corporations, but only to the extent of income from certain Canadian sources (see section 6.2.). This survey is restricted to public and private corporations resident in Canada as well as non-resident corporations. A partnership is treated as a separate person for the purpose of computing the income of the partnership. Once the income of the partnership has been computed, that income is then allocated to the respective partners based on their respective interests in the partnership. A partner that is a corporation includes its share of partnership income in its own income and pays tax on such income as if the partner had earned the income directly. 10

13 CORPORATE TAXATION DOING BUSINESS IN CANADA 2017 A trust can opt to pay tax at the trust level, as if the trust were a separate entity, or can act as a form of conduit, flowing income through to the beneficiaries who then pay tax on the income. Investment funds may or may not be taxable depending on whether or not they are a trust and have chosen to flow the income through to beneficiaries, in which case the income is taxed in the hands of the beneficiary, or a corporation, in which case the entity itself is taxable. A number of corporate entities are exempt from the corporate income tax. The more significant of such entities are as follows: subject to certain exceptions, corporations that are at least 90% owned by the federal, a provincial, or a municipal government; registered charities; non-profit corporations organized and operated exclusively for non-profit purposes. This includes a non-profit corporation constituted exclusively to carry on or promote scientific research and experimental development; and corporations incorporated and operated solely to administer a registered pension plan and accepted by the Canada Revenue Agency (CRA) as a funding medium in connection with the registration of the plan. Special rules apply if a corporation becomes or ceases to be exempt from income tax. The tax year of the corporation is deemed to end at the time of the status change, a disposition of capital assets is deemed to occur, and loss carry-forwards may not be carried over for use after the changed status Residence A corporation is deemed to be resident in Canada if it has been incorporated in Canada. A corporation that has been incorporated outside Canada is considered resident in Canada if its central management and control is located in Canada. Factors that determine where a corporation is centrally managed or controlled include the place where: its directors live and hold their meetings; its shareholders live and hold their meetings; its managers live and hold their meetings; and the organization performs its principal business and operations, and keeps its books and records. Central management and control may be divided between two places, in which case the corporation is considered to be resident in both places. Usually, central management and control of a corporation is exercised by the directors. If so, the corporation is resident where the directors meet Taxable income General Corporations resident in Canada are taxable on their worldwide income. Non-resident corporations are taxable only on certain types of Canadian-source income (see section 6.2.). 11

14 DOING BUSINESS IN CANADA 2017 CORPORATE TAXATION If a corporation earns income in more than one province or territory, its taxable income is allocated among the provinces and territories pursuant to federal rules. The following allocation formula, which is based on the gross revenue and total wages attributed to the province, is used: One half the aggregate of (i) that proportion of its taxable income for the year that the gross revenue for the year reasonably attributable to the permanent establishment in the province is of its total gross revenue for the year and (ii) that proportion of its taxable income for the year that the aggregate of the salaries and wages paid in the year by the corporation to employees of the permanent establishment in the province is of the aggregate of all salaries and wages paid in the year by the corporation. The formula can also be expressed as follows: 1/2 [(provincial gross revenue)/(total gross revenue) + (provincial salary and wages)/(total salary and wages)] taxable income A Canadian resident corporation that has only one permanent establishment in Canada and no other permanent establishment outside Canada is deemed to have earned its entire taxable income in the province in which its permanent establishment is located. For corporations, the income tax system recognizes three main types of income sources: business income, property income and capital gains. Property income consists of passive income, such as rent, interest, royalties and dividends, earned through investment (as opposed to business) activities. A corporation must compute income from each source separately, although the various sources of income are aggregated before computing the taxable income of the corporation. For example, a corporation might carry on two different businesses. Each separate business constitutes a different source of income and the net income or loss must be computed separately for each. Both sources of income are then aggregated with all other sources of income before computing taxable income. When computing tax payable, a taxpayer first computes income based on the profit and loss statement to determine net income for the year. The taxpayer then computes taxable income by claiming specific deductions (such as unused loss carry-overs from other taxation years). Once taxable income has been determined, the appropriate tax rate is applied to calculate the tax payable. Taxable income is taxable at full rates. Property income is usually taxable at full rates, with exceptions for certain types of dividends. Capital gains are effectively subject to tax at reduced rates, as only 50% of a capital gain must be included in income (see section 1.4.) Exempt income Virtually all corporate income is subject to income tax, whether that income is received in money or in money s worth. The only important exceptions are as follows: certain intercorporate dividends are deductible in computing taxable income (see section 2.2.); and in general, the death benefit paid under a life insurance policy is exempt from income tax. For example, a corporation might acquire a life insurance policy on a key employee to provide the corporation with funds to assist the corporation if the employee were to die unexpectedly. 12

15 CORPORATE TAXATION DOING BUSINESS IN CANADA Deductions Deductible expenses Income from a business or property is equal to the profit from that business or property. The Income Tax Act applies the following general principles in respect of the deduction of expenses: expenses are deductible only to the extent that they are incurred for the purpose of gaining or producing income; expenses are deductible only to the extent that they are reasonable in the circumstances; expenses incurred on capital account are deductible only to the extent that the deduction is expressly permitted by the Act (see section ); expenses are not deductible to the extent that they are incurred for the purpose of gaining or producing exempt income; and expenses are not deductible if they are incurred solely for the purpose of realizing capital gains. In general, an expenditure must have been incurred in the year in order to be deductible in that year. A prepaid expense is deductible only to the extent that the expense relates to the year in question. In general, the following expenses may be deducted: intercorporate dividends (see section 2.2.); royalties; financing expenses (over a 5-year period, with 20% of the expense being deducted in each year); management fees; and overhead expenses. Interest expense that is on capital account may be deducted only in accordance with specific statutory rules. Generally, these rules provide a current deduction for simple interest during the year in which it accrues (not the year in which it is paid). In contrast, compound interest is deductible only in the year of payment. In lieu of taking a current deduction for interest on money borrowed to acquire depreciable capital assets, a corporation may elect to capitalize the interest. This election does not apply to inventory. With regard to interest expenses, thin capitalization rules apply pursuant to which a corporation resident in Canada may deduct interest on debts owed to specified nonresidents only to the extent that the debt does not exceed two times the corporation s equity (see section 7.3.) Non-deductible expenses Subject to specific exceptions, a corporation may deduct only 50% of entertainment expenses. This limitation does not apply to employee functions (for example a staff Christmas party) up to a maximum of six employee functions per year. Fines and penalties in general are not deductible. Federal and provincial income taxes are not a deductible expense (they are not incurred for an income-earning purpose but are a result of the income-earning process). Other taxes are deductible if they meet 13

16 DOING BUSINESS IN CANADA 2017 CORPORATE TAXATION the income-earning purpose requirement. For example, municipal property taxes paid in respect of real estate used in the business represent a cost of doing business and are deductible under this principle Depreciation and amortization Taxpayers may depreciate or amortize the cost of most types of capital assets acquired for an income-earning purpose. The major exceptions are land and corporate shares. Two different depreciation and amortization regimes apply. The capital cost allowance (CCA) system applies in respect of most types of tangible capital assets (buildings, furniture and equipment) as well as specific types of intangible assets (patents, franchises, concessions and licences provided they are of fixed duration). A separate eligible capital expenditure system applies in respect of other types of intangible assets used directly in a business (i.e. goodwill and patents, franchises, concessions and licences, for an unlimited period) Capital cost allowance The capital cost allowance system groups depreciable assets into various classes. Each class is depreciable at a specific rate, generally on a declining-balance basis. Depreciation for tax purposes may differ from depreciation for accounting purposes. Capital cost allowance is calculated on the basis of asset pools. Assets of the same class form the pool. For example, office furniture is a class 8 asset, depreciable at a rate of 20% per year on a declining-balance basis. In the year of acquisition, only half the normal depreciation rate may be claimed. The taxpayer may claim as much or as little capital cost allowance as the taxpayer chooses, subject to the maximum amount permitted. A negative balance in a pool may arise if assets are sold for more than their depreciated cost. A negative balance is brought into income only if it exists at the end of the tax year. A taxpayer can avoid including the negative balance in income if the taxpayer acquires other assets of that same class prior to the end of the tax year and the combined cost of those other assets is at least equal to the amount of the negative balance that would otherwise arise. If no assets are in the pool at the end of the tax year, the taxpayer may deduct the full amount of the remaining balance as a terminal loss. A terminal loss may not be claimed if any assets are brought back into the pool before the end of the tax year. No capital cost allowance may be claimed before an asset is available for use. Various statutory criteria determine the date on which an asset is considered to be available for use; however, the maximum delay in claiming capital cost allowance is generally 2 years. The following table sets out capital cost allowance rates for some of the more common items of tangible depreciable assets. All rates are on a declining-balance basis and are subject to the half-rate rule for the year of acquisition. 14

17 CORPORATE TAXATION DOING BUSINESS IN CANADA 2017 Class Type of asset Rate (decliningbalance basis) (%) 3 Data communication wire or cable 5 8 Office furniture, general machinery and equipment and other tangible property not included in any other class Automobiles and automobile equipment Metric scales and non-system computer software Machinery and equipment used for manufacturing and processing operations in Canada (subject to a 50% straight-line rate for machinery and equipment acquired after 18 March 2007 and before 2016 Class 29) Specified clean energy generation and conservation equipment acquired before Computer hardware acquired after 18 March The eligible capital expenditure system To the extent that intangible capital assets are not eligible for capital cost allowance treatment, the cost of the asset may be eligible for amortization under the eligible capital expenditure system. However, no amortization may be claimed for the cost of shares in a corporation or for the cost of a partnership interest. The eligible capital expenditure system provides amortization relief only for assets used to generate business income. No amortization may be claimed in respect of assets used to earn property income. The following types of business assets generally may be amortized under the eligible capital expenditure system: purchased goodwill; expenses of incorporation (i.e. legal fees and filing fees); and the cost of most franchises, licences and concessions granted for an indefinite period. The eligible capital expenditure system is similar to the capital cost allowance system. All costs eligible for eligible capital expenditure treatment are pooled into a single class for each business that is carried on. 75% of eligible costs are added to the balance in the pool and 75% of sale proceeds received in respect of a pooled asset are subtracted from the pool. Deductions may be claimed at a 7% rate on a declining-balance basis. To the extent that a pool has a negative balance at the end of a tax year, the negative balance is recaptured by including it in income. If a taxpayer ceases to carry on the business to which the pool relates, the taxpayer generally may deduct any positive balance as a terminal loss Reserves and provisions Except as specifically provided by statute, no deduction may be made on account of reserves and provisions. An accrual-basis taxpayer must include all receivables in calculating income. However, the taxpayer may claim a reasonable provision for doubtful debts. The provision must be included in income in the following tax year, at which point another provision may be claimed based on the facts in existence in that subsequent year. A taxpayer may deduct bad debts in the tax year that they have gone bad. If any part of the debt is later recovered, the recovery must be included in income in the year of recovery. 15

18 DOING BUSINESS IN CANADA 2017 CORPORATE TAXATION In addition, a reserve may be claimed for goods or services that are to be delivered or rendered after the end of the tax year, provided the taxpayer has included the payment for those goods or services in income. A reserve may be claimed for periods in respect of which rent has been received in advance. A maximum 5-year reserve may be claimed in respect of the unpaid portion of a capital gain arising on the sale of capital assets. A maximum 3-year provision may be claimed for the unearned profit on instalment sales. Taxpayers in the extractive industries may be required to establish trust funds to ensure the future rehabilitation of mining sites, quarries and waste disposal sites. Contributions made to these reclamation trusts are deductible provided the contribution is made pursuant to a statutory obligation Capital gains Generally, one half of a capital gain must be included in income and is then subject to the normal rate of tax. This provides for a lower effective tax rate on capital gains. The inclusion rate is reduced to one third in the case of capital gains arising as a result of gifts to certain types of charitable organizations. Capital gains and losses arise on the disposition of capital assets. Whether an asset is held on capital or income account is a question of fact. Generally, capital assets are those that form the structure within which a taxpayer carries on his business (as opposed to inventory assets that are bought and sold in the normal course of the business). No ownership periods have been prescribed to distinguish between capital and non-capital assets. Rollover relief is available in order to defer the capital gains tax that would otherwise arise on certain types of dispositions. In general, these rollovers also defer the recognition of recaptured depreciation that might otherwise arise on the disposition of depreciable capital assets. Replacement property that was subject to an involuntary disposition may be exempt from capital gains taxation Losses Ordinary losses Ordinary losses may be carried back 3 years and forward 20 years for deduction against any form of income. Special rules apply in the case of losses incurred in farming and fishing businesses. The carry-back and carry-forward of losses is restricted if control of a corporation is acquired. The restriction applies only on an acquisition of control by a person; the rules do not apply if a person merely gives up control of a corporation without another person acquiring control. If an acquisition of control occurs, the tax year of the target corporation is deemed to end immediately before that event. Except for losses incurred in earning business income, ordinary losses incurred by the target corporation prior to an acquisition of control are not deductible after the acquisition of control (and vice versa). Ordinary losses incurred in earning business income prior to the acquisition of control are deductible in subsequent years (and vice versa) only if the business which gave rise to the loss (the loss business) is carried on with a reasonable expectation of profit throughout the subsequent year. The loss is deductible only to the extent of income from the loss business or a similar business. 16

19 CORPORATE TAXATION DOING BUSINESS IN CANADA 2017 As corporate groups may not elect to file tax returns on a consolidated basis, there is no opportunity to transfer losses within a group (see section 2.1.) Capital losses Capital losses may be deducted only against capital gains. The deductible portion of capital losses is one half of the loss, which is the same proportion as the portion of the capital gain that must be included in income. To the extent that the deductible portion of capital losses exceed the includible portion of capital gains in any tax year, the excess may not be deducted against any other form of income. Instead, the excess may be carried over to the 3 immediately preceding tax years or any subsequent tax year and deducted from the includible portion of any capital gain realized in those other years. Net capital losses may not be carried over to other years if there has been an intervening acquisition of control of the corporation that incurred the loss. This prohibition applies whether or not the corporation continues to carry on the same or a similar business. If a capital loss has been realized on shares or debt of a small business corporation, that capital loss becomes an allowable business investment loss and may be deducted against any type of income. A small business corporation is a Canadian-controlled private corporation that uses substantially all its assets in an active business carried on primarily in Canada Rates Income and capital gains The rate of corporate income tax depends on the type of income earned, the status of the corporation and the Canadian province or territory in which the income is earned. The general federal rate of tax on corporations is 38%. A 10% rebate applies to the extent the income has been earned in a Canadian province, bringing the federal rate down to 28%. The tax rate on corporate income that is earned in a Canadian province and that does not currently benefit from other preferential tax treatment is further reduced by a general rate reduction of 13 percentage points. This makes the general rate 15%. Various types of corporate income currently benefit from preferential treatment and thus do not qualify for the reduced rate, including Canadian manufacturing and processing income, investment income earned by a Canadian-controlled private corporation, income from non-renewable natural resource activities and income earned by mutual fund corporations, mortgage investment corporations and investment corporations. A non-resident corporation is subject to a branch profits tax equal to 25% of taxable income earned in Canada (after deduction of federal and provincial income tax and after deduction of an allowance for investments in certain types of Canadian property), which may be reduced under a tax treaty (see section ). 17

20 DOING BUSINESS IN CANADA 2017 CORPORATE TAXATION The appropriate provincial income tax rate is added to the federal rate (general or reduced) to get the effective combined rate. The rates of provincial income tax vary from jurisdiction to jurisdiction. Following are the combined general federal and provincial tax rates effective 1 January 2017 (according to information available as of 1 January 2017), listed by province and type of income: Province General rate (%) General reduced rate (%) M&P rate (%) CCPC active rate (%) Alberta British Columbia Manitoba New Brunswick Newfoundland Northwest Territories Nova Scotia Nunavut Ontario Prince Edward Island Quebec Saskatchewan Yukon Territory The rate is 23% for income between CAD 425,000 and CAD 500, The rate is 27% for income between CAD 350,000 and CAD 500,000. The M&P rate referred to in the table applies to Canadian manufacturing and processing income. The federal portion of the CCPC active rate referred to in the table applies to the first CAD 500,000 of active business income earned by a Canadian-controlled private corporation provided the business activity is carried on primarily in Canada. The provincial thresholds vary, e.g. CAD 500,000 in Alberta. The limit applies on an annual basis and is not cumulative, although it must be shared among associated corporations. The federal annual income limit is reduced for corporate groups having taxable capital in excess of CAD 10 million. For a corporate group with CAD 15 million or more of capital, no income is eligible for the preferential rate. The effective income tax rate on capital gains is lower than the general rate because only one half of capital gains are included in income. In general, the effective rate on a capital gain can be computed by multiplying the general tax rate by one half Withholding taxes on domestic payments In general, no withholding tax applies on payments made to resident corporations. For rates of withholding tax on payments to non-residents, see section Incentives For the preferential tax rate on manufacturing and processing activity and on the first CAD 500,000 of active business income earned by Canadian-controlled private corporations, see section

21 CORPORATE TAXATION DOING BUSINESS IN CANADA 2017 Special tax credits may be claimed in respect of qualifying expenditures. For example, a 15% investment tax credit may be claimed in respect of qualifying scientific research activities. Any such tax credit claim will generally reduce the depreciable cost of the asset in question. Various provinces also have provincial tax credit programmes to encourage specific activities (including film and video productions) Administration The Canada Revenue Agency (CRA) administers the federal income tax system, and administers the provincial corporate income tax system for all provinces except Quebec, Ontario and Alberta Taxable period The tax year of a corporation is its fiscal period. A fiscal period is the period for which the accounts of the business are ordinarily made up; however, a fiscal period may not exceed 53 weeks. Accordingly, a corporation may choose to have a tax year that is other than the calendar year. Once a fiscal period has been established, any change in that fiscal period requires the consent of the CRA Tax returns and assessment A corporation must file an income tax return no later than 6 months after the end of each tax year. Canada employs a self-assessment system Payment of tax Corporations must make monthly tax instalment payments. A corporation may choose one of the following three instalment options: it may make payments at each month-end equal to 1/12 of its estimated tax liability for the current year; it may make payments at each month-end equal to 1/12 of tax paid in the immediately preceding year; or at the first 2 month-ends, it may make payments equal to 1/12 of tax paid for its second preceding tax year and, at each of the 10 succeeding month-ends, payments equal to 1/10 of the amount remaining after deducting the payments made in the first 2 months from tax paid in the immediately preceding tax year. If instalment payments fall short of actual tax liability for the current year, the corporation must pay the shortfall by the end of the second month after the end of the tax year (even though the tax return is not due until the end of the sixth month after the end of the tax year). The deadline for final payment of tax is extended by 1 month for Canadian-controlled private corporations in certain circumstances Rulings Taxpayers may request advance income tax rulings to confirm how the income tax law will apply to a stated set of facts. In general, advance rulings are not given on pure questions of fact. The taxpayer must assume responsibility for the accuracy of all statements of fact upon which the interpretation of the law is based. A fee is charged for advance rulings. A ruling can be obtained only on the tax consequences of an actual proposed future transaction (as opposed to a hypothetical transaction). Advance ruling letters do not have the force of law. However, the CRA considers itself bound by advance ruling letters provided that the taxpayer has fully disclosed all relevant facts and that the transaction is implemented as set out in the advance ruling letter. 19

22 DOING BUSINESS IN CANADA 2017 CORPORATE TAXATION 2. Transactions between Resident Companies 2.1. Group treatment Corporate groups may not elect to file tax returns on a consolidated basis. Expenses incurred by a parent corporation as a shareholder managing its investments should be borne entirely by the parent corporation and applied against its income from the investments. Expenses that are clearly incurred for the benefit of a single member of a corporate group should not be borne by other members of the group. Generally, the Canada Revenue Agency takes the view that no profit element should be present in shared costs charged to Canadian branches and subsidiaries. However, a reasonable mark-up is allowed in respect of charges made by a non-arm s length nonresident who is in the business of providing management and administration services Intercompany dividends Corporations must include dividends in income but generally may claim an offsetting deduction to the extent that the dividends have been received from taxable resident corporations. Generally, no additional tax cost results from dividends passing through several layers of resident corporations. The intercorporate dividend deduction is not available in respect of dividends received on certain types of preferred shares that are more akin to debt substitutes than equity shares. For example, the deduction may be denied if certain entities have provided a guarantee against loss to the shareholder or if the payment of dividends is secured by certain assets. Other rules applicable to dividends on preferred shares may impose a tax if the corporation paying the dividend has not paid a minimum amount of tax on the income used to generate the dividend. An otherwise deductible intercorporate dividend may be subject to capital gains treatment if the dividend reduces the capital gain inherent in a share and is not supported by what may be loosely described as taxed retained earnings realized after This rule prevents the realization of appraisal surplus (the untaxed pre-realization growth in value of corporate assets) in the form of a tax-free intercorporate dividend. An exception applies if: the dividend is not part of, and is not preparatory to, a transaction in which an unrelated third party acquires an interest in a corporation; or the dividend is paid as part of certain corporate reorganizations. While intercorporate dividends generally pass tax-free, private corporations and certain other closely held corporations must pay a refundable tax equal to one third of dividends received. The tax approximates the tax that would have been payable by an individual shareholder and is refunded to the corporation when it in turn pays a taxable dividend (whether to a corporate or non-corporate shareholder). The refund is granted at the rate of CAD 1 of refund for each CAD 3 of dividend paid. No refundable tax is imposed if the recipient corporation controls the payer corporation or owns at least 10% of the votes and value of the payer corporation. Dividend treatment is generally denied for dividends received as part of a dividend rental arrangement. A dividend rental arrangement involves transferring the right to receive a dividend on a share without also transferring the risk of loss and opportunity for gain that normally accompanies ownership of a share. 20

23 CORPORATE TAXATION DOING BUSINESS IN CANADA 2017 For foreign-source dividends, see section ; for dividends paid to non-resident companies, see section Other Taxes on Income Each province imposes a provincial corporate income tax (see section ). The provinces of Quebec and Alberta administer their own corporate income tax system; in other provinces, the provincial system is administered by the federal government so that corporations in those provinces need file only one income tax return. Such taxes are not deductible from federal income tax. In general, Canadian municipalities do not impose income taxes. However, various municipalities impose business licence fees. Such fees will depend on the type of business and the location in which the business is carried on. Such fees are deductible in computing taxable income. The provinces of British Columbia and Quebec impose a special tax on income from logging operations. The federal government and the two provinces in question allow taxpayers to claim the provincial logging tax as a credit against regular income tax. Each province charges its own royalties or taxes on income from oil, gas and mining operations. The federal government also charges royalties on such production from lands under federal control. In general, these charges are equal to a specified percentage of production. 4. Taxes on Payroll 4.1. Payroll tax Newfoundland, Manitoba, Quebec, Ontario, the Northwest Territories and Nunavut are the only Canadian jurisdictions that impose a payroll tax. In general, payroll taxes constitute a cost of doing business and may be deducted in computing income for income tax purposes. However, the federal government does not allow the deduction of any increase in provincial payroll taxes over the rates in effect as of March Rates of payroll tax range from 1.95% in Ontario to 4.3% in Manitoba. Various exemptions apply based on the level of annual payroll Social security contributions The employer must collect the employee portion of the contribution and remit both the employer and employee portions to the tax authorities on at least a monthly basis. The federal government administers an employment insurance fund to provide assistance to workers during periods of temporary unemployment. In 2017, the employer must contribute CAD per CAD 100 of insurable earnings up to an annual maximum level of CAD 51,300 in insurable earnings per employee. For employers, the maximum per-employee annual contribution is CAD 1,171. Employees must also make contributions, which are deducted and paid to the CRA by the employer (see Individual Taxation section 3.2.). The taxable base is salaries and wages (including cash benefits and the value of board and lodging). The federal government also administers a contributory pension plan designed to provide a minimum level of retirement, disability and certain other benefits to Canadian residents. The province of Quebec administers a separate but similar plan for residents of Quebec. In 2017, employers must contribute 4.95% of pensionable earn- 21

24 DOING BUSINESS IN CANADA 2017 CORPORATE TAXATION ings in excess of CAD 3,500 per employee, up to a maximum of CAD 55,300 in pensionable earnings per employee. For employers, the maximum per-employee annual contribution is CAD 2,564. Employees must also make contributions, which are deducted and paid to the CRA by the employer (see Individual Taxation section 3.3.). The taxable base is salaries and wages (including the value of most fringe benefits) Other taxes Provincial medical insurance Each province administers a general health insurance plan to assist provincial residents with the cost of medical care. The method of funding the plan varies from province to province. In most provinces, residents must pay monthly premiums and employers must collect and remit the premiums Workers compensation Each province administers an accident fund to compensate employees who have been injured on the job. In general, membership in the fund is mandatory for certain industries and may be voluntary for others. Employers participating in the fund must make monthly contributions on a per-employee basis. Rates vary by province and by industry. 5. Taxes on Capital 5.1. Net worth tax Federal taxes The federal government imposes a capital tax on financial institutions. Generally, income tax or corporate surtax may be credited against the capital tax. In effect, the capital tax is a form of minimum tax. If a corporation has no income in a year and hence no income tax or surtax to credit against the capital tax, carry-over mechanisms allow unused credits from other years to be applied to reduce the capital tax due Provincial taxes Many provinces impose a form of capital tax on financial institutions with a permanent establishment in the province including Manitoba, New Brunswick, Newfoundland, Nova Scotia, Prince Edward Island and Saskatchewan. In general, capital taxes are deductible for income tax purposes. However, the federal government allows the deduction of provincial capital taxes only up to the rates in effect in March Real estate tax Real estate taxes are imposed in each province, usually at the municipal government level. In general, the tax is based on the annual assessed value of the real estate. Rates vary by class of property and from municipality to municipality. In general, municipal real estate taxes are deductible for income tax purposes. However, property taxes paid in respect of vacant land may be deducted only to the extent of the net income from that land. A limited exemption from this restriction exists for corporations whose principal business is the leasing, rental, sale, or development of real estate. Restrictions also apply on the deductibility of municipal property taxes incurred during the construction, renovation or alteration of a building. Transfer tax is also payable on transfers of real property (see section 9.2.). 22