Carrying on business in Canada.

• Author: Kroeker, Loren

In the past 15 years, direct investment in Canada has more than tripled in value; more than 65% of that investment has come from the U.S. At the end of 2004, total direct investment in Canada held by American investors totalled over $238 billion; see "Foreign direct investment," The Daily Statistics Canada (5/17/05), p. 3. It is anticipated that this figure will continue to grow as U.S. corporations seek to expand their markets. This item discusses the basic Canadian tax issues facing U.S. corporations seeking to expand their businesses into Canada and the use of limited liability companies (LLCs) and unlimited liability companies (ULCs).

Taxation of Nonresident Corporations

Under Canadian law, nonresident corporations are subject to income taxes in Canada when they carry on a business there or dispose of taxable Canadian property (generally real estate, property used in a Canadian business and private company shares). These corporations will be subject to tax at ordinary rates, which range from 31% to 39% depending on the province to which the income is allocated.

In addition to income taxes, nonresident corporations are subject to a branch tax of 25% of the profits deemed to have been repatriated to the U.S. The amount is determined by formula and is designed to replicate the withholding tax that would have been imposed had those corporations carried on their Canadian business indirectly through a Canadian corporation that distributed its after-tax business earnings via dividends.

Defining "Carrying on Business"

A question often asked is, "what level of Canadian business activity can a nonresident corporation engage in before being deemed to be carrying on business in Canada?" The term "carrying on business" is not specifically defined in the Canadian Income Tax Act (Act); rather, a common-law definition has evolved from the U.K. and Canadian courts. In addition, Act Section 253 provides an extended meaning of the term that deems a nonresident to be carrying on business in Canada if it:

1. Produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs anything in Canada;

2. Solicits orders or offers anything for sale there through an agent or servant, whether the contract or transaction is completed inside or outside of Canada; or

3. Disposes of certain resource properties or Canadian real estate.

   Accordingly, the level of Canadian activity required to be deemed to be carrying on business there is very...