Carrying on Business Through a Canadian Subsidiary

This blog post highlights some of the principal tax matters that should be considered in deciding whether to carry on business in Canada through a Canadian subsidiary or as a branch operation.

See Chinese version below [中文版参阅下文].

A corporation incorporated in Canada will be resident in Canada and subject to Canadian federal income tax on its worldwide income. As noted in our previous blog post, income of the subsidiary may also be subject to provincial and/or territorial income tax.

The combined federal and provincial/territorial income tax rate to which the subsidiary is subject will depend on the provinces and territories in which it conducts business, the nature of the business activity carried on and other factors.

The calculation of the subsidiary’s income will be subject to specific rules in the Income Tax Act (Canada) and any applicable provincial or territorial tax legislation. Income includes 50% of capital gains.

Expenses of carrying on business are deductible only to the extent they are reasonable. Neither federal nor provincial/territorial income tax is deductible in computing income subject to the other level of tax. Generally, dividends may be paid between related Canadian corporations on a tax-free basis. Groups of corporations may not, however, file consolidated income tax returns. Accordingly, business losses of the subsidiary will not be directly available, for Canadian tax purposes, to offset income of an affiliated company. However, it may be possible to enter into intra-group income balancing transactions in certain situations.

Transactions between the subsidiary and any person with whom it does not deal at arm’s length, including its parent corporation, will generally need to be effected for tax purposes on a “fair-market-value” basis. Certain contemporaneous documentation may also be required under Canada’s transfer pricing rules.

The debt/equity structure of the subsidiary will be subject to thin-capitalization rules, which operate to deny the deduction of interest payable to specified non-residents by the subsidiary to the extent that the subsidiary is “thinly capitalized.” The subsidiary is considered to be thinly capitalized where the amount of debt owed to the non-resident shareholder is more than 1.5 times the aggregate of the retained earnings of the corporation, the corporation’s contributed surplus that was contributed by the non-resident shareholder and the paid-up capital of the shares owned by the non-resident shareholder. Interest that is not deductible because of the thin-capitalization rules is deemed to have been paid as a dividend and is subject to withholding tax as such.

In some cases, the subsidiary may be established as an unlimited liability company (ULC) under the laws of Alberta, British Columbia or Nova Scotia. This may be done to access the advantages of both a branch and a subsidiary operation for a U.S. parent corporation. The reason is that while a ULC is treated as a corporation for Canadian tax purposes, we understand that it may be treated as a branch or a partnership for U.S. tax purposes. U.S. tax advice should be obtained on this point and certain provisions in the Canada-United States Income Tax Convention (1980) (U.S. Convention) should also be considered, as in certain cases they may eliminate the tax benefits associated with such hybrid entities or give rise to adverse tax consequences without proper tax planning.

The withholding tax regime, briefly described above, will apply to the subsidiary’s payments to non-residents, including interest and dividends. In the case of payments by a subsidiary to a U.S.-resident parent, the U.S. Convention eliminates the withholding tax on interest (other than certain types of interest, such as interest determined with reference to profits or cash flow or to a change in the value of property). The benefits of the U.S. Convention are, subject to some exceptions, available only to certain “qualifying persons,” as defined in the “Limitation on Benefits” provisions of the U.S. Convention.

Canada signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) in June 2017. The federal legislation to ratify the MLI in Canada is contained in Bill C-82, which received Royal Assent on June 21, 2019. The most significant treaty modification to be implemented through the MLI will be the addition of a broad anti-avoidance rule into the applicable tax treaties, referred to as the principal-purpose test. Under the principal-purpose test, a treaty benefit may be denied where it is reasonable to conclude that one of the principal purposes of an arrangement or transaction was to gain such benefit, unless it is established that granting the benefit would be in accordance with the object and purposes of the relevant provisions of the treaty.

通过加拿大子公司经商

本篇博客将介绍在加拿大以子公司和分公司方式经营时需要考虑的一些主要税务事项。

在加拿大注册成立的公司视为加拿大居民；该公司应就其在全世界的任何所得缴纳加拿大联邦所得税。如上篇博客所述，子公司也可能需缴纳省级或地区所得税。

子公司所需缴纳的联邦和省或地区的合并所得税税率取决于该子公司的经商地点和商业活动性质等因素。

子公司的收入计算须遵照《所得税法（加拿大）》的具体规则和相关省或地区税务法规的约束。收入包括50%的资本收益。

企业运营中产生的支出只能在合理的范围内扣除。在申报联邦或者省或地区的所得税时，在另一级别缴纳的所得税不得从收入中扣除。一般来说，加拿大关联公司之间的红利支付免交所得税。然而，集团公司不能以汇总合并方式申报所得税。因此，就加拿大的税务而言，子公司的经营损失不能用来抵消关联公司的收入。但在某些情况下可以进行集团内收入平衡交易。

附属公司与非公平交易的任何人士之间的交易，包括其母公司在内，一般都须按“公平市场价”缴税。根据加拿大的转移定价规则，交易方也可能须要递交某些同期文件。

子公司的债务/股本结构须符合资本弱化规则的要求，当子公司处于“资本弱化”时不得扣除支付给指定非居民的利息。如果子公司欠非居民股东的债务金额超过公司留存收益、非居民股东的缴入盈余和非居民股东所持股份的实缴资本之和的1.5倍以上，则该子公司处于资本弱化。因资本弱化规则规定而不可抵扣的利息支出视为股息支出，须要缴纳预扣税。

在某些情况下，子公司可以按照阿尔伯达省、不列颠哥伦比亚省、或新斯科舍省的法律设立无限责任公司（ULC）。这样做有可能让美国母公司同时取得分公司和子公司运营的有利之处。其原因是无限责任公司（ULC）虽然在涉及加拿大所得税时被当作公司，在涉及美国税务时它有可能被当作分公司或合伙企业。在这点上读者应该寻求美国税务方面的建议，同时还要考虑《加拿大-美国所得税公约》（1980）（美国公约）中的某些条例。在某些情况下，与这种混合实体相关的税收优惠政策可能会被取消，甚至有可能在没有适当的税务规划下造成不良的税务后果。

上文简要描述了预扣税制度，该制度适用于子公司向非居民支付的款项，包括利息和股息。当子公司向美国居民母公司支付款项时，美国条约免除了利息收入的预扣税（除某些例外的利息款项，比如按利润、现金流、或财产价值变化确定的利息）。除特殊情况，美国公约的优点仅适用于《美国公约》“利益限制条款”中所界定的特定“合资格人士”。

2017年6月，加拿大签署了《实施税收协定相关措施以防止税基侵蚀和利润转移的多边公约》（以下简称(多边公约)）。加拿大联邦政府批准通过了多边公约C-82法案并获得了皇室御准，该法案于2019年6月21日获得了皇室御准。最重要的更新是将在适用的税收协定中增加广泛的反避税规则，称为主要目的测试。在主要目的测试下，如果合理地断定某项安排或交易的主要目的之一是为了获得税收协议利益，则不能赋予此优惠，除非纳税人能够证明授予该优惠是符合本协议相关条款的宗旨和目的。