US companies which look at Canada for expansion ought to be aware that they could have a tax exposure here.
Online PR News – 03-July-2013 – Sunnyvale, CA – Sunnyvale, CA) - Canada considers the presence of US employees or even contractors on its behalf as “carrying on business in Canada”.
The Canadian authorities expect US companies to register and file appropriate returns; otherwise serious penalties will be charged on such US firms, finds out Nair & Co. which provides international tax consulting for companies expanding overseas.
The actual tax liability will depend on the nature of the business and in some cases it is observed that most companies could simply not have a tax liability here at all.
Goods and Services Tax ("GST")
GST payment is conditioned by the provinces where the companies operate. Sales tax systems have been integrated by some provinces with the federal government’s GST, which are administered federally. This tax is popularly known as harmonized sales tax (HST) which varies between 13-15 per cent depending on the province. Meanwhile in Quebec it is commonly known as QST which requires another return.
While provinces which do not impose HST apply five per cent of GST, along with provincial sales taxes of up to seven per cent like the US states.
It may or may not be required to register for GST if a company is not Canada based. But it is always advisable to register to have access to the input tax credit system.
Corporate Income Tax
Income tax withholding at source comes at first when any company invoices for services rendered here. The client in Canada must withhold and remit 15 per cent of any payment for services rendered here.
When the withholding amount is more than the anticipated actual tax, companies can appeal to the Canada Revenue Agency (CRA) to abolish this levy.
Withholding is required at each stage- say when the company’s client pays a middleman, who in return pays the company.
A Permanent Establishment (PE) is subject to Canadian taxes per the country’s norms. Three ways to have a PE are mentioned below:
* Any individual working here for more than 183 days in any 12-month period working on a single project or a group of connected projects and
* The existence of an office or presence of physical place of business
* A two part test:
# Canadian revenues exceed 50 per cent of the company’s gross business revenue and
# An individual working for more than 183 days in any 12-month in Canada
If any US firm has no PE, it will be exempt from tax and any withholding will be refunded.
A foreign resident working in Canada is subject to withholding tax like any other Canadian employee.
Canadian wages, which generally represent the pro-rated portion of an employee’s worldwide wages (depending on the time spent by employees in the country), are subject to withholding.
Home-country payroll taxes are applicable for workers working outside Canada. For example, taxes like social security, medicare, and state disability insurance, among others will apply for an American employee. The concerned company will pay regular unemployment insurance premiums on continuous basis.
Some employees will be subject to the Canada Pension Plan instead of social security and medicare, and be subject to the applicable state employment insurance instead of the home-country equivalent.
Employers may be asked to pay into provincial workers’ compensation.
For a detailed advice on the issue, contact the International Tax team at email@example.com
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