Americans in the states along the Canadian border may see the Canadian market as another opportunity to expand their businesses. For US-based online businesses, the Canadian market may seem like an easy way to dip their toes into the waters of international business. But doing business in Canada isn’t as easy as providing goods and services across the bridge. Canada’s federal and provincial layers of government and vastly different tax systems can present a challenge to ambitious but unsuspecting business owners.
In this guide, we’ll look at some of the things to be aware of when expanding your business to Canada.
The Canada Revenue Authority will tax the portion of foreign-based income that is related to goods or services provided to Canadians. For example, if you have a Maine-based business, but 25% of your revenue is from your sales in Canada, that quarter of your revenue will be taxed by the CRA.
Canadian corporate tax is divided into two parts: a federal corporate tax rate of around 15% and a provincial tax rate of between 8-16%. Combined with other provincial taxes, the final corporate tax rate for Canadian businesses is around 27-30% of net income. Alberta has the lowest overall taxes, whereas British Columbia and Ontario have higher taxes. Similar to the US, there may be tax credits available for certain industries that can reduce the overall rate.
The US and Canada maintain a tax treaty to avoid double taxation of businesses that conduct operations in both countries. If you plan to conduct business in both countries, it’s worthwhile to consult with a tax advisor. They can help you plan the best business structure for your Canadian business operations.
It is worth noting that while the US allows LLCs to act as a pass-through entity, where the income passes directly to the owner’s personal tax return, Canada does not. In Canada, a US-based LLC would receive exactly the same tax treatment as a standard corporate entity.
Certain Canadian income paid to a nonresident owner may also be subject to a withholding tax. This is because the Canadian government wishes to encourage their domestic businesses over foreign investment. Because of tax treaties, the withholding tax for US businesses in Canada can be as low as 5% of passive income derived in Canada, but it can be as high as 25%. This is not applicable to all Canadian income sources, but merely specific passive income such as dividend, interest, and royalty income from Canadian sources.
Canada’s sales taxes are different than the US. Like the corporate taxes, the sales tax has both a federal and provincial component. The federal GST is 5% across most industries, and the provincial tax varies between 5-15%. There are some categories of essential goods and services that are exempt from GST, and there are others that, while non-exempt, pay a 0% sales tax. The GST amount is paid by the customer, collected by the business, and remitted to the government.
Nonresidents, including online businesses, doing business in Canada are required to register with the CRA for GST/HST. Sales tax is remitted quarterly or yearly, depending on overall revenue.
Every bit of Canadian income tax paid by US companies doing business in Canada can be treated as a tax credit for US income tax to avoid double taxation. Since the corporate tax rate is quite similar between the US and Canada, there may be very little overall benefit to paying tax in one country versus another, but it is worth consulting with a tax advisor who can speak to your specific situation.
Canadian business taxes can be complicated, and the penalties for non-compliance are often quite high. If you are considering expanding your US business operations to Canada, it can mean learning an entirely new set of rules and regulations for your business. The experts at Canadian Tax Compliance can help you make this important step. Contact Canadian Tax Compliance to discuss your specific business needs.
References:
https://www.bnncpa.com/resources/doing-business-in-canada-requires-an-understanding-of-their-taxes/
https://ca.usembassy.gov/business/getting-started-canada/
https://mcmillan.ca/wp-content/uploads/2022/04/Doing-Business-in-Canada-2022.pdf
https://www.tmf-group.com/en/news-insights/articles/2023/july/doing-business-in-canada/
