- Key Considerations for Foreign Businesses Expanding to Canada
- April 23, 2015
- Law Firm: Houser Henry Syron LLP - Toronto Office
- Sales Tax
Sales taxes are complicated. A foreign company, with a place of business and sales in Canada, is responsible for collecting sales tax for its sales in Canada. If the foreign company fails to properly collect or pay Canadian sales tax, it can result in substantial interest and penalties against that company.
Canada has a value added tax regime, which applies to the sale of most goods and services in Canada. The Federal sales tax of 5% is known as Goods and Services Tax, or “GST”. Many provinces have a separate provincial sales tax. Some provinces, such as Ontario, merge this provincial sales tax and federal sales taxes into a Harmonized Sales Tax, or “HST” administered by the Federal Tax Authority, Canada Revenue Agency. HST in Ontario is 13%.
When the business pays sales tax, it receives input tax credits. These input tax credits are used to offset the required GST/HST remittance on their own Canadian sales.
Employee Termination Pay
Before terminating any of your Canadian employees, it is important to understand your employment obligations to them. Failure to do so can result in additional costs to and potential legal proceedings against the employer.
The law in Canada does not recognize the concept of “employment-at-will.” A Canadian employee who is terminated without just cause is entitled to reasonable notice of termination or pay in lieu of notice.
For a discussion on terminations and reasonable notice, please refer to our publication FAQ: Employee Terminations where we explain the deeper implications of employee scenarios in Canada.
A foreign company with sales into Canada may be required to file a Canadian tax return. Failure to properly report income tax to the Canada Revenue Agency may expose your business to penalties and interest charged to overdue taxes.
Non-resident companies with Canadian income are required to file a Canadian tax return and pay tax on their Canadian source income. However, tax treaties between Canada and the non-resident company’s home jurisdiction may reduce this income tax liability. Where a tax treaty is in place, a company’s Canadian source income may not be taxed unless the non-resident company has a “permanent establishment” in Canada. Whether or not a company has a “permanently establishment” in Canada depends on the facts which may include having a Canadian office or an employee who is normally resident in Canada.
“Flow-through entities” in Canada
When planning your entrance into Canada, it is important to understand that a foreign limited liability corporation (“LLC”) will be treated as an ordinary business corporation for tax purposes.
The LLC is not recognized under Canadian law. In Canada, the LLC is taxed as any other corporation. This means that the LLC is liable to pay corporate tax on its Canadian source income and required to report such income on a T2 Corporation Income Tax Return.
For more information, please refer to our guide on Doing Business in Canada or contact one of our business lawyers directly; we’d be pleased to help you.