CANADABusiness and Taxation Guide
This guide has been prepared by the Canadian member of
MOORES ROWLAND INTERNATIONAL
COLLINS BARROW
Major offices are located in Calgary, Edmonton, Montreal, Red Deer (Alberta), Toronto, Vancouver and Winnipeg, with other offices throughout Canada.
© MRI September 1995
This guide is intended as a general guide and should not be acted upon without further advice.
1. General information
2. Regulation of foreign investment
3. Government incentives
4. Business organizations available to foreigners
5. Setting up and running business organizations
6. Corporate taxation
7. Personal taxation
8. Double taxation agreements
9. Other taxes
10. Portfolio investment for foreigners
11. Trusts
12. Practical information
Attractions and drawbacks for foreign investors
Canada offers political and economic stability and an environment that is relatively free of crime and violence. Because of its proximity and close business ties with the United States, many foreign investors find Canada an ideal 'window' on the U.S., particularly for monitoring direct investment in that country.
The Investment Canada Act of July 1985 encourages investment by both Canadians and non-Canadians that contributes to economic growth and employment opportunities.
The Act was amended in 1989 and in 1993 as a result of the Free Trade Agreement (FTA) between Canada and the United States, and under the North American Free Trade Agreement (NAFTA) between both countries and Mexico. NAFTA seeks to establish a free trade area among the three countries and provides for the gradual removal of virtually all tariffs, thereby improving and expanding the export opportunities for Canadian businesses.
Deregulation of Canada's financial industry has created new opportunities for foreign institutions by liberalizing the laws governing the activities of foreign banks and investment firms in Canada.
Area and population
Canada is the second largest country in the world. With an area of nearly ten million square kilometres, its boundaries reach from the Atlantic to the Pacific Oceans and from the Arctic to the border with the United States. Canada's vast territory offers a wide range of conditions, climate, topography, vegetation and resources.
Most of the population of 29 million live within 200 miles north of the U.S. border. The 1991 population figures for the eight largest cities are:
Toronto, Ontario 3,893,000
Montreal, Quebec 3,127,000
Vancouver, British Columbia 1,603,000
Ottawa, Ontario and Hull, Quebec 921,000
Edmonton, Alberta 840,000
Calgary, Alberta 754,000
Winnipeg, Manitoba 652,000
Quebec City, Quebec 646,000
Although people of British, French, or Native origin represent a large portion of the population, Canada also has significant communities of people from almost every country of the world. This cultural mix provides ample opportunity for individuals to reside in communities where they feel comfortable to live and raise a family.
Constitution and political structure
Canada has a federal government with ten provincial and two territorial governments which have strong powers to enact laws within the many spheres delegated to them. The provincial and territorial governments delegate legislative authority for some local or regional matters to a third, municipal, level of government. Thus a business may be subject to federal, provincial or territorial, and municipal laws. Each government's legislative authority is prescribed by the Constitution.
Economic structure
The economy operates on the basis of market demand as the main determinant of what goods should be produced. Market demand is, to a large extent, supplied by privately-controlled industry. However, certain industries considered vital to the country as a whole are government owned or regulated.
The strength of the economy is based on the country's enormous agricultural and fisheries output, and its production of minerals, oil, gas, forest products, and other natural resources. The manufacturing and service industries play an almost equally important role in the economy. Canada is one of the world's top ten industrial nations.
The economy is also very conducive to starting small businesses. Over 90% of all registered businesses are small businesses with sales of less than $2 million a year.
There is excellent potential for future growth of the economy. The historically lower Canadian dollar against the US dollar increases the demand for exports of goods and services to the United States, Canada's largest trading partner. The amount of trade with both the United States and Mexico should increase due to the North American Free Trade Agreement.
Investment prospects are good. The investment environment is becoming more favourable due to deregulation in the financial industry as well as in the energy and transportation industries. In recent years the Canadian dollar has been relatively weak against other currencies, offering opportunities to outsiders to invest in Canada at a cost that is low in relation to historical values.
The domestic market has a number of attractive features for the business person. Based on the most recent four-year census, the average annual income was $24,000 per person in 1990. Most families have more than one income earner. The average family income in 1992 was $54,000.
Basis of legal code
The Province of Quebec follows a civil code approach to non-criminal matters. The rest of Canada generally follows the common-law tradition wherein legal principles are developed by judges applying legal precedents and statutes to specific facts on a case-by-case basis.
Regulation of foreign investment
There are no restrictions governing the transfer of funds into or out of Canada.
Government restrictions on investment are of two types: one of general application and the other applied to specific business sectors considered key to economic or cultural development. General application includes a review process for investments that are significant in size and nature; they are required to supply minimal information and the average time taken to approve investments is about 30 to 35 days. Federal and Provincial laws may limit foreign participation in specific business sectors, including communications, broadcasting, transportation, publishing, fisheries, land, energy, and some financial services.
Financial assistance
The Federal and Provincial Governments encourage a continued increase in active investment in the Canadian economy. They offer a number of industrial and tax incentive programs to eligible businesses. Such incentives include cash grants, forgivable and repayable loans, loan guarantees, technical assistance and equity participation.
To obtain government assistance, a business should present a detailed, well-documented business plan. This plan should demonstrate that the proposal meets the eligibility requirements of the particular government assistance program under which it is applying.
Investment incentives
Over one hundred different incentive programs are offered to Canadian businesses by the Federal and Provincial Governments. Some of the more popular ones are:
The Export Market Development Program: This provides various forms of assistance to businesses through the Export Development Corporation (a Crown corporation). The program is designed to stimulate activity in developing and increasing an export market for Canadian goods and services.
The Small Business Loans Program: This is designed to help small businesses obtain term loans to finance the purchase of specified operating assets. Under this program, the Federal Government guarantees loans of up to $250,000 to eligible businesses with annual sales not exceeding $5 million.
The Business Immigration Program: This provides the means of admitting qualified business persons to Canada on the basis of their willingness to invest their capital in Canadian business ventures. Under this program, the potential immigrant investors must have a net worth of at least $500,000 and must invest a minimum of $250,000 into a qualified project or syndication for a minimum holding period of five years.
The Western Diversification Program: This is a federal program set up to promote and assist economic and industrial development in western Canada by means of a Western Economic Diversification Fund. This program assists small companies with the development of new products, new technologies, new markets and import replacements, and does systemic projects on an industry-wide basis.
The Atlantic Canada Opportunities Agency (ACOA): This is a federal government agency mandated to promote the sustained economic growth of Atlantic Canada by creating and implementing development programs for small and medium-sized businesses. The program provides loan insurance, interest buy-downs on capital loans, and capital contributions towards the costs of establishing, expanding or modernizing a business venture or introducing a new product.
Several other programs are available, some geographically based. When applying for government assistance, it is important to understand thoroughly the requirements under each specific program and to provide the government with a documented well-designed proposal.
To obtain government financing successfully it is often necessary to use the services of an experienced consultant or business advisor. Anyone starting a new business is expected to comply with business regulations, registrations, business practices, tax obligations, licence requirements, labour regulations and other business policy and practice requirements.
Business organizations available to foreigners
Several forms of business entity are recognised, including:
the corporation;
the partnership; and
the sole proprietorship.
Corporation
The use of a corporation provides several advantages to an investor:
Shareholder's liability is generally limited to the extent of the capital contribution.
A corporation has a perpetual existence.
The incorporation, organization and operation of a corporation is relatively simple and straightforward.
It is often easier to obtain financing and regulatory approvals through a corporation resident in Canada.
In many cases, a local corporation can achieve greater market presence and identification.
Partnership
A partnership is a contractual agreement between two or more persons to carry on a jointly-run business. Great flexibility exists in setting the terms of a partnership agreement.
Division of partnership profits and losses is made according to the terms of the partnership agreement. No minimum capital contribution may be required, and it is not unusual for one partner to contribute capital and another to contribute only services.
There are two types of partnerships: general and limited. Every general partner is jointly and severally liable for partnership debts. Limited partners are not liable beyond the extent of their capital contribution to the partnership. A limited partner may not take part in the management of the partnership. A limited partnership must have at least one general partner who manages the partnership and whose liability is unlimited.
Limited partnership agreements must generally be recorded with the government of the province in which the partnership was formed. Limited partnership interests are ordinarily acquired as investments. A limited partnership is often used as a financing entity for a business where significant tax losses in initial years can be allocated to limited partners.
Sole proprietorship
A sole proprietorship is a business, usually small, owned and operated by a single individual. Management and control of the proprietorship stems entirely from the owner or his designated agent.
The liability of the owner is both unshared and unlimited, and, consequently, available credit for the business is directly tied to the owner's personal wealth. Profits of the business are taxed directly to the owner.
Any individual, regardless of citizenship and residency, may be a sole proprietor. The proprietorship terminates upon the cessation of the business activity and disposal of assets as well as on the death of the proprietor.
Setting up and running business organizations
Legal requirements
Corporation
Incorporation under the Canada Business Corporations Act or a provincial incorporating statute is a simple process involving the filing of articles of incorporation and the payment of a fee to the appropriate government authority. Most businesses which plan to operate in only one province are incorporated under provincial legislation.
The steps involved are briefly:
select a name and obtain approval to use that name (numbers are often used);
indicate the municipality or geographic township within the province and the address where the registered office is to be;
state the classes and any maximum number of shares that the corporation is authorized to issue;
state the number of directors, and for each director (i) the full name and address of the director, and (ii) whether the director is a Canadian citizen; and
maintain corporate books and records, and adequate accounting records.
The cost of provincial incorporation, including legal fees, can be less than $1,000.
Partnerships
No formal written agreement is necessary to establish a partnership; however, it is generally recommended that an agreement be completed. Under normal circumstances, there is no limit to each partner's personal liability. However, partnership arrangements can be structured where liability is assigned to one or more partners. There are no significant formalities or regulations governing how the business is to be conducted.
Sole proprietorship
Any individual (other than an undischarged bankrupt) may start a business but is wholly responsible for all its debts.
Minimum capital
The law does not specify minimum capital requirements to start a
business as a sole proprietorship, partnership or corporation.
Work permits for staff
As a general rule, only Canadian citizens, persons admitted to Canada as permanent residents (those who have obtained landed immigrant status) and foreigners who hold valid employment authorizations (for a set period of time) may be employed. Under the North American Free Trade Agreement, special provisions have been made for temporary entry for business persons and intra-company transfers of executives. This agreement provides free access for Canadian, American and Mexican business travellers to each others markets in order to facilitate trade in professional and commercial services.
The use of Canadian labour is strongly encouraged and to this end the Immigration Department issue work visas only to those persons with specialized skills that are not generally available in the local workforce. Employers must demonstrate to the Immigration Department that they have unsuccessfully pursued all avenues to recruit specialists locally before work visas for visitors are issued.
Labour law
Compared to most European countries the union movement in Canada has been relatively moderate in its demands. Most major industries are unionized but a notable exception is oil and gas exploration. Many aspects of labour law fall within provincial jurisdiction. Some provinces have passed legislation to make it easier to set up non-union operations, particularly in the construction industry.
Federal and provincial labour laws prescribe the minimum standards concerning wages, work conditions, hours of work, overtime pay, paid holidays, vacation with pay, maternity leave and individual and mass employment terminations. These standards cannot be lowered by private contract or by a collective agreement with a union.
In addition, human rights legislation prohibits employment discrimination on such grounds as race, colour or gender. Other statutes deal with health and safety at work and with injuries on the job.
Corporations
Directors and other officials
Before incorporation, a list of the persons who have consented to act as directors must be filed according to the relevant Business Corporations Act. Officers may be appointed after incorporation. Some provinces require that a majority of directors be residents of that province.
Registered office
A corporation must at all times have a registered office in the municipality or geographic township within the province specified in its articles.
Auditors
All public corporations must appoint a qualified auditor to audit their financial records. Private corporations are also required to appoint auditors except in certain circumstances; for example, where all shareholders agree in writing not to do so, or where the corporation revenues are below a threshold amount.
Books, registers and share certificates
The secretary is required to acquire and maintain the various statutory records of the corporation.
Powers and duties of officials
The articles of incorporation and bylaws of a corporation set out the name of the corporation, where it is registered and the specific powers and duties of company officials; for example, the president, secretary and directors.
The president is the chief executive and operating officer of the corporation. The president is responsible for the general supervision of the business and the affairs of the corporation.
The secretary's responsibilities include the following:
to maintain statutory registers;
to organize and attend meetings of shareholders and directors;
to ensure that accounting records are maintained;
to supervise preparation of income tax returns and ensure that the corporation complies with Provincial and Federal taxing provisions; and
to comply with the directives of the corporation and report results to them.
The shareholders annually appoint the Board of Directors who oversee the overall operations of the corporation. It is common practice that the officers of the corporation are drawn from the ranks of the directors. They in turn may delegate their authority in whole or in part to employees or other persons.
The directors must present to the shareholders on an annual basis a financial report and a directors' report. The directors' report for public corporations is required to refer to specific areas of activity and to comment thereon.
Federal corporation tax
Resident corporations
Corporations resident in Canada at any time during the year are subject to income taxes on their world income during the period they are resident, with appropriate tax credits for any taxes paid or payable to foreign jurisdictions on income from sources outside Canada.
Corporations incorporated in Canada are generally deemed to be residents. If not incorporated in Canada, residence is wherever the central management and control of the corporation is located, subject to overriding provisions in double taxation agreements.
Rates of tax
Corporate tax rates vary depending upon the classification of a corporation as public or private. A public corporation is a corporation resident in Canada whose shares are listed on a Canadian stock exchange. A private corporation is one which is not controlled in any manner by a public corporation. One type of private corporation is a 'Canadian-controlled private corporation' which may not be controlled, either directly or indirectly, by non-residents or by public corporations.
The basic federal corporate tax rate in 1995 is about 39% of taxable income and is normally reduced by 10% of taxable income earned in a province to compensate for provincial taxes. A corporation is also subject to provincial tax depending upon where it carries on business (see Provincial Income Taxes).
Taxable income is calculated by adjusting financial statement net income for certain non-taxable income, non-allowable expenses and for certain specific deductions.
Specific income tax incentives promote investments in certain segments of the economy; these include the small business rate, and manufacturing and processing tax credit. Corporations are eligible for the reduced small business tax rate on the first $200,000 of active business income annually only if they are Canadian-controlled private corporations having less than $10 million of taxable capital. A corporation owned 50% by Canadian residents and 50% by non-residents could qualify for this lower small business rate. If the corporation is a member of an associated group, the $200,000 must be shared among the members of the group.
The approximate federal tax rates after applicable incentives are as follows:
Manufacturing Other Other
and processing business income
income income
Eligible for small business tax rate 13% 13% 29%
Not eligible for small business tax rate 22% 29% 29%
Provincial taxes are in addition to these amounts.
Capital cost allowance
In computing taxable income, a deduction for depreciation of capital assets is allowed by way of 'capital cost allowance' which may differ from depreciation calculated for accounting purposes. An allowance may be claimed from the year an asset is acquired and is considered available for use until the year in which the asset is retired, but for the first year the amount allowed is only one-half of the rate otherwise calculated. The allowance is computed for each pool of assets in a particular class, not for each individual asset.
The following are capital cost allowance rates, calculated on a declining balance basis, for some of the more common classes of assets:
Rate
Buildings 4%
Automotive equipment 30%
Small tools, jigs, dies and moulds 100%
Manufacturing or processing equipment 30%
Other machinery and equipment 20% .
Losses
Losses are categorised as non-capital losses, net capital losses, and allowable business investment losses.
Non-capital losses include losses from business and property. They are deducted against income from all sources in the year and if unused may be carried back three years and forward seven years.
Net capital losses are realised on the disposition of capital assets and are deductible only against capital gains. Only 75% of capital gains, net of capital losses, realized in the year are taxable, so only 75% of unused capital losses can be carried back three years and forward indefinitely for application against capital gains.
Losses from the disposal of shares or debt of a small business corporation carrying on substantially all of its business in Canada are allowable business investment losses. 75% of these losses are deductible against all sources of income and can be carried back three years and forward seven years.
Dividends
Generally all dividends received by a corporation must be included in income for tax purposes. However, certain dividends received from taxable Canadian corporations and foreign affiliates are deductible in arriving at taxable income. In addition, a private corporation may be subject to a special refundable tax on dividends received.
Investment tax credit
The investment tax credit (ITC) is an incentive to incur certain expenditure because it reduces federal income tax. The ITC is 20% of scientific research expenditure (35% for small businesses) and 10% of the cost of new equipment used in certain industries, such as manufacturing, located in prescribed areas of Canada.
An unused ITC can be carried back three years and forward ten years to reduce taxes. Small businesses may be eligible for 100% refund of ITCs relating to current expenditure for scientific research and a 40% refund of other ITCs.
Scientific research and development
In addition to an investment tax credit, qualifying scientific research and development current and capital expenditure made in Canada and current expenditure made outside Canada, net of any ITCs claimed, are 100% deductible in the year or any subsequent year.
Foreign tax credits
Corporations are allowed credits against Canadian taxes for taxes paid to foreign countries on income from foreign sources. The credit is limited to the Canadian tax which would otherwise be payable on that income. Any foreign taxes in excess of this limit may be deductible when computing taxable income in the year. Unused foreign business income tax credits may be carried forward seven years and back three years. Unused foreign non-business income tax credits may not be carried forward or back.
Payment of tax and filing a return
Each corporation resident in Canada and each non-resident corporation carrying on business in Canada is required to file a tax return within six months of its year end.
Most corporations are required to pay monthly tax instalments equal to the lesser of their tax payable for the current year and their previous year's liability. The balance of tax is due two or three months (depending on the type of corporation) after the end of their taxation year.
Provincial income taxes
Each province imposes tax on the taxable income of a corporation earned in that province. Taxable income is allocated among provinces according to prescribed formulae generally dependent upon gross revenue earned and wages paid within each province in which the corporation has a permanent establishment.
The provincial income tax rates vary from nil to 17% depending upon the nature of the income and classification of the corporation.
Many provinces offer their own tax incentives, such as small business rates, manufacturing and processing credits, venture capital investment incentives, resource royalty rebates and logging credits.
Capital taxes
In addition to income tax, corporations must pay a 'large corporations tax' of 0.225% of their taxable capital employed in Canada in excess of $10 million. Taxable capital is defined as the total capital stock, retained earnings and indebtedness, with allowance for investments in other corporations. The large corporations tax is reduced by corporate income taxes but only to the extent of about 1% of taxable income.
Some provinces levy a separate capital tax on corporations with permanent establishments in a province. Depending on the province and the nature of the business, the tax ranges from 0.3% to 3.0% of taxable capital. The 3% rate applies only to financial institutions. Taxable capital generally includes capital stock, retained earnings and indebtedness, with allowance for investments in other corporations.
Non-residents
Corporations not resident in Canada are taxed at resident tax rates on certain income from Canadian sources including income from business carried on in Canada and 75% of capital gains on the disposal of certain Canadian properties.
Certain payments to non-residents of Canada are subject to a flat 25% withholding tax which may be reduced under a double taxation agreement. Examples of payments on which this flat tax is levied include interest, dividends, rents, royalties and management fees.
Branch tax
A branch operation of a non-resident corporation carrying on business in Canada is taxed as if it were a resident corporation. It is also subject to an additional tax of 25% on branch profits, net of corporate income taxes, to the extent that the after-tax profits of the branch are not reinvested in Canada. Branch tax is intended to equate to the non-resident tax on dividends paid from a Canadian subsidiary to a foreign parent. In some cases, double taxation agreements provide for profit threshold exemptions and reduced branch tax rates. The branch tax may not apply to certain types of businesses, such as banks, transportation companies or communications companies.
Thin capitalization
Foreign investors are discouraged from providing financing to a Canadian subsidiary entirely through interest-bearing debt. Interest paid to a foreign parent on the portion of the debt exceeding three times the subsidiary's capital is not deductible by the corporation. Thus the ratio of related-party debt to equity should not normally be greater than 3 to 1 at any time.
Summary of corporate taxes
The following table sets out the combined federal and provincial tax rates on corporate income for selected provinces. Although the tax rates in other provinces may vary somewhat, the combined taxes are generally similar.
British Nova
Columbia Alberta Ontario Scotia
% % % %
Manufacturing and processing income
eligible for small business rate
Federal 13.1 13.1 13.1 13.1
Provincial 10.0 6.0 9.5 5.0
Total 23.1 19.1 22.6 18.1
not eligible for small business rate
Federal 22.1 22.1 22.1 22.1
Provincial 16.5 14.5 13.5 16.0
Total 38.6 36.6 35.6 38.1
Other income
eligible for small business rate
Federal 13.1 13.1 13.1 13.1
Provincial 10.0 6.0 9.5 5.0
Total 23.1 19.1 22.6 18.1
not eligible for small business rate
Federal 29.1 29.1 29.1 29.1
Provincial 16.5 15.5 15.5 16.0
Total 45.6 44.6 44.6 45.1
Income tax
Individuals who are considered resident in Canada at any time of the year are subject to income tax on their world income while they are resident.
Individuals who ordinarily make their home in Canada are considered to be resident. As well, a resident of another country who stays in Canada temporarily for a period or periods aggregating more than 182 days in the year is deemed to be a resident of Canada for the entire year.
Generally immigrants and emigrants are taxed on world income earned in that part of the year in which they reside in Canada.
Rates of tax
Income tax is levied on an individual's taxable income for the calendar year. Federal tax is calculated by applying a graduated rate schedule to the amount of taxable income. Federal tax rates range from 17% to 29% with surtax of 3% to 8% applied to basic federal tax, depending on the level of tax.
Provincial taxes are calculated as a percentage of the federal tax payable except in Quebec. In other provinces, the rates can vary between 45% and 69% of the basic federal tax. Quebec provincial tax is calculated by applying a graduated rate schedule to the amount of taxable income. Most provinces also levy surtaxes which apply when income or tax exceeds certain thresholds. Several provinces also apply flat taxes.
Depending upon the province of residence, the top marginal combined federal and provincial tax rate ranges from about 44% to 54%.
The following table shows approximate combined federal and provincial taxes, including applicable surtaxes and flat taxes, at various levels of taxable income for selected provinces. Although tax rates in other provinces may vary somewhat, the combined rates are generally similar.
Taxable British
income Columbia Alberta Ontario Quebec
$ $ $ $ $
10,000 900 700 1,000 600
30,000 6,300 6,100 6,500 7,900
50,000 14,400 14,000 14,900 17,300
70,000 23,800 22,600 24,600 27,500
100,000 39,800 36,500 40,500 43,400
Individuals may be subject to a combined minimum tax of about 25% regardless of their level of taxable income, depending on their sources of income and the nature of their deductions.
Taxable income
Taxable income is calculated as the total income of an individual from all sources less certain deductions. Total income includes amounts earned from such sources as employment, pensions, self-employment, rentals, as well as dividends, interest and taxable capital gains. Individuals may claim deductions for certain expenses including contributions to private pension plans, professional membership fees, and interest incurred to earn income.
The federal tax rates are applied to taxable income to calculate federal tax. Personal credits are then allowed as reductions in computing basic federal tax.
Typical tax credits include:
Basic personal credit $1,098
Married credit 915
Age credit (65 and over) 592
Credits may also be claimed for tuition fees, charitable donations and medical expenses. The credit is generally restricted to 17% (up to 29% for charitable donations) of the expenses incurred. Provincial taxes are generally calculated as a percentage of basic federal tax.
Capital gains
Capital gains (net of capital losses) realised on the disposal of capital property receive favourable tax treatment in that only 75% of the gain is taxable. Resident individuals are allowed a lifetime exemption from tax on the first $500,000 of gains on farm property and shares of qualifying small business corporations. Gains arising on the sale of a dwelling by a Canadian resident may be exempt from tax.
Investment income
Dividends received from taxable Canadian corporations are taxed at lower rates than income from other sources. The maximum combined rate on such dividends is about 34%, depending upon the province of residence of the individual.
Tax returns and payment of tax
Employers are required to deduct taxes throughout the year on salaries and wages paid. Where an individual's total tax for the year and one of the two preceding years exceeds tax withheld by more than $2,000, the individual is required to remit additional quarterly instalments. The tax return for a calendar year is due on or before April 30 of the following year. Any balance of taxes payable is also due by this date.
Partnerships
Partnerships are not considered taxable entities. Instead the partners (whether individuals or corporations) are taxed on their shares of partnership net profits. The calculation of partnership profits may be based on the calendar year or any 12-month period. Certain partnerships must use the calendar year. Partnerships that have more than five members must file annual information returns.
Non-residents
Non-resident individuals who carry on business in Canada, are employed in Canada or dispose of taxable Canadian property are subject to tax in Canada at resident tax rates. Certain amounts, for example interest or dividends, paid to non-residents will normally be subject to a 25% withholding tax which may be reduced by a double taxation agreement.
Social security
Under the Canada Pension Plan (CPP) or Quebec Pension Plan and the Unemployment Insurance Act (UIC), an employer is required to withhold certain amounts from salaries paid to employees during the year in order to provide pensions and unemployment benefits. The employer also makes a contribution. Maximum required contributions by employers per employee are $851 CPP and $1,780 UIC per year.
Canada has entered into tax agreements with various countries to provide relief to persons who might otherwise be subject to tax both in Canada and in another country on the same income. Canada has agreements in force with 56 countries and another four agreements have been signed but not yet ratified.
The agreements generally provide for the rights of each of the contracting countries to tax certain incomes, for example pensions, personal service income, and gains. They also generally provide for a reduction of the 25% flat withholding tax on payments such as interest, dividends, royalties and management fees.
Some of the agreements prescribe certain tests to ensure that a dual resident is deemed to be resident either in Canada or the other country but not both.
The following table illustrates the withholding tax rates under agreements. The actual withholding rates vary in certain situations. The agreement should be examined for the applicable rate on specific payments.
Location of recipient Withholding tax rate %
Dividends Interest Royalties
Argentina 10/15 0/12.5 3/5/10/15
Australia 15 15 10
Austria 15 15 0/10
Bangladesh 15 15 10
Barbados 15 15.25 0/10
Belgium 15 15 0/10
Brazil 15/25 15/25 15/25
Cameroon 15 15 15
China 10/15 10 10
Cyprus 15 /15 0/10
Czech Republic 10/15 0/10 0/10
Denmark 15 15 0/15
Dominican Republic 18 18/25 0/18/25
Egypt 15 0/15 15
Finland 10/15 0/10 0/10
France 10/15 0/10 0/10
Germany 15 15 0/10
Guyana 15 15 10
Hungary 5/10/15 0/10 10
India 15/25 15 25
Indonesia 15 0/15 15
Ireland 0/15 15 0/15
Israel 15 0/15 0/15
Italy 15 0/15 0/10
Ivory Coast 15 15 10
Jamaica 15 15 10
Japan 10/15 0/10 10
Kenya 15/25 15 15
Korea (South) 15 15 15
Luxembourg 10/15 15 0/10
Malaysia 15 15 15
Malta 15 15 0/10
Mexico 10/15 0/25 0/15
Morocco 15 15 5/10
Netherlands 5/10/15 0/10 0/10
New Zealand 15 15 15
Norway 15 15 10/15/25
Pakistan 15 0/15 0/15
Papua New Guinea 15 0/10 10
Philippines 15/25 0/15 10
Poland 15 15 0/10
Romania 15 15 10/15
Russia 15 0/15 0/10
Singapore 15 25 15
Slovakia 10/15 0/10 0/10
Spain 15 0/15 0/10
Sri Lanka 15 0/15 0/10
Sweden 15 0/15 0/10
Switzerland 15 0/15 0/10
Thailand 15 15 5/15
Trinidad & Tobago 15 15 0/15
Tunisia 15 0/15 0/15/20
United States 10/15 15 0/10
Zambia 15 15 15
Zimbabwe 10/15 0/15 10
Agreements with the following countries have been signed but are not yet in force: Estonia, Latvia, Liberia, and Nigeria. A protocol has been signed with the United States which will reduce rates on intercorporate dividends to 5%, interest to 10% and certain royalties to nil.
The federal and provincial governments levy various forms of taxes including capital taxes, sales and excise taxes, payroll taxes, customs duties and land transfer taxes. Municipalities also levy certain taxes such as business taxes and property taxes. Canada has no succession duties, death taxes, or gift taxes, although increases in market values of capital properties are subject to income tax on death or when property is gifted.
Goods and services tax and provincial sales tax
The federal goods and services tax (GST) is a 7% tax charged on the sale of most goods and services in Canada. Certain goods and services such as basic groceries, prescription drugs, medical devices, and residential rents are tax free. The GST does not apply to the purchase of used residential property, dental and health services, most financial services, and most educational services.
From the consumer's perspective, the GST is similar to the retail sales tax. From the business perspective, the GST is collected at each stage in the production or distribution chain and is similar to a value-added tax. Businesses are eligible to claim full input tax credits for tax paid on their business purchases.
Provincial sales taxes, ranging from nil to 12%, in addition to GST, apply generally to the retail value of goods.
Payroll taxes
Several provinces levy payroll taxes on employers. The rates vary from 1% to 4.5%.
Land transfer tax
Some provinces levy a tax on the purchase of land at a percentage which varies according to the province in which the land is situated.
Portfolio investment for foreigners
There are virtually no restrictions on foreigners investing in Canadian stocks and shares or other property. Foreigners are not subject to any legal restrictions on buying, selling or renting land in most provinces. Some provinces do, however, impose higher land transfer taxes on purchases of farm and recreational land by non-residents.
The residence of a trust for tax purposes is a question of fact. A trust is generally considered to have the residence of the trustee, executor, or other legal representative who manages the trust or controls its assets.
A trust is considered a taxable entity separate from the settlor or beneficiaries of the trust under federal and most provincial statutes and, unless created on death, is taxed at the top combined federal and provincial individual rate.
The taxable income of a trust is generally computed in the same manner as that of an individual. An additional deduction is allowed for income payable in the year to beneficiaries who are then subject to tax on this income. Payments of certain types of income by the trust, such as dividends and capital gains, retain the same character as in the trust when paid to the beneficiaries.
Non-resident trusts
Investment income earned by non-resident trusts with Canadian resident beneficiaries may be subject to tax in Canada.
Communications
Transportation is excellent by air, water, railway or road. Air travel is the most important means of passenger transport between the major centres. Many international airlines serve the larger cities while Canadian airlines provide excellent service to almost all centres of significant size.
Languages
The official languages are English and French. The Province of Quebec is primarily French speaking, while in the rest of Canada the predominant language is English. Many foreign languages are spoken.
Time relative to Greenwich Mean Time
Canada is divided into six time zones which are behind GMT as follows: Newfoundland 3½ hours, Atlantic 4 hours, Eastern 5 hours, Central 6 hours, Mountain 7 hours, and Pacific 8 hours.
To use daylight better, clocks (except in the province of Saskatchewan) are advanced one hour from the beginning of April to the end of October.
Business hours
Business in Canada is normally conducted during an eight-hour day between 9:00 a.m. and 5:00 p.m. with one hour for lunch. Most business offices are closed on Saturdays and Sundays. Retail operations are open Monday through Saturday, and in most provinces, Sunday as well.
Public holidays
The holidays observed by most business and government offices are:
New Year's Day 1 January
Family Day (Alberta only) Third Monday in February
Good Friday 10 April 1998, 2 April 1999, 21 April 2000;
Victoria Day Third Monday in May
St. Jean le Baptiste
(Quebec only) 24 June
Canada Day 1 July
Civic Holiday
(New Brunswick, Ontario,
Manitoba, Saskatchewan,
Alberta and
British Columbia only) First Monday in August
Labour Day First Monday in September
Thanksgiving Day Second Monday in October
Remembrance Day
(Nova Scotia, New Brunswick,
Manitoba, Saskatchewan,
Alberta and
British Columbia only) 11 November
Christmas Day 25 December
Boxing Day 26 December
Natal Day (Nova Scotia only) Set annually.