Thinking beyond borders
Business travelers are likely to be taxed on employment income relating to their Canadian workdays and will have an obligation to file a Canadian income tax return. In addition, employers have a payroll reporting and withholding obligation, even if the employee’s income is exempt from tax in light of the provisions of a treaty
Liability for Canadian tax is determined by an individual’s residence status. A person can be a resident or a non-resident for Canadian tax purposes.
Individuals resident in Canada are subject to Canadian income tax on their worldwide income and allowed a credit or deduction for foreign taxes paid on income derived from foreign sources. There are no specific Canadian tax rules for determining whether or not an individual is resident in Canada. The law is based on jurisprudence and Canada Revenue Agency (CRA) administrative practice. Each case is determined on its own merits.
By commencing long-term or permanent employment, acquiring a Canadian self-contained dwelling place, moving one’s family into the country/jurisdiction, and establishing multiple secondary residential ties (such as acquiring bank accounts, club memberships, a provincial health card, social and professional memberships, and a provincial driver’s license) in Canada, an individual may establish Canadian residency at a specific point in time. Residence is also established by virtue of the taxpayer’s intent to remain in Canada. Where Canadian residency is established by the occurrence of particular events, individuals are taxed as residents for one part of the year and as non-residents for that part of the year that precedes residency.
An individual may also be deemed to be a resident taxpayer for the entire calendar year if the individual is present in Canada for more than 183 days during that year. As a deemed resident, the individual is subject to tax on worldwide income for the entire year. Tax relief may be available if the individual is also a resident of another country/jurisdiction with which Canada has a tax treaty.
Non-resident individuals who are employed in Canada, who are carrying on business in Canada, or who have disposed of “Taxable Canadian Property” (a term which is defined in the tax legislation) are also subject to regular Canadian income taxes. Income earned in Canada from property and certain other sources, such as dividends, rents, and royalties, is subject to a federal tax imposed at a flat rate of 25 percent (which may be reduced under the terms of an applicable tax treaty) that is withheld, and remitted to the CRA, by the Canadian payer. There is no withholding required to be deducted and remitted in respect of Canadian interest income earned and received by non-residents from arm’s length Canadian sources (e.g. a bank), except on “participating” interest (i.e. based on the Canadian debtor’s profits). Non-residents may also elect to file a Canadian tax return within a special time period and calculate Canadian tax using the same graduated rates as apply to a resident of Canada on their net Canadian source rental income (i.e. after deducting all eligible expenses) if the resulting tax will be less than the 25 percent tax that would otherwise apply on their gross rents received during the year.
Extended business travelers from countries/jurisdictions which have tax treaties with Canada are likely to be considered non-residents of Canada for tax purposes unless they enter Canada with the intention to remain for more than 6 months.
Employment income is generally treated as Canadian-source compensation where the individual performs the services being remunerated while physically located in Canada. Directors are considered officers of the employer and any remuneration received for their duties performed within Canada (e.g. attending directors’ meetings held in Canada) is considered Canadian source employment income.
There is no threshold or minimum number of days provided in Canadian domestic tax law that exempts an employee from the requirements to file and pay tax in Canada. To the extent that an individual qualifies for relief under the terms of the income from the employment article of an applicable double tax treaty, there will be no Canadian tax liability. However, the treaty exemption will not apply if a Canadian entity is the individual’s economic employer.
It should be noted that a treaty exemption does not relieve a non-resident person from the obligation to file a Canadian income tax return in respect of employment income or self-employment income earned from working within Canada. Similarly, every employer, whether or not a Canadian resident, has a Canadian payroll reporting and tax withholding obligation for all payments made to an employee, regardless of whether that person is a resident or a non-resident of Canada, for services rendered by that person in Canada.
The withholding obligation can be eliminated if the employer or employee obtains a written withholding waiver from the CRA. In addition, a non-resident employer may register with the CRA as such under a new waiver program that began in 2016 and will thereby be exempt from the normal Canadian withholding rules for its non-resident employees who meet all of the following conditions:
Under this program, the non-resident employer is required to track the number of days its non-resident employees are physically present in Canada and to provide certain information to the CRA on a regular basis. If it is expected that the employees will not satisfy all of the above requirements, or if their actual work days stay in Canada wind up exceeding the relevant limit, a formal waiver must be obtained from the CRA before that time, otherwise the employer will be required to withhold and remit Canadian tax in regards to the employee’s compensation earned from working within Canada from the first day its employees no longer meet all three requirements identified in the preceding paragraph.
If an extended business traveler is considered a non-resident, they will generally be taxed on income derived from certain specific sources in Canada, such as:
Employment income is taxable when received, or when the individual is entitled to receive it, if earlier. Employment income is subject to tax to the extent that it was earned during a period of Canadian residence, or in the case of income earned while non-resident, to the extent it was earned in respect of duties physically performed within Canada.
Net taxable income is taxed at the federal level using graduated personal rates ranging from 15 percent to 33 percent and income thresholds, which apply both for residents and non-residents. For the 2020 calendar year, the maximum federal tax rate is currently 33 percent on income earned over 214,368 Canadian dollars (CAD).
The provinces (except Québec) and territories use the same taxable income calculated for federal tax purposes but apply their own tax rates and tax brackets to that income figure. The provinces and territories also set their own non-refundable and refundable tax credits. Currently, the provincial and territorial personal tax rates range from 11.50 percent (Nunavut) to 25.75 percent (Québec). In addition, two of the provinces (Ontario and Prince Edward Island) apply surtaxes, depending on the taxable income subject to provincial income tax. The maximum combined federal and provincial rates range from a low of 44.50 percent for Nunavut to a high of 54.00 percent for Nova Scotia.
Non-residents and part-year residents are subject to the same federal and provincial tax rates and income thresholds as full-year Canadian residents. An additional federal tax calculated at 48 percent of the regular graduated federal rates is applicable on employment or self-employment income that is not allocated, under federal tax regulation, to a province and thus is not subject to any provincial income tax.
The CRA administers both the federal and the various provincial and territorial personal tax systems, except Québec's, which is administered by Revenu Québec (formerly called the “Québec Ministry of Revenue (MRQ)).
Most Canadian taxpayers, whether resident or non-resident in Canada, calculate their federal and provincial income taxes on one annual federal tax return, which is filed with and processed by the CRA. However, taxpayers who are subject to Québec income tax will be required to file both a federal tax return with the CRA and a separate Québec tax return with Revenu Québec for the relevant calendar year.
Canada has an extensive social security system that confers benefits for disability, death, family allowances, medical care, old age, sickness, and unemployment. These programs are funded mainly through wage and salary deductions and employer contributions.
An employee’s responsibility is made up of two parts: Canada Pension Plan (CPP) and Employment Insurance (EI). Fifteen percent of the contributions made by an employee to CPP or EI are creditable against that individual’s federal income tax liability. The contributions are also creditable for provincial tax purposes.
|Rates for 2020
Social Security Tax
|Canada Pension Plan||5.25%||5.25%||10.50%|
CPP must be deducted from an individual’s remuneration if the individual is employed in Canada (other than in the province of Québec), is aged 18 to 70 years (unless the individual has chosen to receive CPP benefits anytime from age 65 to 69) and receiving pensionable earnings. The employer is responsible for withholding and remitting the individual portion and the matching employer portion to the CRA. The maximum employee and employer contributions for 2020 is CAD2,898 for each. Individuals working in Québec contribute to the Québec Pension Plan (QPP) instead of the CPP program. The maximum employee and employer QPP contribution for 2020 are each CAD3,146 and the QPP contributions are remitted to Revenu Québec.
If an employee is transferred from a country/jurisdiction that has a social security agreement with Canada or, if the assignment will be located there, Québec, the employer may request a certificate of coverage from the other country/jurisdiction to exempt the compensation from CPP or QPP and allow the employee to remain in the other country/jurisdiction’s social security system for the lesser of the period of the assignment in Canada and the maximum period provided under the relevant agreement.
Annual federal Employment Insurance (“EI”) premiums must be deducted from an individual’s remuneration if the individual is employed anywhere in Canada and is receiving insurable earnings. There is no age limit for deducting EI premiums.
Like the CPP contribution, the employer is responsible for withholding and remitting the individual’s portion as well as remitting the employer portion (1.4 times the individual contribution) to the CRA. The maximum employee contribution limit for 2020 is CAD856, with a corresponding employer contribution limit of CAD1,199.
In Québec, the maximum employee contribution limit for EI in 2020 is CAD650, with a corresponding employer contribution limit of CAD911, and these EI contributions are also remitted to the CRA. In addition, employers must deduct premiums under the Québec Parental Insurance Premium program (QPIP) and remit them with the employer portion (also set at 1.4 times the employee amounts) to the MRQ. In 2020, the maximum employee QPIP is CAD388 and the maximum employer contribution is CAD543.
CPP and EI (and QPIP for Québec residents) are assessed on employment earnings, and the rates are adjusted each year based on actuarial calculations prepared by the federal government and, for QPP, the Québec government.
Canada has entered into formal social security totalization agreements with over 50 countries/jurisdictions to prevent double taxation and allow cooperation between Canada and overseas tax authorities in enforcing their respective tax laws. Québec has also entered into separate social security agreements with various countries/jurisdictions, although those are not as extensive as Canada’s agreements.
Care should be taken by employers to obtain certificates of coverage under the Social Security Agreement between an employee's country/jurisdiction of regular coverage and the relevant Canadian government (i.e. federal or Québec) based on where the employee will be working in Canada before the commencement of any assignment in Canada.
Individuals’ Canadian and Québec tax returns are due by 30 April following the tax year-end, which is 31 December. There are no provisions that permit taxpayers to extend this deadline, although taxpayer’s who report self-employment income on their Canadian tax returns have until 15 June to file their tax returns. Late-filing penalties and interest are generally based upon unpaid taxes, although penalties can also be assessed on certain late-filed information forms.
The Canadian tax system is a self-assessment system. Individuals are required to determine their own liability for income taxes and file the required returns for any taxation year in which taxes are payable. Individuals file their own tax returns; spouses do not file jointly.
A non-resident employee is required to file a Canadian income tax return by 30 April (or 15 June if reporting self-employment income earned within Canada) following the tax year to report Canadian source compensation and compute the tax on it or claim an exemption from Canadian tax pursuant to an income tax treaty. Any income taxes withheld are applied as a credit against the non-resident employee’s final Canadian tax liability for the year calculated on the tax return and any excess withholding tax should be refunded to the non-resident employee by the CRA (or by Revenu Québec in respect of a Québec tax return) once the tax return has been assessed. Any income tax liability calculated on the tax return that is in excess of the employee’s withholding taxes must be paid by 30 April to avoid late payment interest and penalties. If the non-resident taxpayer is reporting self-employment income earned in Canada, late-filing penalties will apply on any tax still owing after 15 June, although arrears interest will be applied to any tax owing after the regular payment deadline of 30 April. To facilitate filing a return, the employee must apply to the CRA for either a Canadian Social Insurance Number or, in the event of being ineligible for a Social Insurance Number (e.g. the employee has left Canada and no longer has a valid Canadian work visa), an Individual Tax Identification Number.
The filing of a tax return is recommended for non-resident employees even if their employment income is exempt from Canadian taxation pursuant to the provisions of an income tax treaty, because it will ensure that the CRA (and the Revenu Québec in the case of a non-resident who worked in the province of Québec) may not review and challenge the non-resident’s exemption after 3 years have passed from the date the relevant Canadian tax authority issues a formal notice of assessment for the tax return. Certainty regarding the applicability of the tax treaty exemption is thereby achieved, otherwise all years the non-resident employees worked in Canada remain open to possible review and reassessment at any time in the future, when records may no longer be available to support the non-resident employee’s eligibility for treaty exemption, if no Canadian tax returns have been filed for them.
Employers are required to report, withhold, and remit withholding tax for each of their non-resident employees unless a written waiver letter authorizing the reduction of, or the exemption from, Canadian withholding tax has been issued by CRA (and by Revenu Québec in respect of Québec tax withholdings), or the employer has registered with the CRA under the new non-resident employer program and its non-resident employees meet the criteria for exemption from withholding.
Even short business trips to Canada are subject to Canadian payroll withholding using the same rates that apply to resident employees unless a waiver for the non-resident employee has first been obtained from the CRA (and from Revenue Québec in respect of any employment activities that will be exercised in Québec), or the employer has registered under the non-resident employer program. These requirements apply even if the employer is a foreign company that does not have a PE in Canada and the employee is able to claim an exemption from Canadian tax under the tax treaty between the employee’s country/jurisdiction of residence and Canada.
Should the CRA (and Revenu Québec in respect of employment activities performed within Québec) discover that a nonresident employer has failed to withhold and remit the required tax from its nonresident employees’ remuneration earned from physically working in Canada, the nonresident employer will usually be assessed a tax liability equal to the total of:
The usual practice of the CRA when it becomes aware that a nonresident employer has failed to meet its withholding and reporting obligations is to apply the assessed tax, penalties and interest to the current year when the omission is discovered plus the 3 preceding calendar years, although the CRA is legally entitled to go back even further into the past. The withholding tax remitted by a nonresident employer may only be recovered by having its relevant employees who worked in Canada during the assessed period file Canadian nonresident individual tax returns with the CRA (and Québec individual nonresident tax returns with Revenu Québec, if applicable) to formally report their Canadian source employment income and claim, if they qualify, an exemption from Canadian tax under the provisions of any bilateral tax treaty in force between Canada and their country of residence, and report the withholding tax remitted on their behalf by their employer on their nonresident tax returns and turn the resulting refunds, once they receive them, over to their employer (or former employer).
Depending on the number of years subject to assessment by the CRA (and by Revenu Québec, if applicable) and the number of employees who worked in Canada during those years, it is often a very onerous task for the employer to organize and prepare and submit the required Canadian tax returns needed for its employees and former employees to claim full or partial refunds of the Canadian withholding tax that was paid on their behalf to the CRA and recover those refunds from the various employees or former employees. It is also usually very difficult to obtain the necessary cooperation from the affected employees and former employees who often do not understand why they must retroactively file foreign tax returns for prior years and transfer any money received from the Canadian tax authorities to their employer or former employer. Also, if employees who worked in Canada have left their employer before the assessment is issued or before the recovery actions can be organized, it may be impossible for the employer to recover their share of the withholding taxes that have to be remitted on their behalf to the Canadian tax authorities.
The penalties and interest portion of the assessed tax liability are never recoverable.
A foreign national requires a valid Temporary Resident Visa (TRV) to enter Canada, unless their nationality is a visa-exempt country/jurisdiction. For example, nationals of China, India, Russia, and South Africa require a TRV, while British, Australian, French, and Japanese nationals are visa-exempt. A TRV is an entry document, separate from a status document such as a work permit. A Visa National – even if they have a valid status document – will not be granted entry to Canada unless they have a valid TRV.
Visa-exempt nationals, other than citizens of the United States, are required to obtain an Electronic Travel Authorization (eTA) prior to travelling to Canada by air. The eTA application is made online and the approval is linked to a specific passport. Normally, the eTA is approved immediately, unless there are potential inadmissibility issues that require additional review.
In most cases foreign nationals are also required to give biometrics if entering Canada to work, study or visit. Biometric data is used to confirm a foreign national’s identity. Biometrics are required by visa-exempt and visa requiring nationals between the ages of 14 and 79. Biometrics are valid for a period of up to 10 years.
To be permitted entry to Canada, foreign nationals must not have criminal or medical inadmissibility issues. Specifically, nationals of certain countries/jurisdictions are required to provide police clearance certificates. Police clearance certificates are a copy of a foreign national’s criminal record, or a statement that the foreign national does not have a criminal record. Biometric data is used to confirm a foreign national’s identity. Further, an immigration medical examination is required if an individual has lived in certain countries/jurisdictions for more than 6 month in the past year, and will be in Canada for more than 6 months or will be working in specific occupations.
Generally, foreign nationals require work permits to undertake work activities in Canada. In limited circumstances, a foreign national may be granted entry as a business visitor and is authorized to work without a work permit. A business visitor is a foreign national who comes to Canada for international business activities without directly entering the Canadian labor market. A business visitor is not authorized to perform any “hands-on”, productive activities while in Canada. For example, an individual can visit Canada temporarily, as a business visitor, to develop new business, negotiate contracts, attend conferences, or provide after-sales services, provided that their principal place of business and source of income are outside of Canada. A business visitor may enter Canada with an eTA or a TRV.
The analysis of business visitor activities is complex and business traveler compliance is a major consideration for most companies. Legal advice is highly recommended.
Canadian work permits are typically employer-specific, such that the foreign worker may only work for that particular employer in Canada under specific conditions. If the foreign national is visa-exempt, the work permit application can be made at the port of entry, e.g. the airport or land border. If the foreign national requires a TRV, the application must be submitted online to a Canadian Visa Office abroad. The TRV will be issued together with a work permit approval letter. The actual work permit is issued at the port of entry.
As a default rule, a Canadian employer seeking to hire a foreign national must first obtain a positive Labour Market Impact Assessment (LMIA) opinion from Employment and Social Development Canada (ESDC). A positive LMIA will show that there is a need for a foreign worker to fill the job, and that no Canadian or permanent resident worker is available to do the job. The employer, in most cases, needs to conduct rigorous recruitment efforts and demonstrate that there are no qualified and willing Canadians or permanent residents to fill the position. ESDC must be satisfied that the employment of the foreign national will have a positive or neutral impact on the Canadian labor market. Once ESDC issues a positive LMIA opinion to the employer, the foreign national can then apply for a work permit either at the port of entry or a visa office abroad. The LMIA application preparation and review process can be fairly lengthy and unpredictable.
In June 2017, EDSC and Immigration, Refugees and Citizenship Canada (IRCC) introduced a secondary stream of the LMIA program – the Global Talent Stream. This stream is intended to offer a responsive and predictable option for Canadian employers to access highly-skilled global talent. Specifically, innovative companies can be referred to ESDC to make applications to hire “unique and specialized” foreign nationals. In addition, it facilitates employers with filling in-demand highly skilled positions that are on the Global Talent Occupations List. The current list primarily includes occupations in the IT sector, such as computer programmer, information systems analyst, and web developer. This list is amended from time to time, as the government engages in ongoing stakeholder discussions.
There are various exemption categories to the LMIA, which are administered under the International Mobility Program. The Canadian employer must first submit an offer of employment through its online Employer Portal and pay a compliance fee. Of particular relevance for multinational corporations are the intra-company transfer exemption categories.
For multinational corporations, the intra-company transfer categories are available for executives/senior managers and for workers who have specialized knowledge. To be eligible, the foreign and Canadian entities must have a qualifying corporate relationship and the employee must have been employed abroad for at least 1 year in the preceding 3 years and will be transferred to Canada in a similar position. In particular, to demonstrate specialized knowledge, the employee must have both proprietary knowledge and an advanced level of expertise. Proprietary knowledge generally refers to company-specific expertise related to a company’s product or services, or the enterprise’s processes and procedures such as its production, research, equipment, techniques or management. An advanced level of expertise means that the specialized knowledge is gained through significant and recent experience with the organization and used by the individual to contribute significantly to the employer’s productivity.
There are certain LMIA-exempt work permit categories made available by Free Trade Agreements between Canada and various countries/jurisdictions. For example, under the North American Free Trade Agreement (NAFTA), US and Mexican citizens can work temporarily in Canada if their occupation is on the specified Professionals list and they meet the education requirements specified for the profession. Similarly, the Canada-South Korea Free Trade Agreement, Canada-Chile Free Trade Agreement, and others, provide for similar work permit categories. Furthermore, the Comprehensive Economic and Trade Agreement between Canada and the European Union (CETA) provides for various options for EU nationals to work temporarily in Canada. Moreover, the latest Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) also includes professional mobility provisions and provides for work permit options to nationals of the CPTPP parties to work in Canada.
Under Canada’s Global Skills Strategy, certain foreign nationals may be eligible for a short term work permit exemption to work in Canada. Specifically, the foreign worker must be in a management level or a high-skilled professional occupation. The work duration must be less than 15 or 30 consecutive calendar days. The 15-day exemption is available to an individual once every 6 months, and the 30-day exemption once every 12 months.
A careful assessment of the foreign worker’s intended work activities in Canada is required to ensure eligibility under the occupation requirement. Further, accurate travel tracking is necessary to determine subsequent eligibility and ensure compliance. Assistance from legal counsel is highly recommended.
There have been a series of substantive amendments to the Immigration and Refugee Protection Regulations, which are intended to promote the integrity of Canada’s immigration systems and impose greater compliance obligations on Canadian employers who hire foreign workers. Immigration officials have been granted greater authority to investigate and penalize employers who are found to be non-compliant with immigration laws or regulations.
Employers are subject to inspections by immigration authorities to verify that they have complied with the conditions imposed by the immigration regulations. The inspections may be random or can be triggered by previous non-compliance, adverse publicity, or whistle-blowers.
The conditions under inspection include application information accuracy; document retention; foreign worker’s wages, working conditions, and occupation; business legitimacy; and compliance with applicable employment and recruitment laws.
The consequences for non-compliance are serious. An employer may be subject to a system of Administrative Monetary Penalties for specific conducts that result in non-compliance. Moreover, a non-compliant employer may be banned from hiring foreign workers for a period of 1, 2, 5, or 10 years, or permanently. Employers can also be “black-listed” on the government’s website which publicizes their violations and penalties.
Generally, family members (spouse and minor children) may accompany a foreign worker in Canada. They are eligible to obtain visitor status for the duration of their stay in Canada. Entry requirements, such as a TRV or eTA and criminal and medical admissibility assessments, apply to all accompanying family members.
A dependent spouse is typically eligible for an open work permit and can work for any employer in any occupation. A medical exam is required if the work is in healthcare, childcare, or similar fields. A dependent minor child is eligible to attend primary and secondary school in Canada with a Visitor Record or a Study Permit. A dependent’s status document will be valid for the same duration as the foreign worker’s work permit.
In addition to its domestic tax rules that provide relief from international double taxation, Canada has entered into bilateral tax treaties with approximately 90 countries/jurisdictions to prevent double taxation and allow cooperation between Canada and overseas tax authorities in enforcing their respective tax laws. All of the provinces and territories, including Québec, follow the employment income provisions in all of Canada’s tax treaties.
A PE could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has exercised within Canada.
The Canada/US income tax treaty has a provision, which became effective in 2010, that may result in a deemed PE, even if a PE does not otherwise exist. Under this provision, a deemed PE may result if a company in one country/jurisdiction provides services in the other country/jurisdiction for an aggregate of 183 days or more in any 12-month period, with respect to the same project or connected projects for customers who are resident of that other country/jurisdiction or who maintain that other country/jurisdiction for which the services are performed.
The federal goods and services tax (GST) applies at a rate of 5 percent to most goods acquired and services rendered in Canada. Five provinces have a harmonized sales tax (HST) that is comprised of a 5 percent federal component and a provincial component that varies by province. In Ontario, the HST rate is 13 percent. In New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador, the HST rate is 15 percent. Subject to few exceptions, the HST system is essentially the same as the GST system (e.g. tax base and mechanics).
In general, businesses (suppliers) that carry on business in Canada and make taxable supplies are required to collect and remit GST/HST on those taxable supplies. These businesses are generally entitled to claim offsetting input tax credits for GST/HST paid on their expenditures.
The word supply includes most forms of goods and services. The scope of the GST/HST is not restricted to the provision of goods and services by way of sale but also includes other types of transactions, such as leases and rentals, barter transactions, and the granting or assignment of a right.
Zero-rated supplies (e.g. qualifying basic groceries and most exports) are also taxable supplies but are taxed at a 0 percent rate. Suppliers of zero-rated supplies are generally entitled to claim input tax credits for the GST/HST paid on their expenditures.
Taxable supplies do not include exempt supplies. Suppliers of exempt supplies (e.g. qualifying healthcare services, financial services, and residential rentals) are not entitled to claim input tax credits to recover the GST/HST paid on related expenditures.
Generally, the GST/HST applies to the value of the consideration for taxable supplies of goods or services made in Canada. While the consideration is usually expressed in money, the consideration, or part of the consideration, may be other than money, such as property or a service. In such cases, the value of the consideration, or part of the consideration, is the fair market value of the property or service.
The payment of money and the provision of an employee’s services to an employer are not supplies. However, certain actions may, in some circumstances, cause GST/HST to be payable; for example, imports of services and intangibles by a Canadian branch from a foreign branch of the same financial institution, or benefits provided to employees.
There are many special rules for public sector bodies and for financial institutions.
Registration – Canadian entities
Generally, if a person makes taxable supplies in Canada and the value of its taxable supplies made inside or outside Canada (including supplies made by any associated entities) exceeds CAD30,000 in the last four calendar quarters, the person is required to register, collect, and remit the GST/HST on its taxable supplies. If the value of taxable supplies made by the person and its associated entities is below this registration threshold, the person is considered a small supplier, but can still choose to register voluntarily for GST/HST purposes. A person who voluntarily registers is subject to the same obligations and rules as other GST/HST registered persons.
Other special registration rules apply to, among other entities, charities, taxi businesses and financial institutions
Registration – Non-Canadian entities
In general, the registration rules that apply to Canadian entities also apply to non-Canadian entities that make taxable supplies in Canada in the course of a business carried on in Canada.
However, other registration rules may apply to some non-Canadian entities such as an entity that sells taxable admissions to an event.
Non-resident registrants without a permanent establishment in Canada will generally be required to provide and maintain security with the CRA.
Provincial indirect taxes
The provinces of British Columbia, Saskatchewan, and Manitoba each levy retail sales taxes on tangible personal property and certain intangibles and services. The rates vary from 6 percent to 7 percent (up to 20 percent on certain goods). The legislation and rules vary among the provinces. The province of Alberta currently does not have a sales tax.
In addition, the province of Québec levies a 9.975 percent Québec sales tax (QST), a value added tax, In general, the QST rules are similar to the GST rules. However, Québec has implemented new QST rules requiring many Canadian businesses located outside of Québec and non-resident businesses to register under a simplified QST registration system and collect QST effective 1 January 2019 or 1 September 2019 depending on their facts and circumstances.
In addition to the general GST/HST, PST or QST, the provinces of Saskatchewan, Manitoba, Ontario, Québec and Newfoundland and Labrador also levy unrecoverable retail sales taxes on taxable insurance contracts at rates varying from 6 to 15 percent.
Most provinces also levy special taxes on commodities like fuel (in some cases as part of a broader carbon pricing scheme), alcohol, tobacco and cannabis.
Canada generally follows the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”). In recent years, OECD has undertaken strong initiatives to enhance transparency for tax administrations and curb tax avoidance.
The CRA and Income Tax Act Section 247 provide the transfer pricing authority. CRA’s various transfer pricing memoranda along with OECD Guidelines provide guidelines to the regime. Canadian transfer pricing legislation and administrative policy generally require that transactions between Canadian taxpayers and non-arm’s length non-residents are priced according to the “arm’s length principle” The arm’s length principle is, most simply, the terms to which unrelated parties would agree. These terms include the price as well as other elements of the transaction (for example, payment terms).
Canadian transfer pricing rules generally apply to all entities including corporations, partnerships, branches and trusts under common control in different jurisdictions that transact with each other or have a parent/subsidiary relationship. Common intercompany transactions where transfer pricing rules apply include provision of management and other services, sales and purchases of tangible goods and intangible goods (know-how, trademark and patents), and financing arrangements such as intercompany loans.
An example of an intercompany service transaction is an employee of Company A, who performs services for the benefit of Company B, a non-arm’s length non-resident. This situation often gives rise to intercompany service transactions that should be priced according to the arm’s length principle (i.e. Company A would not allow its employee to provide services to a third party without charging appropriate compensation for those services).
Executive employees, employees of shared service centers or technical employees often perform functions that benefit more than one entity within a related group. Therefore, it is important to consider the activities they perform in the context of whether or not an inter-company transaction exists (e.g. operating activities performed for the benefit of the recipient resident in another jurisdiction or stewardship activities performed for the benefit of the non-resident shareholder).
In determining whether a deduction is allowed for transfer pricing purposes, it must first be determined whether an intra-group service has in fact been provided (i.e. whether the activity provides a respective group member with economic or commercial value to enhance its commercial position). It must also be determined whether the intra-group charge for such services is in accordance with the arm’s length principle. The costs must be specific, identifiable, and reasonable. Furthermore, the service should not be duplicative of the service provided by the company or a third party. Each case must be determined according to its own facts and circumstances. In all cases, proper documentation must be maintained to support the transfer pricing methodology used.
Canada has data privacy laws. The Personal Information and Protection Electronic Documents Act establishes 10 privacy principles and applies to all inter-provincial and international transactions. Businesses must generally obtain opt-out consent in order to collect, use, or disclose personal information. The law has received an ’adequacy‘ rating from the European Union. The Privacy Commissioner’s Office has broad powers to ensure compliance. Various provinces have implemented separate data privacy rules that are largely similar to the federal law.
No direct controls are in effect on the movement of capital or other payments either into or out of the country/jurisdiction. The government is in the process of actively strengthening its anti-money laundering regime to align with international best practices. There are some limitations on foreign investment in specific sectors, but these have been significantly liberalized since 1985.
Every individual entering or leaving Canada is required to report any importation or exportation of currency or monetary instruments in excess of CAD10,000 to the Canada Border Services Agency at the point of entry or departure. The currency or monetary instruments are subject to forfeiture or assessment of a penalty if not properly reported.
Currency refers to the currency of any country/jurisdiction. A monetary instrument refers to any financial instrument that is immediately negotiable; is a bearer instrument, such as a bearer bond; or is a security, government, or corporate note or bond.
Importation or exportation refers to carrying currency or monetary instruments on one’s person or causing another person to do so, including a courier or mail delivery.
Electronic money transfers between financial institutions are subject to separate reporting procedures typically handled by the financial institutions.
All information contained in this publication is summarized by KPMG LLP, the Canadian member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on The Income Tax Act (R.S.C., 1985, c.1 , 5th Supp.), The Excise Tax Act (R.S.C., 1985, c. E-15), the Immigration and Refugee Protection Act (S.C. 2001, c.27), and on current information for 2019 regarding personal income tax rates and thresholds, payroll taxes, sales taxes and income tax treaties and social security tax agreements provided by the official websites of the Canada Revenue Agency, the Canadian Department of Finance, Immigration, Refugees and Citizenship Canada, the Ontario Ministry of Finance, the Québec Ministry of Revenue, the British Columbia Department of Finance, the Newfoundland and Labrador Department of Finance, the Nunavut Department of Finance, the Northwest Territories Department of Finance, and the Manitoba Department of Finance.