International Tax Accountants | Doing Business in Canada

Regulation 105 - Non resident withholding tax Canada
HST and other sales taxes
Thin Capitalization
Tax holiday / Treaties
Forms

This is a non resident withholding tax Canada. Regulation 105 tax is largely misunderstood. Its purpose is to capture tax on all services rendered in Canada that might be taxable. We find that most of our clients that pay this find that it is refundable because of a tax treaty or due to a waiver situation. The challenge is that the tax is charged and then you must apply for a refund. We at Gilmour Knotts Chartered Accountants can help you with that. We can also help you plan to minimize this risk and get set up to speed the refund process if it does become payable. The mechanism is simple conceptually but of course in practice it gets complex. The concept of regulation 105 tax is, if you are not a Canadian resident and you do work in Canada the person or entity paying you is required to withhold taxes and remit them. You may not (usually don't) owe those taxes at the end of the day. They are just withheld in case you do. You must file a tax return to prove that you don't owe them. It is generally a good idea to register on the tax system before someone withholds taxes from you. This is because by registering for taxes (tax identification number) you have your money labeled when it is remitted and it is easier to find and refund. Without a tax number your money can be hard to find when it comes time for a refund. Regulation 102 Requirement for an ITN Form T1261 form to get an ITN Film industry rules Form T1287 to reduce tax withholding We get far fewer questions about regulation 102 than we do about regulation 105. The general feeling I have is most small cross border stuff that might be covered by Regulation 102 is being handled as part of the service package of big four firm or being completely ignored.
HST (Harmonized Sales Tax) is the most commonly found sales tax in Canada. It is a unified tax that combines provincial and federal taxes into one tax. Some provinces do not participate in the HST and in those province you have GST (Goods and Services Tax) and PST (Provincial Sales Tax). HST can be so overwhelming for clients that we could have a top ten list just for HST. 1. PST versus HST/GST 2. Permanent establishment rules and requirement to register 3. Confusion between a GST number and a Business Number 4. Role of the border broker and sales taxes 5. Self assessment of HST by recipient of goods or services. 6. Confusion about whether the vendor is a GST registrant. We frequently see GST charged by non-resident GST registrants and then it being charged again by the border broker and sometimes it being charged a third time as a self assessment. 7. Requirements of bureaucracies like TELUS and other publically listed companies that buy extensively from non-resident suppliers to have a GST number even though one may not be required in the transactions actually taking place. 8. Risks to the purchaser create a general tendency to over tax ourselves 9. Options to recover or not pay HST/GST when you are a non-resident. 10. Although not clearly a non-resident issue. There is also confusion with any tax charged that is not labeled or is poorly labeled. I.e. room tax and HST. Or the new tax on private vehicle purchases and HST
The Canadian government uses an investment ratio approach to help prevent profits from being taken out of Canada without Canadian taxes being paid. The investment ratio means that a certain ratio of the money invested in Canada can not bear interest and thus interest can not be used as an inter-company expense to remove profits from Canada. There is a good overview on Revenue Canada document RC4027 available on the Canada Revenue Agency web site. The concept of a thin Capitalization ratio is a simple concept but now is getting more complex for two reasons 1. Invention of hybrid tax structures that allow double dipping on deductions (see topic 8 on this page) 2. Rather complex rules regarding upstream financing and other increases in complexity of rules regarding stacked corporate structures where Canadian entity is part of a multinational
Our recommendation is KISS. Also consider the market of the client. Truly large multi nationals will deal with the likes of Delottes and KPMG and E&y etc.. The issue is not really the expertise but the budget to spend on compliance issues. Let me repeat the recommendation to KISS We highly discourage stacked structures, but do encourage a simple “strand” of cross border taxable transactions. So our favourite structure is one Canadian entity owned by one foreign entity. The foreign entity can be owned by a parent company on its side but we highly discourage transactions between the Canadian entity and multiple related nonresident companies. Instead we recommend the transactions all get funneled through the Canadian company and its direct parent.
Common Non-resident forms NR301, Nr302, NR303 – DECLARATION OF ELIGIBILITY FOR BENEFITS UNDER A TAX TREATY FOR A NON-RESIDENT TAXPAYER Generally I think of these as “Application for treaty rates of withholding”. These are generally supporting work papers for other filings. I.e. the T2062 or the payables department of the Canadian customer of a non-resident service provider. BN forms ITN forms and Applications for reduced withholding under waivers or other treaty reductions T2062 T2062A used to report property dispositions and calculate estimated tax on transactions. Issue of before the transaction as opposed to after the transaction. The need to file a tax return if you miss the before deadline. NR4 –used to report withholdings NR5 used in personal tax situations to reduce withholdings Nr7 T4A -NR T1135 is familiar to most personal tax return filers. The thing is that this form is for all filers not just personal tax return filers. So corporations may find that they have missed filing this form. T1134A and T1134B are for reporting interests in foreign affiliates. This includes an organization chart. We see this being missed when Canadians set up a subsidiary in a foreign jurisdiction. We see confusion over what entails a foreign subsidiary. Common confusion is that the client thinks of it as branch and the foreign accountant has set up an LLC for example. A couple bizarre ones we have seen are LLC’s set up to own motorhomes and rental properties. T106. Thankfully this has a De minimis rule. It discloses a lot of transactional information in multinationals. It can catch you off guard because its transactions are additive of both positive and negative amounts. There are also forms for trust transactions T1141 and T1142, but in keeping with the KISS principle we try to avoid working with offshore trusts. They require a whole higher level of reporting and management.