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Taxation of Non-Resident Franchisors in Canada

Written by: Peter Macrae Dillon

Article Overview: This article provides a brief overview of the kinds of taxation issues a foreign franchisor can expect to encounter when doing business in Canada. peter macrae dillon Siskinds franchise franchisor franchising lawyer attorney Toronto Ontario Canada www.franchiselaw.ca

Taxation of Non-Resident Franchisors in Canada

Taxation of Non-Resident Franchisors in Canada

Federal Income Tax

Canada imposes a federal corporation income tax upon non-residents who carry on business in Canada and derive income from Canadian business sources or investments in Canada. This tax is not imposed on foreign franchisors who have no permanent establishment in Canada.

A federal non-resident "withholding tax" is imposed on a number of different remittances from Canadian franchisees to non-resident franchisors. The franchisee is required to withhold tax from the gross amount of the dividend, interest or related amount and remit it to the Receiver General for Canada as tax proceeds for the non-resident recipient. International conventions provide for a reduction in the withholding tax for enumerated Canadian-source income that is distributed to non-residents.

If a non-resident franchisor has a permanent business establishment in Canada, it will be responsible for "branch tax" if it does not incorporate Canadian subsidiaries. However, a foreign franchisor will not be liable for branch tax until its aggregate income earned in Canada exceeds its capital investment in Canada.

Federal Capital Tax

Canada imposes a "large corporations tax" at a rate of 0.2% on the capital a corporation uses in Canada in excess of $10,000,000.00 Cdn.. For non-resident franchisors, the tax is limited to the portion of the corporation's capital which is used in Canada in the relevant fiscal year.

Provincial Income and Capital Taxes

All provinces collect income tax from corporations conducting business within the province. Most provinces also impose a capital tax that is based on a percentage of the corporation's "taxable paid up capital".

Sales and Commodity Taxes

Both Federal and Provincial governments impose sales tax in Canada, not including the province of Alberta. Most provinces have sales tax between 6% and 10%. Ontario sales tax is 8%.

There is also a federal goods and services tax, which is a 7% tax that is applied to each transaction in the production and distribution chain, including services and including the importation of most goods and services into Canada.

Federal Customs Duties

Goods imported into Canada may be subject to federal customs duties. The rate of the concession fee will depend upon the tariff classification and origin of the goods. Note that the North America Free trade Agreement eliminated customs duties for most goods imported into Canada from the United States, and also the converse.

Land Transfer Tax

In most provinces, a land transfer tax will apply to the acquisition of real estate. In Ontario the general rate is 0.5% on the initial $55,000, 1% on the following $195,000 and 1.5% on the balance of the consideration to be paid for the land.

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