Canada Tax & Business Guide - Deloitte

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Basic facts
Population 32.6m Inflation 1.9% (2006)*
Main languages English, French GDP per head US$39,420*
Currency Canadian dollar (C$) GDP growth 2.7% (2006)*
Economic communities Asia Pacific Economic Co-operation, North American Free Trade Agreement, OECD, WTO
GDP sources 2.2% agriculture, 29.0% industry, 68.8% services
*Economist Intelligence Unit estimates.
Political environment

Canada is a democratic confederation of ten provinces, each with substantial powers, and three territories. Stephen Harper, the Conservative Party leader, is the prime minister. The next election is scheduled to be held no later than January 2011.
Foreign trade and investment
Exports US$414.2bn (2006)* Imports US$356.4bn (2006)*
*Economist Intelligence Unit estimates.

Leading export markets: The US, the EU, Japan and China.

Major exports: Natural resources (energy and forest products), machinery and equipment, and automotive products.

Foreign direct and indirect investment in excess of specified threshold amounts requires the approval of Investment Canada, a federal agency, but few requests are rejected.
Business and financing
Business forms Incorporated limited liability company, branch, partnership, joint venture, trust

The majority of foreign firms operate through a Canadian subsidiary rather than a branch because of taxation and operating efficiencies. Companies may be incorporated federally, under the Canada Business Corporations Act, or under any of ten provincial corporate statutes.

Foreign companies often start businesses through partnerships or joint ventures. Partnerships are not taxable in Canada, and income or losses from a partnership flow through to the partners.
Labour environment
Unemployment rate 6.6% (2006)* Minimum wage Varies by province
*Economist Intelligence Unit estimate.

The provincial governments and the territories set minimum wages, which range from C$6.70 to C$8.50 per hour. The average wage in industry is about C$20 per hour.

All Canadians are covered by public health insurance, which provides medical and hospital care. Employers and employees must contribute to the federal Employment Insurance Fund and the Canada or Quebec Pension Plan.

Foreign nationals need permanent-resident status or temporary work authorisation (work permit) to work in Canada, and Canadian companies seeking to hire a non-Canadian must demonstrate that there is no Canadian available to do the job.
Taxation
Corporate tax
Standard rate Combined federal and provincial/territorial general income tax rates: 32Ò38%

Resident companies are taxed on worldwide income; non-resident companies are taxed only on Canadian-source income. Corporate income tax is imposed at the federal and provincial/territorial levels. The federal general corporate income tax is charged at 21%, and a surtax amounting to an additional 1.12% of tax also applies. (The corporate surtax will be eliminated and the general corporate tax rate will be reduced to 20.5% in 2008.)

Provincial/territorial income tax is charged on income earned in a particular province/territory. The general rates vary between 10% and 16%. (Quebec has a rate of 9.9% for active income.) A branch profits tax applies to non-resident companies.

Capital tax is also levied federally and in all provinces other than Alberta. (The federal government and a number of provinces levy capital tax only on financial institutions. The federal capital tax on non-financial institutions was eliminated in 2006.)

Payments made to non-residents for services rendered in Canada are subject to a 15% tax withholding at the federal level and to an additional 9% withholding if the services are rendered in the province of Quebec.
Individual tax
Progressive rates rising to 29% (federal)

Resident individuals are taxed on their worldwide income; non-residents pay tax only on Canadian-source income. An individual will be considered Canadian resident from the day the individual establishes significant residential ties with Canada. An individual is also deemed to be resident if the individual stays in Canada for 183 days or more in a calendar year. The federal income tax rates rise progressively to 29%. In addition, each province and territory imposes an income tax, at rates ranging from 4% to 24%.

Payments (other than remuneration) made to non-residents for services rendered in Canada are subject to 15% tax withholding at the federal level and to an additional 9% withholding if the services are rendered in the province of Quebec.
Capital gains
Generally 50% of gains included in income

50% of capital gains are included in taxable income. Capital losses may be carried back for three years or forward indefinitely, but are generally only deductible against capital gains. Rollover relief is available for gains on the disposal of certain business assets. Individuals have a lifetime exemption of C$500,000 on gains from the sale of a qualifying small business, farm or fishing property. Gains on the sale of a principal private residence are exempt.
Indirect tax
Standard federal rate 6%

The federal goods and services tax (GST) is imposed at 6% on supplies within or imports to Canada. All the provinces (except Alberta) impose a consumption tax on goods, and a number of provinces also tax services. Provincial consumption tax rates range from 7% to 10%. Some services, such as long-term residential leases, health services and domestic financial services are exempt from GST.

Registration for GST is compulsory for businesses with annual turnover above C$30,000.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

Companies make monthly advance payments of tax, based on the previous yearÌs liability or an estimate of the current yearÌs liability. A final payment must be made by the end of the second month following the end of the tax year (third month following the end of the tax year for small Canadian-controlled private corporations).

Employment income is subject to tax withholding by the employer. Individuals may be required to make quarterly tax instalments on income that is not subject to withholding.
Additional tax information
Withholding taxes Dividends 25%, Interest 25%, Royalties 25%. The withholding tax rate may be reduced by an applicable tax treaty.
Tax treaties Canada has concluded 86 tax treaties.
Dividends Taxable to individuals. A dividend gross-up and tax credit mechanism applies to provide a preferential tax rate to Canadian residents receiving dividends from corporations resident in Canada. Two different preferential tax rates exist, depending on whether a dividend is an Ïeligible dividendÓ. Taxation of intercorporate dividends will depend on factors such as residence of the payer and the relationship of the corporations.
Revenue protection Transfer-pricing, thin-capitalisation and foreign-subsidiary (CFC) legislation.
Groups No tax consolidation.
Incentives Special depreciation rates; manufacturing and processing relief; Canadian-controlled private company benefits; generous research and development credits; Quebec tax holiday for certain specialised foreign individuals coming to work in the province; International financial centre incentives in Quebec and British Columbia; various other incentives.
Other taxes Import and excise duties, Income tax payable on death, Land transfer taxes, Municipal taxes, Various provincial payroll taxes.