NON-RESIDENT ACTIVE BUSINESS OWNERSHIP in CANADA

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For non-residents investing in Canada, contact our law firm at Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

For non-residents engaging in active business in Canada, it is essential that advance tax planning is undertaken to minimize the adverse impact of Canada's dual tax regimes that apply to their earnings. First, the active business profits earned in Canada are subject to standard Part I corporate income tax rates at the federal and provincial levels. For foreign corporations operating directly through a branch, Canada imposes an additional tax, the Part XIV Branch Tax, on after-tax profits that are deemed to be remitted to the foreign head office. This Branch Tax is intended to mimic the withholding tax that would be imposed on dividends paid by a Canadian subsidiary, thereby achieving tax parity between branch operations and incorporated subsidiaries. Therefore, non-residents must carefully model the cumulative effective tax rate on profits remaining in Canada versus those repatriated to their home jurisdiction.

Beyond the taxation of operating profits, the repatriation of funds to the non-resident investor is subject to Part XIII withholding tax, a critical component of cross-border tax planning. This flat-rate tax is generally imposed on certain passive income payments made by a Canadian entity to a non-resident, most notably dividends, but also rents and royalties. The statutory rate for this withholding is typically 25%; however, this is where bilateral tax treaties become the non-resident's most powerful planning tool. Virtually all of Canada's tax treaties reduce this rate, often to 15% or as low as 5% for qualifying substantial shareholders (i.e., corporate investors holding a significant percentage of the Canadian company's voting stock). Effective planning necessitates claiming these treaty benefits proactively via the proper forms to ensure the reduced rates are applied at the time of payment.

Furthermore, non-residents must meticulously plan for the disposition of their Canadian business interest, particularly regarding Taxable Canadian Property (TCP). The definition of TCP is broad and includes interests in private Canadian corporations where the value is principally derived from Canadian real estate or resource property [more on Taxable Canadian Property]. The sale of TCP triggers a capital gain taxable in Canada, regardless of the investor's residency. To ensure compliance and manage cash flow, the Income Tax Act requires a non-resident vendor to obtain a Certificate of Compliance (a "Section 116 Certificate") from the Canada Revenue Agency (CRA) prior to the disposition. Without this certificate, the Canadian purchaser is statutorily required to withhold a significant portion (typically 25%) of the gross sale price, imposing a substantial temporary liquidity burden that planning seeks to avoid.

As such, successful non-resident investment in a Canadian active commercial business requires a sophisticated, multi-stage tax strategy. Effective planning involves an optimal initial structuring (subsidiary vs. branch, considering both Part I and Part XIV taxes), proactive management of withholding taxes on profit repatriation (leveraging applicable tax treaties), and establishing a clear exit strategy that minimizes liabilities associated with the disposition of Taxable Canadian Property (using Section 116 clearance). By addressing these distinctive tax rules, spanning corporate liability, profit extraction, and divestiture, non-residents can appropriately mitigate risks and ensure the long-term profitability of their Canadian investment.

For knowledgeable and experienced tax, investment and corporate law representation for non-residents looking to invest in Canada, whether through active business enterprises, passive income investments or real estate investments, we welcome you to contact our law firm for strategic legal advice to optimize your commercial interests in Canada at Chris@NeufeldLegal.com or call 403-400-4092 / 905-616-8864.

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