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 Posted: Fri Dec 08, 2006 5:59 am Post subject: DOING BUSINESS IN CANADA |
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DOING BUSINESS IN CANADA
FORMS OF BUSINESS ORGANISATION
Principal forms of doing business
Most foreign companies choose to set up a Canadian subsidiary, rather than a branch, to conduct business in Canada. Doing so limits the liability of the foreign parent to the amount of capital it contributes to the subsidiary. A branch that initially incurs losses might provide a tax benefit to the foreign parent, but that parent’s liability is not limited for debts and other obligations undertaken by its Canadian offshoot. Moreover, a subsidiary structure is more convenient for management and accounting purposes, and it may be necessary when applying for various forms of federal government assistance.
Requirements of a federally incorporated limited-liability company
Capital. No minimum. Subscription may be in cash, property or recognition of a shareholder’s past services. Non-cash equity must be a fair equivalent determined by directors. No legal reserves are required for non-financial corporations.
Founders, shareholders. Minimum of one founder. No nationality or residence requirements. Shareholder meetings must be held in Canada unless voting shareholders agree otherwise.
Board of directors. Under recent amendments to the Canada Business Corporations Act, only one-quarter of a board’s members must be Canadian residents (formerly a majority was required) unless there are fewer than four directors, in which case one must be a resident Canadian.
Residency rules vary for provincial incorporation. In Ontario and Alberta, at least half the directors must be Canadians, and British Columbia requires a majority of Canadian representation, with at least one member from the province. Permanent residents of Canada who are not citizens may qualify as Canadian directors. Some provinces, including Quebec, New Brunswick and Nova Scotia, do not have residency requirements for directors.
Directors are not required to own shares in a corporation. Under the federal act, at least one-quarter of the directors at a board meeting must be Canadian. Board meetings may be conducted by telephone. Companies are not required to have a representative of labour on the board.
Management. There are no specific requirements for the composition of management.
Disclosure. Federally incorporated businesses must submit annual financial statements to the Corporations Directorate of Industry Canada. Federal corporations must file annual information returns within six months of the end of their financial year. The filing fee is C$50. Holding companies may submit consolidated reports. Filings by private companies are not required. Most companies must report yearly on the extent of their foreign ownership. Books must be kept at a company’s head office in Canada.
Fees. The charge for a federal incorporation certificate is C$250 (C$200 if the application is submitted electronically). Fees for provincial incorporation vary. In Ontario, it is C$360 (C$300 if the application is submitted electronically). Additional fees may be payable. For federally incorporated companies, a certification of amendment costs C$200, a certificate of continuation C$200, and a certificate of amalgamation C$200.
Types of shares. There are no restrictions. Classes of shares may be voting or non-voting, although articles of incorporation normally set out provisions for non-voting shares to acquire a vote (if certain conditions are not fulfilled or in the event of a takeover proposal). Some shares may be issued with multiple voting rights. Shares must be registered, with nominal or par value. A corporation may acquire its own shares, but a publicly traded company must make its intentions known to the securities authorities and the public.
Control. A majority of voting shares usually constitutes control. Minority shareholders have appraisal rights and oppression remedies. Derivative actions by shareholders in the name of the company are legitimate. Further information on federal incorporation can be obtained from the Corporations Directorate. Each province has a department that administers consumer and commercial matters, including incorporation; these can be located through the federal government’s Strategis website.
Establishing a branch
For several reasons, including taxation and operating efficiency, most foreign companies in Canada choose to set up a subsidiary rather than a branch operation. A branch must be registered in each province in which it plans to conduct business. Having an office or a resident agent in the province qualifies as conducting business; merely soliciting orders through a travelling salesperson or by mail does not normally require registration.
Branches must be registered in all Canadian provinces except Prince Edward Island, where they must be licensed. Registration or licence fees for branches are usually levied at the same rate as incorporation fees. The provincial authorities also require certain information about branch operations in their provinces, including copies of the articles of incorporation and/or designation of an agent for service of process upon the company. In Ontario, further information on company registration is available from the Companies Branch, Ministry of Consumer and Commercial Relations.
Setting up a company
Companies can be incorporated federally under the Canada Business Corporations Act (CBCA) or under any of ten provincial corporate statutes. Although the laws are similar, the federal act is broader and provides protection for a company’s name nation-wide. It may also help in negotiating global business agreements. Federal incorporation also side-steps some provincial rules (such as those requiring directors and officers to be local residents).
A provincial incorporation may be preferable if a company’s business ambitions are limited or if it intends to have large holdings of real estate in any one province. For operations outside a home province, extra-provincial registration is sometimes required. Companies may choose how their names will be registered.
Canadian law distinguishes between private and public companies (those with one or a few owners and those with publicly traded shares), but legal incorporation is the same, and the difference cannot be distinguished by their corporate names. The incorporating documents of private companies generally limit the number of shareholders to less than 50, and they are prohibited from selling shares to the public. Most foreign companies set up Canadian subsidiaries as private companies.
Whether private or public, nearly all company names include “Limited”, “Incorporated” or “Corporation”. Company names may be in English or French or in both languages. Foreign subsidiaries often include “Canada” or “Canadian” in their names to distinguish them from their parent companies. A French-language version of a company’s name must be used in Quebec.
Under the CBCA or a provincial act, a company can be formed by filing articles of incorporation and other documents. Prior notification for guidance is possible and can ensure that a proposed company name is not already taken. Federal applications are filed with the Corporations Directorate, Industry Canada. Applications by fax or e-mail (through the Industry Canada website) are also accepted. Incorporation is granted with a certificate, which indicates a start date for the business. Federal incorporation usually takes a week and costs C$250 (C$200 if done online). The fee in Ontario is C$360 (or C$300 online). Registration fees are required in some provinces before a business can begin operating.
Articles of incorporation must indicate the name of the company, any restrictions on its business activities, its share structure, restrictions on the transfer of shares and the number of directors. In British Columbia and Nova Scotia, two documents must be filed: (1) the “memorandum”, which provides the company’s name, restrictions on its business, its authorised capital and the names of its shareholders; and (2) the “articles”, which govern a company’s internal affairs. In other jurisdictions, the “articles” required in British Columbia and Nova Scotia are enacted by directors and shareholders as byelaws after a company has been incorporated.
Most incorporation laws require that many directors (sometimes a majority) be resident Canadians. Under the federal act, 25% of directors must be Canadians. In Alberta, at least half must be Canadians and in British Columbia a majority of Canadians is required.
Foreign companies often start business in Canada through partnerships or joint ventures. Partnerships are not taxable in Canada, and income or losses flow through to the partners and are taxable in their accounts. If large losses are expected in the early years of a joint venture, partnerships permit the losses to be written off as expenses in a profitable parent company. Joint ventures are common, though they are not legal entities. If joint ventures are formed, documentation should state the responsibilities of the participants and indicate that a full partnership is not intended; otherwise, a joint venture will be regarded as a partnership in any legal context.
BUSINESS TAXATION
Overview
Taxes on Canadian companies are generally higher than in the US, which has been a disadvantage since the two economies are highly integrated and compete for investment and human resources. The federal government and most provincial governments have lowered taxes in recent years. Officials believe this helps to spur economic activity and to curb the expansion of the underground economy, which accounted for 16% of the value of goods and services sold in the mid-1990s, according to a study published in early 2002 by the Canadian Tax Foundation. A decade of economic growth in the 1990s—and high taxes and surtaxes—enabled the federal and most provincial governments to balance their budgets, to begin reducing their debts and to start cutting taxes. Tax cuts have mostly benefited individuals and smaller, entrepreneurial businesses.
Companies pay taxes to three levels of government: federal, provincial and municipal. These include income, capital, property, sales and excise taxes, and some special taxes, such as royalties for resource exploitation. Taxes on corporate income are collected at two levels, the federal and provincial governments. Combined tax rates vary, depending on the province where a business is located. However, a tax cut by one province puts pressure on its neighbours—spurring British Columbia, for example, to match or improve on neighbouring Alberta’s low rates. Companies incorporated in Canada are considered resident in Canada and taxed on global income.
Both federal and provincial governments (other than the province of Alberta) assess a tax on paid-up capital. This tax primarily impacts financial institutions, but other types of companies are also affected. Some jurisdictions are reducing or scrapping these taxes as more governments accept the principle that only profits should be taxed and that other levies are a disincentive to investment. In its budget for 2003/04, the federal government indicated that capital taxes would be eliminated over five years. Small steps were taken to begin that process for fiscal 2004/05.
In December 2003 the former Canada Customs and Revenue Agency was split in two. One new unit, the Canada Revenue Agency (CRA), is the main collector of income taxes and dispenser of tax credits. The other is the Canada Border Services Agency (CBSA), formed in response to terrorism. It is responsible for national security, crisis management, monitoring crossborder traffic, applying customs rules, and levying and collecting duties.
Federal payments go to the provinces to help pay for various services, such as healthcare, education and welfare. These transfer payments also redistribute wealth, with the “have” provinces of Ontario and Alberta, in effect, helping the other “have-not” provinces. The provinces in turn provide some funding to the municipalities. Federal payments were reduced during the recession of the early 1990s, which put financial pressure on the provinces and municipalities. Municipalities collect revenue in the form of property taxes, business taxes and other fees. But the federal government has also begun to make direct contributions to large cities to help cover their growing deficits.
Canada has a variety of tax incentives for corporations. Manufacturing and processing companies may be eligible for tax reductions of up to 9%, depending on the province where they operate and whether a business is located in a depressed area. Other reductions are open to Canadian-controlled private corporations that are not available to a wholly owned subsidiary of a non-resident. From time to time, Canadian governments have raised allowable depreciation rates to stimulate investment. The March 2004 budget raised the depreciation rate for computer equipment to 45% (from 30%), and for Internet-related investment to 30% (from 20%).
Besides income and capital taxes, the federal government and nine of the ten provinces collect a consumption tax on goods and services. Under the Federal Excise Tax Act, nearly every business with income exceeding C$30,000 participates in this system. The federal goods and services tax (GST) of 7% is a type of value-added tax. Alberta is the only province without its own corresponding consumption tax. Three Atlantic provinces (New Brunswick, Newfoundland and Labrador, and Nova Scotia) harmonised their provincial taxes with the federal government, producing a combined tax of 15%. The other provinces charge consumption tax at various rates and on a differing range of goods and services.
Many foreign companies begin doing business in Canada through branch operations so that the parent company can write off large start-up losses. The switch to subsidiary structure is often made later. In the long term, branches may create complications in allocating expenses and profits, making it challenging to prepare financial statements that satisfy tax officials in both Canada and the foreign parent’s country. Moreover, there is a branch tax on non-resident companies of 25% of branch profits after tax. This is intended to equalise the tax position of foreign companies that operate through branches or through a Canadian subsidiary. Tax treaties affect the rate of branch tax, however, and US branches are taxed as low as 5%.
Canada’s general corporate income tax rate has been lowered over the past four years from 28.12% (including a 1.12% surcharge) to 22.12% for 2004. Progressive cuts were promised in the 2001/02 federal budget, and differentials between general corporate rates and those for manufacturing and resource development have been eliminated. No further reductions have been promised. The government has said it believes its income taxes are internationally competitive, although economic think-tanks and the IMF have pointed out that Canadian rates are significantly higher than those in the US, its most direct competitor for investment. The federal Canadian-controlled small-business tax rate is 13.12% (including surtaxes) on income up to C$250,000 for 2004 (a threshold increase of C$25,000). The threshold is to be raised to C$300,000 for 2005.
Most provinces have also steadily dropped their corporate tax rates.
The highest combined (federal and provincial) general corporate tax rate for 2004 is 39.12% in Saskatchewan and the lowest is 31.02% in Quebec. Ontario’s combined rate, the lowest among provinces in 2003, is 36.12% for 2004, reflecting the current Liberal government’s rollback of cuts enacted by the previous Conservative government. Some provinces—such as Newfoundland and Labrador, Ontario, Prince Edward Island and Saskatchewan—tax manufacturing and processing (M&P) companies at lower rates, producing lower combined rates for those sectors.
The combined tax rate for Canadian-controlled small business for calendar year 2004 is highest in Quebec, at 22.02%, and lowest in New Brunswick, at 15.87%. Ontario’s combined small-business tax rate is 18.62%. Most provinces have been encouraging smaller enterprises by giving them lower tax rates and higher income thresholds to which those rates apply. For calendar year 2004, income of up to C$412,500 is being taxed at 2.75% in New Brunswick, and income of up to C$400,000 is being taxed at 3.25% in Alberta and 5.5% in Ontario. Quebec’s small business taxes are the highest, at 8.9% on income of up to C$300,000.
Provincial tax is calculated by allocating taxable income to the province in which a company has a permanent establishment. Considerations in this calculation include revenues and salaries attributable to each province in relation to a company’s total revenues and salaries. Each provincial tax rate is then applied to income from the portion of business done in that province. Alberta, Ontario and Quebec collect their own corporate taxes and require taxable companies to file provincial returns separately from their federal returns. The federal government collects taxes for the other provinces and territories; a separate return is not required.
The federal government has occasionally imposed surtaxes on corporate income tax; a 4% surtax is now in place. The federal government and the provinces levy a variety of capital taxes. There is no excess profits tax or minimum tax other than the corporate minimum tax in Ontario.
Non-resident companies, including those with licensed branches in Canada, are taxed at general rates. Branches pay a special 25% tax on their Canadian earnings, after deducting federal and provincial income taxes and any net increase in capital permanently invested in Canada. The branch tax is applied regardless of whether profits are distributed or repatriated. The rate is reduced to 15% for the branches of many foreign countries under tax treaties; the present rate for US companies is 5%. Companies that operate in Canada from a foreign base, or through local independent salespersons, would ordinarily be liable for taxes on profits made in Canada. But double-taxation treaties generally provide a safeguard against payment of Canadian taxes.
Royalty payments for exploiting natural resources (oil and gas, minerals and timber) are common in Canada. Federal royalty payments are collected on resource production on federal Crown lands, including the northern territories and offshore locations. Provincial resource royalties and taxes are collected on resource production on provincial crown lands.
For example, Ontario has a flat 10% tax on mining profits exceeding C$500,000. Quebec applies a 12% duty on mining profits. British Columbia has a range of taxes for different minerals, but its general rate is 12.5% of net income.
All provinces charge for timber rights and rates vary. In British Columbia and Quebec, two provinces with large forest operations, the tax on profits is 10%, but one-third may be credited against provincial income taxes.
Taxable income and rates
Taxable income defined
Taxable income is the total of net income from business and other activities and property disposals, plus one-half of net gains on the disposal of capital assets within or outside Canada. Companies resident in Canada are generally subject to federal tax on their worldwide activities, regardless of whether the income is remitted to Canada. Income from a branch of a Canadian company in a foreign country is taxed in Canada as part of global income, and losses from foreign branches are deductible. Non-resident companies are taxed only on local income.
All normal operating costs, from the purchase of supplies to wages, are deducted in determining income, though special rules apply to some expenses. There are limits to amounts that can be spent to buy or lease cars; and advertising in foreign-owned publications is not a tax-deductible expense (a measure enacted to protect the domestic publishing industry). Some provinces, which also collect income taxes, limit expenses. Ontario has special limits on deducting royalties, rents and management fees.
Under the thin-capitalisation provisions of Canada’s Income Tax Act, the deductibility of interest paid on a loan by a non-resident to a Canadian company may be restricted. This is done to discourage the financing of subsidiaries with a high level of debt, on which interest payments can be written off as expenses. These rules apply to interest paid or payable to a non-resident creditor who is either a 25% shareholder or a relation. Interest on such debts is not deductible for a Canadian-owned company to the extent that, at any time during a year, the loans exceed a 2:1 debt-to-equity ratio (lowered from 3:1 in 2001). If the 2:1 ratio is exceeded, there is a proportionate denial of otherwise deductible interest. Loans made by arm’s-length third parties are not affected unless the non-resident shareholder has lent money to a third party on the condition that it is given as a loan to the subsidiary.
Dividends received from other Canadian companies are deductible, as they have already been taxed. Private companies may deduct taxable dividends received from portfolio investments of shares in other companies, but these are subject to a special refundable tax of 33.3%. Dividends from non-resident companies doing business in Canada may be deductible, depending on the ratio of taxable income earned in Canada to income earned worldwide. Dividends from foreign affiliates, or a portion thereof, may also be deductible, depending on the specific facts and circumstances.
When losses (excluding net allowable capital losses) and deductions from net income exceed income from all sources for a year, a non-capital loss results. These losses may include an allowable business investment loss—a special type of loss equal to one-half of capital losses on an arm’s-length sale of equity or debt in specified Canadian-controlled private companies. Non-capital losses, including business losses that cannot be taken in the current year, may be carried back three years and forward for ten years (changed from seven in the 2004/05 federal budget). The deductible portion of the loss is limited to income for the year minus other deductions. Net capital losses (half of capital losses minus capital gains) may be carried back three years and forward indefinitely, and they are applied against net capital gains.
Reserves are not usually deductible for tax purposes, unless they represent determinable liabilities or are specifically allowed as deductions.
Depreciation
Capital cost allowances are generally calculated on the declining balance. For buildings acquired after 1987, the rate is 4%; for most machinery, 20%; for cars, lorries and mining equipment, 30%; for heavy construction and excavation equipment acquired after 1987, 30%; and for dies, jigs and patterns, 100%. Some assets require straight-line depreciation. For example, leasehold improvements are written off on a straight-line basis over the term of the lease, plus one renewal period, if applicable. The minimum period for depreciation is five years. Assets may not be revalued.
More generous allowances have been introduced in recent years for technology-related equipment. Assets that tend to become obsolete quickly (like photocopiers, computers, fax machines and telephone equipment) may be included in a separate class to ensure that a terminal loss may be claimed on disposal of all the property in the class. In its March 2004 budget, the federal government raised the depreciation rate on computers and related equipment to 45% (from 30%) and for Internet investments to 30% (from 20%). Limited life patents and related licences may be written down based on the life of the asset. Depreciation rates of 30% apply to machinery and equipment (acquired after February 1992) that is used in manufacturing and processing, including process-control computers.
Depreciation begins in the year the assets are available for use. For most assets, the “half-year” rule limits capital cost allowance in the year of acquisition of an asset to one-half of the amount computed in accordance with the applicable rate. Companies may claim less than the maximum depreciation allowed in any one year. Unclaimed amounts remain in the undepreciated balance and may be used in future years.
For any asset that is sold during the year, its class of depreciable property is reduced by the amount of the proceeds of the sale, but limited to its original cost. If assets in the pool are sold for more than the undepreciated capital cost, the amount of the excess, up to the original cost, is included in taxable income. Any proceeds exceeding the original cost are treated as a capital gain.
Capital gains taxation
One-half of capital gains are included in taxable income for the year in which they are realised. Capital losses may be carried back for three years or forward indefinitely, but are deductible only against capital gains. Non-arm’s-length transactions are deemed to have been conducted at fair market value. There is no adjustment or inflation component for gains.
Gains from long- and short-term holdings receive the same tax treatment, as do different types of assets such as real property and share certificates. A 1997 tax treaty protocol between Canada and the United States stipulates that US investors in US companies with property in Canada are not subject to Canadian capital gains taxes if they sell.
If Canadian shareholders exchange shares for cash in a merger or takeover, they are taxed on the capital gain. Many acquisitions are accomplished with a combination of cash and shares, permitting a tax-free rollover if an exchange of shares is chosen. Where foreign companies acquire Canadian firms in share transactions, considerations such as ensuring the continuation of Canadian pension plans (which have a 30% limit on foreign holdings), may require special attention.
Foreign income and tax treaties
In mid-2004 Canada had treaties in place with 83 countries to prevent or reduce double taxation; treaties with nine others had been signed but not yet enacted. Negotiations, or renegotiations, with another 17 countries had been undertaken.
Treaties signed but not yet ratified were with Armenia, Azerbaijan, Belgium, Gabon, Ireland, Italy, Lebanon, Oman and Romania. Negotiations or renegotiations were under way with Barbados, Bolivia, China, Colombia, Costa Rica, Cuba, Egypt, Finland, Greece, Republic of Korea, Mauritius, Mexico, Serbia and Montenegro, Saint Lucia, Singapore, Turkey and the US.
Transfer pricing
Planning for methods, documentation, penalties and other transfer-pricing issues is a complex undertaking. Tax authorities generally assume that payments by a Canadian subsidiary to a foreign parent (for direct purchases, shared expenses or management fees) are a reasonable cost of doing business and therefore deductible. However, transfer pricing is regulated. If goods or services are purchased from a non-resident parent or a related company at prices higher or lower than if they had been made in arm’s-length negotiations, the Canadian subsidiary is deemed to have paid the lower or higher competitive price for the purposes of computing income tax.
The federal government requires taxpayers to maintain contemporaneous documentation for crossborder, related-party transactions. A special annual corporate information return (Form T-106) requires detailed reporting of non-arm’s-length transactions between a Canadian company and each of the related foreign entities that it transacts with during the year. Each type of intercompany transaction (except for dividends and interest) must be classified under one of seven transfer-pricing methods: comparable uncontrolled price, cost-plus, resale, profit split, transactional net margin, qualifying cost contribution arrangement and other. These methods must be identified not only for goods bought and sold but also for rents, royalties, licence and franchise fees, commissions, services and other intangibles. A Canadian company must file one of these forms for each of the related foreign parties with which the company transacts.
The Canada Revenue Agency has published an Information Circular providing guidance with respect to the Canadian transfer pricing rules, which are in line with the OECD’s transfer-pricing guidelines for multinational enterprises and tax administrations.
The province of Ontario also has limitations on deductions of royalties, rents and management fees for income tax purposes.
Turnover and other indirect taxes and duties
The federal government imposes a 7% goods and services tax (GST) on sales within or imports to Canada, with a number of exceptions, as noted below. All the provinces except Alberta have a consumption tax on goods; some also tax services.
Some services are exempt from the federal GST, such as basic groceries, long-term residential leases, health services and domestic financial services. The tax is generally applied to imported goods, based on their duty-paid value, but not to imported services and intangible property such as patents and trademarks.
Businesses remit the federal GST based on the value added in bringing their goods or services to market. Value added is the difference between the selling price and the cost of materials and purchased services, excluding the input of the company’s employees. Each registered supplier of taxable goods or services collects the tax from the purchaser and passes it on, periodically, to the Canada Revenue Agency. Suppliers deduct from their collections any of the tax they have paid on their own purchases, known as input-tax credits. Refunds are made if more tax was paid than was collected. Essentially, the end-consumer pays the full tax, but increments are allocated through the production and distribution process.
Companies with annual sales of more than C$6m must file their GST returns and tax payments monthly. Companies with sales of C$500,000–6m a year may file their returns and payments quarterly. Companies with sales of less than C$500,000 may file annually and remit tax payments either quarterly or annually. Businesses with sales of less than C$30,000 are exempt from the GST, as are most services charities provide.
Among the provinces, separate sales tax rates are as follows: none in Alberta; 7% in Saskatchewan and Manitoba; 7.5% in British Columbia and Quebec; 8% in Ontario; and 10% on Prince Edward Island. The provinces of New Brunswick, Newfoundland and Labrador, and Nova Scotia have harmonised their sales taxes with the federal government’s GST at 15%. Quebec adds the federal tax to the price on which the provincial tax applies, resulting in a total tax at the cash register of 15.025%, which is included in the market price of goods and services. In other provinces, the GST and provincial sales taxes are added to the bill separately at the point of sale.
Federal excise taxes apply to the manufacturer’s selling price on a variety of items, including cigarettes and tobacco, petrol, alcoholic beverages and jewellery. Provinces also tax tobacco and alcohol. Diesel fuel, propane, aviation and marine fuel are taxed at lower rates than petrol for automobiles.
Other taxes
The federal government manages social programmes—primarily Employment Insurance (EI) and the Canada Pension Plan (CPP)—that require record-keeping and payments on behalf of employees. These are not taxes, but they are related to the tax system.
Employees and employers must pay into the EI fund, which compensates those who are temporarily out of work. Employee premiums are C$1.95 for each C$100 earned in 2005, with a maximum contribution of C$761. Employer contributions are 1.4 times the employee level, or C$2.73 for each C$100 earned, to a maximum contribution of C$1,065. Part-time and casual workers are also eligible for EI benefits. Certain small businesses are exempt from premium payments.
Contributions by employees and employers to the CPP have been raised gradually to ensure solvency of the plan when more Canadians reach retirement age. The employee contribution rate is 4.95% of earnings for 2004 and 2005 (the same as in 2003, but up from 4.7% in 2002 and 4.3% in 2001). Employers match these contributions, producing a combined 9.9% rate for 2004 and 2005. Maximum pensionable earnings for 2005 are C$41,100 (up from C$40,500 in 2004). The maximum employer and employee contribution to the plan is C$1,861.20; the maximum contribution by self-employed workers is C$3,722.40 CPP payments on retirement are based on the length of time and how much an individual contributed to the CPP over the years.
Manitoba, Newfoundland and Labrador, Ontario and Quebec tax employer payrolls to help finance health services, which are provided under Canada’s universal healthcare programmes. The present rate for healthcare in Ontario is 1.95% (on payrolls over C$400,000) and in Quebec ranges from 2.7% (on payrolls under C$1m) to 4.26% (on payrolls over C$5m). In Manitoba, taxes ranging from 2.15% to 4.3% cover post-secondary education as well as healthcare. Newfoundland and Labrador also has a healthcare and education tax of 2% on payrolls exceeding C$600,000.
In all provinces, companies must contribute to provincial Workers Compensation boards, which provide insurance benefits for workers injured on the job.
Tax compliance and administration
Tax returns are due within six months of the end of a company’s tax year. Monthly instalments of estimated tax are payable throughout the year. The Canada Revenue Agency’s Corporation Internet Filing Service began operation in October 2002 and most large- and medium-size companies report electronically.
PERSONAL TAXATION
Taxable income and rates
The personal tax burden on Canadians is among the highest in countries that are members of the OECD, despite reductions in recent years. Personal taxes account for three times as much federal government revenue as corporate taxes—an estimated C$87bn for fiscal 2004-05. Besides federal and provincial income taxes, Canadians pay consumption taxes to the federal government on most purchases (the 7% goods and services tax, the GST) and to all provinces (the provincial sales tax, the PST), except Alberta.
High income tax rates in Canada are mainly the result of a large social-support system, including government-paid healthcare and lower-cost university education. Recent budgets from Canadian federal and provincial governments have reduced taxes and increased disposable income.
In 2001 the federal government promised to reduce personal income taxes by C$100bn by 2004. It stated that a two-income family of four with total earnings of C$100,000 would save C$2,666 in taxes (or 17%) at the end of the three years. During the same period, personal tax rates were also lowered in most provinces, with low- and medium-income earners the main beneficiaries. In Ontario the combined federal-provincial tax rate on C$30,000 of annual income dropped from about 28% in 2002 to 25% in 2004.
However, tax levels differ significantly among provincial jurisdictions. In Alberta, with a single provincial tax rate of 10%, the combined tax rate for 2004 on personal income of C$35,000-70,000 is 32% and the maximum rate for income over C$113,000 is 39%. In Ontario combined taxes on C$35,000-70,000 of income range from 33% to 39%, and the rate on income over C$113,000 is 46.4%. The highest combined rates for 2004 (on income over C$113,000) are in Newfoundland and Labrador (48.6%) and Quebec (48.2%).
Foreign business personnel do not receive any special tax considerations, and US citizens who work in Canada must usually file tax returns in both Canada and the US. Application of the Canada–United States Tax Convention can reduce the overall tax burden. Transferees qualify for Canadian medical benefits. To counter higher Canadian tax rates, foreign parent companies often use some sort of tax-equalisation plan.
Following reductions in federal and provincial tax rates, indexing for inflation and the near-elimination of surtaxes, many Canadians have more disposable income today than a few years ago. The top marginal rate for federal taxes was lowered from 31% in 1999 to 29% for 2001 where it has remained into 2005. In Ontario the combined federal-provincial top marginal rates have dropped from just under 49% in 1999 to 46.4% in 2005. In Alberta, with the lowest top marginal rates of all the provinces, the decline in the combined top rate is most evident—from 45.6% in 1999 to 39% in 2001-05.
Tax rates for 2005 remain much as they were in the previous three years. No federal tax is payable on income under C$8,148. Federal tax payable on income from C$8,149 to C$35,595 is 16% (basic rates were not changed, but all dollar amounts rose from 2004 levels to reflect inflation). Tax on the next bracket—C$35,595-71,190—is 22%, and on the next—C$71,190–115,739—is 26%. The rate on income exceeding C$115,739 is 29%. The indexation of tax rates was restored in the 2000 budget, so Canadians are no longer being nudged into higher tax brackets with inflation-related pay increases.
Several provinces have lowered personal tax rates more dramatically. No taxes are payable on income ranging up to C$6,365 in Quebec and C$14,523 in Alberta. The latter province, the friendliest tax jurisdiction, lowered its single personal tax rate by a half point to 10% in 2001, where it has since remained. British Columbia, Alberta’s neighbour to the west, was a high-tax province, but the government that was elected in 2001 reduced personal taxes by 25% and introduced five tax brackets (compared with three or four in most other provinces). British Columbia taxes individuals at a 6.05% rate on income of C$8,676-33,061, at 9.15% on C$33,062–66,123, at 11.7% on C$66,124–75,917, at 13.7% on C$75,918–92,185 and at 14.7% on amounts above C$92,185.
Ontario has three tax brackets. Income is taxed at a 6.05% rate on C$8,196-34,009, at 9.15% on C$34,010–68,020 and at 11.16% on amounts above C$68,020. Ontario’s new health premium, levied in the 2004/05 budget, raised total tax payments by C$300-900 for 2005 in flat charges, plus levies on 25% of income over C$36,000.
Quebec’s personal tax rates have been trimmed but are still the highest in the country, with the lowest tax bracket at 16% and the highest at 24%. Quebec has adopted some special credits to provide partial compensation for its rates. These include C$280 for a single parent and C$226 for someone living alone. Effective January 1st 2005, Quebec has introduced a new Child Assistance measure that replaces the current Quebec family allowance, the non-refundable tax credit for children and the tax reduction for families. New Brunswick and Saskatchewan are doing less to cut rates but are shifting more taxpayers into lower brackets and increasing credits for other family costs.
Determination of taxable income
Taxable income for Canadian residents includes worldwide income from wages and salaries, pensions and annuities, unemployment insurance benefits, capital gains on the disposal of investments, interest and dividend income. Old-age security benefits given to high-income earners are reduced under a formula; child tax benefits are not taxable. Excluded from the tax base are gifts, inheritances, lottery winnings and veterans’ pension payments. Some personal expenses are partially deductible for tax purposes, including the cost of childcare for working parents. Canadians who do not reside in Canada are taxed on Canadian income and capital gains from the disposal of Canadian property. There is a lifetime exemption of C$500,000 on capital gains from the sale of a small business or farm property, and no tax is paid on the proceeds from selling a principal residence.
Income from interest-bearing notes is taxed at marginal rates, because payments by note-issuers are a pre-tax expense. But since dividends are paid after corporate taxes, individual taxpayers may claim tax credit on dividends. Dividends from taxable Canadian companies are grossed up by 25% before being included in taxable income. The dividend-tax credit then reduces a taxpayer’s basic federal tax by 13.5% on the grossed-up dividend income.
Payments into Registered Retirement Savings Plans (RRSPs), which are limited by federal government regulation, are the main tax exemption for most Canadians. Contributions are limited to 18% of earned income up to C$15,500 for 2004; this is scheduled to rise to C$18,000 in 2006. A homebuyer’s plan permits borrowing of up to C$20,000 from an RRSP to buy a first house.
Some employment expenses (eg cars, entertainment and home offices) may be deducted from personal income, but amounts are restricted. Medical costs not covered by the healthcare system may also be deducted, but only by the lesser of C$1,813 or 3% of net income. Similar deductions cover education costs and the care of a disabled person.
Low- and even middle-income families receive payments for having children and are eligible for goods and services tax (GST) credits. For a family with income of C$32,000 in 2005, the monthly basic Canada Child Tax Benefit (CCTB) is C$131 for a first child, C$258 for two children and C$808 for five children. The same family with one child receives an annual GST credit of C$422, C$540 for two and C$776 for four or more. A family of four, with income of C$32,000, receives more in benefits with the CCTB and the GST credit (obtainable through a separate application) than it pays in personal income taxes. In effect, it pays no net tax.
Although all Canadians must pay the GST on purchases, there are some general exemptions as well as credits for low-income earners. Basic groceries (as defined by the Canada Revenue Agency), medical devices and prescriptions are zero-rated, so no GST is paid on them. And any payments on cost inputs are refundable. Also exempt from the tax are residential rents, educational services, financial services, used housing, legal aid, health services and day care. Suppliers of these services are not liable for GST, but they may not claim a refund on any inputs.
To offset the regressive nature of the GST, an annual tax credit is available for an individual or family with no children and total income of less than C$35,000 in 2004. The credit is reduced for incomes above the threshold. The tax credit can rise as high as C$934 for a family with four children and income under C$29,000. Several provinces also offer sales-tax credits to low-income taxpayers.
Residency
Non-Canadians who stay in the country for 183 days or more in a calendar year are generally considered residents and liable for Canadian income tax on their worldwide income. Those who work in Canada for shorter periods are considered non-residents and are usually taxed only on their Canadian-sourced income, such as salary and capital gains. Non-residents also benefit from double-taxation treaties.
Individuals employed by companies or other organisations usually have personal taxes deducted from their pay and remitted to the government. Those who are self-employed (or for other reasons do not have taxes deducted by an employer) must usually make quarterly payments based on estimated income. Tax returns for most individuals must be filed by April 30th of the year following the tax year.
Capital taxes
There are no additional taxes on personal capital, net worth or property. |
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