Thanks to global markets and the ability to easily engage with other companies and individuals, businesses can smoothly pursue international commercial activities. However, depending on the company specifics, international business activities may come with various tax consequences that businesses may wish to be mindful of when considering expanding to other markets. Learn about the different tax considerations for Canadian businesses expanding internationally, and find out how an experienced Nova Scotia tax lawyer can help expanding firms with their tax issues; call Jeremy Scott Law today at (902) 403-7201.
Why Canadian Businesses Are Expanding Internationally
Companies that export their goods and services typically benefit from faster growth, improved international visibility, higher sales, and greater resilience during economic slumps compared to businesses relying solely on local markets. Below are several other reasons why Canadian companies are seeking international expansion:
- Benefit from free trade agreements: According to the Trade Commissioner Service (TCS), Canada has 15 free trade agreements in place with 51 countries, giving Canadian companies potential access to billions of consumers worldwide.
- Reduce risk: Due to the existence of free trade arrangements, international firms are increasingly entering the Canadian market. Canadian firms who choose not to export limit themselves to Canadian consumers only and risk losing out to an influx of competitors.
- Profit from Canada’s strong international brand: Canada has a strong global reputation, and Canadian companies may utilize this prestige to market themselves in a way that aligns with the country’s traits. For instance, they could focus on the company being environmentally conscious, innovative, and trustworthy, and producing high-quality goods.
- Start exporting quickly with digital technologies: Because of digital marketing and e-commerce, many Canadian firms expand internationally without significant expenses, giving these companies an easy opportunity to reach more consumers.
Are Canadian Corporations Taxed on Worldwide Income?
Canadian corporations refer to businesses incorporated in Canada or corporations managed or controlled in Canada. These entities do face Canadian corporate income tax on their global income, which includes income earned domestically and internationally.
Is Canada a Good Country To Expand a Business?
Canada is an attractive choice to expand internationally, particularly for American firms, due to its adjacency to the United States, low corporate tax rates among developed nations, steady economic growth, and understanding of American social conventions. Additionally, Canada has a very educated workforce; for instance, per the Organisation for Economic Co-operation and Development (OECD), 62% of Canadian adults aged between 25 and 34 successfully finished high school, ranking second globally.
Why Canada Is Best for International Business
In addition to the reasons listed above, Canada is ideal for international business due to other factors. For instance, Canada is a politically stable country known for having transparent regulations and observing the rule of law. Canada also has an abundance of natural resources, a thriving research and technology sector, and an innovative and creative business climate, making it an attractive country for foreign investment.
Gain a more detailed understanding of the various tax considerations for Canadian businesses expanding internationally, and discover how a Halifax tax lawyer from Jeremy Scott Law may assist companies with their tax concerns. Contact our legal team today to arrange a consultation.
Do Canadian Corporations Have To Pay US Taxes?
Non-residents in the United States, including Canadian corporations, are subject to American federal tax on any income connected to business or trade activities that take place in the United States. In a similar fashion to Canadian tax laws, any business or trade carried on in the United States during any point of a tax year is subject to American tax for that year. This generally applies to Canadian companies that conduct business with American consumers, with the level of commercial activity required being relatively low; for example, making sales in the American market, traveling frequently to the United States for business purposes, performing self-employment or employment services in the United States, and marketing goods to American customers is likely to pass the threshold of carrying on business in the United States.
Those engaged in American commercial activities incur taxes at gradual rates, and they can generally claim deductions that reduce the level of tax owed. Other types of income that could also incur American tax include royalties arising from American commercial activities, inventory sales made in the United States, and gains and losses earned on American real property dispositions.
What Are the Different Tax Considerations for Canadian Businesses Expanding Internationally?
Canadian firms looking to expand internationally are likely to face several tax-related considerations. Here is a summary of these factors.
Corporate Structure
When expanding abroad, Canadian companies may choose between opening another site and setting up a subsidiary in the country they wish to trade in, both bringing different tax consequences. If the company opts to open a branch, the site may pay taxes in Canada in addition to the foreign country.
Conversely, subsidiaries act as separate entities, meaning they may only pay local taxes. However, controlled foreign corporation (CFC) rules could apply, and if this is the case, any income earned by these subsidiaries may incur Canadian taxes.
Tax Treaties
Canada has several tax treaties in place with other nations preventing double taxation and offering tax obligation information. They usually outline withholding tax rates, give dispute resolution mechanisms, and cover the assignment of tax rights. Within these treaties is also typically a definition of permanent establishment, stipulating the level of activity required to subject the company to the other jurisdiction’s taxes.
Tax Credits
Canadian tax laws permit businesses to claim tax credits in other countries for any taxes paid in these locations, which reduces the Canadian taxes paid on the same stream of income. Similar to tax treaties, this helps prevent the payment of double taxation.
Tax Filings
When a Canadian company expands abroad, they have to follow local tax reporting requirements in that jurisdiction to remain compliant and avoid paying interest and receiving substantial penalties. For instance, this includes completing local and value-added tax (VAT) filings, as well as corporate tax returns.
Indirect Taxes
Other countries often have indirect tax systems in place, including VAT or goods and services tax (GST), in addition to customs duties. Canadian firms looking to expand internationally require an understanding of the registration, collection, and remittance rules for each jurisdiction in which they wish to operate. They often take these additional taxes into account to set appropriate prices that allow these companies to make a profit abroad.
Employment Taxes
If a Canadian company expands abroad, the firm is likely to hire employees in that jurisdiction, subjecting the business to local social security contributions and payroll taxes. Some companies may also choose to relocate employees from Canada to the other country, resulting in the company experiencing tax withholding obligations.
Tax Incentives
Tax incentives often exist in other countries to attract foreign investment. Examples include reduced tax rates in certain industries, grants, and tax holidays. Canadian companies may wish to explore these local incentives to reduce their overall tax burden.
Changes in the Exchange Rate
Since exchange rates constantly change, this has the potential to affect the reported expenses and income of a Canadian company’s international operations, impacting the entity’s taxable income. Mitigating this risk is possible through effective financial management and by implementing hedging strategies.
Profit Repatriation
If a Canadian parent company establishes subsidiaries in other countries, and they decide to repatriate profits back to Canada, this might trigger tax consequences, such as withholding tax. To mitigate this impact and boost tax efficiency, Canadian firms can carefully select the repatriation method and choose specific times of the year to make these transfers.
Contact a Halifax Tax Lawyer To Learn More
When seeking to enter new markets abroad, a Canadian firm is likely to make several crucial decisions with lasting and unforeseen ramifications on the business’s operations in the future. To help make sound business decisions and improve their chances of success, these businesses require a thorough understanding of tax rules in relation to foreign investment. Explore the different tax considerations for Canadian businesses expanding internationally, and acquire answers to your tax-related queries by speaking to a seasoned Halifax tax lawyer from Jeremy Scott Law; contact our firm by calling (902) 403-7201.