CORPORATION FACT SHEET - Foreign Business Entry to Canada
Branch - Subsidiary - Incorporation - Partnership - Joint Venture - License - Franchise
For international commercial enterprises requiring Canadian legal services call 403-400-4092 / 905-616-8864 or email Chris@NeufeldLegal.com
Canada has its own distinct approach to corporations and incorporations, with both the federal and provincial levels of government effectively competing for corporate registrations and its location, such that foreign business enterprises need to be aware of these revenue-driven incentives and correctly assess these competing variables to make the decision that is best for your business' specific purposes. Making the appropriate decisions with respect to your incorporation is critical to getting the most out of your international business entry to Canada.
What a corporation is in Canada
A Canadian corporation is a separate legal entity created under statute (federal or provincial) that has its own rights and obligations distinct from its owners (shareholders). It can enter contracts, own property, incur debt, sue and be sued, and continue indefinitely regardless of ownership changes.
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Separate legal personality: The corporation is treated as a “person” in law.
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Limited liability: Shareholders are generally only liable up to the amount they invested (subject to guarantees and special statutory liabilities).
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Perpetual existence: The corporation continues despite death, withdrawal, or sale by its shareholders.
Canadian corporate law is primarily statutory (written law), supplemented by judge‑made (common) law and is divided across federal and provincial/territorial jurisdictions.
Federal vs provincial/territorial corporations
Canadian corporations can be formed under:
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The Canada Business Corporations Act (CBCA) at the federal level; or
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The business corporations statutes of a province/territory (e.g., Ontario Business Corporations Act, Alberta Business Corporations Act).
For a multitude of highly rationale reasons that we have have outlined on our incorporation-focused business website, https://www.lawyerincorporation.com, most foreign businesses would be better served by incorporating their Canadian business operations at the provincial level, as opposed to the federal level (yet due to reasons referenced at the outset, there continues to be a significant push for federal incorporation, which runs counter to our own professional analysis).
Taxation of Canadian‑incorporated corporations
Canadian‑incorporated corporations, whether federally or provincially incorporated, are considered resident in Canada and are therefore taxed on their worldwide income, regardless of who owns them. As such, both Canadian-owned and foreign-owned corporations resident in Canada are subject to Canadian corporate income tax on worldwide income.
Foreign ownership does not change the corporation’s residency or tax base, but it does affect withholding taxes, thin‑capitalization limits, transfer pricing, and reporting obligations.
Repatriation of profits from its Canadian-incorporated subsidiary
Foreign parent companies typically use four main methods to recover profits from a Canadian subsidiary:
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Dividends: A distribution of after-tax profits to shareholders. This is the most common method.
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Return of Capital: Repayment of the original investment (Paid-Up Capital).
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Service/Management Fees: Payments for administrative, technical, or management support provided by the parent.
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Royalties & Interest: Payments for the use of intellectual property or interest on inter-company loans
Taxation and Withholding (Part XIII Tax)
Under the Income Tax Act (Canada), payments made by a Canadian resident to a non-resident are generally subject to Part XIII withholding tax. The default withholding rate is 25%. Yet, most of Canada’s tax treaties reduce this rate [for example, under the Canada-U.S. Tax Treaty, the dividend withholding rate is often reduced to 5% (for parent companies with significant ownership) or 15%].
Transfer Pricing
Transactions between the Foreign parent and its Canadian subsidiary (e.g., service fees, royalties, or interest) must be conducted at "arm’s length." The price charged must be the same as what would be charged between unrelated parties. Companies must maintain "contemporaneous documentation" to justify their pricing to the Canada Revenue Agency (CRA). If the CRA deems a payment too high, they may recharacterize the "excess" as a deemed dividend, subject to withholding tax and penalties.
Thin Capitalization Rules
To prevent "earnings stripping" through excessive debt, Canada limits the amount of interest a Canadian subsidiary can deduct. The debt-to-equity ratio must not exceed 1.5 to 1. Interest paid on debt exceeding this ratio is non-deductible and is treated as a deemed dividend subject to withholding tax.
As such, when your international business seeks the professional services of an experienced Canadian business lawyer to facilitate its entry into Canada's commercial market, contact our law firm for a confidential initial consultation at 403-400-4092 [western Canada], 905-616-8864 [eastern Canada] or Chris@NeufeldLegal.com.