Taxation System in Canada
The tax structure in Canada is distributed in three different levels to the government central level, state or territorial level and the municipal level. The central government has the supreme power to introduce any kind of tax or taxation structure at its discrete. The state or territorial government do not have the same level of authority as the central government to introduce new taxes across the nation but it can introduce new taxes that affects the people living within the state/territory jurisdiction. The municipal government has minimal rights to levy taxes on real estates and buildings.
The taxes can be levied on different things including the sales of products & services, income, real estate and properties, as well as royalties. The capital tax structure has been designed for the financial institutions only. Taxes which are incurred on the income of the federal as well as state level companies will be corporate income tax. Depending on the company in which it has been incorporated, combined tax can also be levied. The central as well as the state governments asses the total taxes to be paid based on the paid-up capital of financial institutions.
As per the past record the maximum % of corporate tax levied across different states in Canada including the federal as well as state/territory in the year 2017 is 31% at Nova Scotia and Prince Edward Island. The minimal tax levied is 26% at British Colombia. The combined rate of tax levied in the state of Ontario is 26.5%.
| Canada Quick Tax Facts for Companies
|General corporate income tax by the central government||15%|
|General corporate income tax by the state/territorial government||11% - 16%|
|Rate of branch tax||15% (Tax includes the central government + the state/territory level both)|
|Rate of tax on the capital gains||50% of the rate as per the standard corporate tax|
|Tax liability for the residents||Worldwide|
|Exempted tax for abroad participation||None. However the dividends which are received as part of the company shareholders from the exempted limit of foreign affiliates is not part of the tax structure.|
|Can be carry forwarded for||20 years|
|Can be carry backed||3 year|
| Relief from the double taxation rule||Mostly Available|
|Consolidation of the taxes||None|
|Rules of transfer price||Yes|
|Rules of minimal initial capital||Yes|
|Rules for the foreign affiliation||Yes|
|− Branch remittance tax||25%
|Tax on Capital /Taxes on the wealth (Net)||None|
|Taxes on transferring the Real estate||As per the state/territory or municipal defined limit|
|Taxes on gifted or inherited|
|Taxes levied on the goods & services (VAT)||5% at the state level and the rate may varies as per the HST|
Tax rates effective from 31st of July, 2017
| Amount of Corporate Tax in Central, State/Territorial
|Jurisdiction||Rate of Tax on Corporates|
|Newfoundland and labrador||15%|
|Prince Edward Island||16%|
If you are not resident of Canada and if you receive dividends from the Canadian entity then in that case they are liable for the 25% tax over it. It can be either 25% or less/more depending on the tax treaty signed between the beneficiary and the entity. However, if the dividends are paid to another entity of Canadian origin then it is exempted from the tax.
If you are resident of Canada and if you pay interest to the non-residents then the income is liable for 25% of the taxes. This tax rate can be lesser than the specified limit based on the tax treaty signed between both the parties. However, if there are certain options based on which the interest paid to the arm’s length lenders from abroad can be exempted. Commonly known as the back to back loan rules which is has been especially designed to avoid the misuse of this exemption.
If you are a non-resident of Canada and receive royalties from the residents of Canada then it is liable for 25% of the withholding tax. The rate can be pre-decided by the parties as per the tax treaty signed between the two. As per the withholding tax structure under the domestic legislation, following copyright payments for musical, literary, or art works are not liable for the tax under the exemption clause. The exemption of the domestic law does not consider the payments over rights of/use of, videos, tapes, films, or reproduction. The rule of back to back rule is also application the royalty payments or similar kind of transactions which involves the debts & shares where the withholding tax is reduced.
Branch remittance tax
If the profits that is generated from a specific branch office of the company incorporated in Canada is not reused in the development of the branch then 25% of the tax rate will be incurred on such income. This rate of tax can be reduced by the tax treaty.
Wage Tax/Social security Contributions
The central government of Canada has introduced different types social development programs like the pension plan and the employment insurance for which the companies have to maintain the records and payments for the employees. Quebec state of Canada has its own set of social development programs like Quebec Pension Plan which has different set of rules than the pension plan offered by the central government.
The purpose of employment insurance fund is to support and protect the employees under certain conditions because of which it is mandatory for the employees as well as the Canadian employers to deposit the funds directly in the employment insurance fund account. The premium to be deposited by the employees in EI fund is CAD $1.63 for every CAD 100 earned, and employers is 1.4 times of the employees’ contribution or CAD $2.28 for every CAD $100 earned by the employees. The maximum amount that employees can contribute is CAD $836.19 and employers maximum limit is CAD $1,170.67. Whether you are working on part time basis or casual, such employees should also be covered under the scheme as per the government rule. The government has also exempted certain smaller businesses from premium payments for the employees.
Canada Pension Plan (CPP) is the central government social development program fund in which the contributions of the employees as well as the employers are deposited. The rate of contribution for the CPP for the employees is currently 4.95% and the employers’ contribution to the fund as on 2017 is 9.9%. The maximum amount that both – employees and the employer can contribute is 2564.10 Canadian dollars and the maximum amount that an individual can earn from pension is 55300 Canadian dollars. Even if you are self-employed, you are eligible for the scheme and the maximum amount that you can contribute to the fund is 5128.20 Canadian dollars. The amount received by an individual from CPP depends on the time of service and amount contributed over the period of service.
Goods and services tax
Just like most of the countries in the world, Canada also follows the standard practice of Goods & Service Tax which is abbreviated as GST. The state of Quebec in Canadian region has a different set of taxation structure known as the QST which has provision on most of the products & services from Quebec. Although the GST designed by the Canadian central government and the QST by the Quebec state government is almost similar, the processing and administration is done separately.
Certain states as mentioned below follow the standard practice of Harmonised Sales Tax (HST) as per the central government of Canada. The provincial sales tax are levied on some of the insurance premiums in Ontario.
- New Brunswick
- Nova Scotia
- Prince Edward Island
The states, British Columbia, Manitoba and Saskatchewan, have a different tax structure which is administered separately using retail and provisional tax system on most of the goods and services bought or used in specific state. The state that does not apply or levy the PST is Alberta.
There are three territories which does not apply Provincial Service Tax or Harmonized Sales Tax so it follows the standard 5% tax as GST. If you are a non-resident of Canada then in that case you need to register yourself to receive or pay any of the taxes (GST/PST/HST or QST) depending on the amount of sales and jurisdiction that is relevant to you. In most of the cases, non-residents can purchase the exported goods or services without any payment of GST/HST/QST or PST. Such provision is allowed only on the products & services which are out of the taxable jurisdiction or intangible properties that are sold to non-residents.
Before to Incorporate
Finalization on the central level or state level incorporation of the company in Canada. Benefits of incorporating company at the central level:
- Company can expand/transact across all the states without any restrictions.
- There is no restriction in using the same company name across all the states.
If the company is incorporated in specific state/territory then you can only trade within the jurisdiction of that state and with foreign companies.
If the nature of your business is to trade within the state jurisdiction then it is not necessary to incorporate the company at the central level.
Have your company name searched and reserved
In order to incorporate your company, the first step will be to identify a suitable name for your company that is available and not taken by other company (ies) in the market.
In case you plan to incorporate the company at the central level or in the state of Ontario then the report of NUANS has to be generated and submitted.
The process in other states like BC and NS is different as you need to first take the approval by submitting Name Reservation Request Form. If the name search for the company results positively then the name can be booked and kept on hold for a specific time period. During that period the process of incorporating the company should be completed.
There are majorly three things which should be considered while selecting the company name:
- Name that is suitable to your business and unique from other company names in the market
- Name that is suitable to your business nature
- Comply with the proper title of the company as Limited (Ltd.), Incorporated (Inc.) or Corporation (Corp.)
The name of the company to be incorporated in Canada can be in either English or French or combined with English and French.
As per the standard process, the name of the company before registration has to be approved by the Registrar of provincial Registry or the federal Corporations directorate, depending on the choice of your incorporation. However, it is mandatory that both of these governing bodies need a unique company name is not used or similar to other companies registered in the market.
The name of the company can also be selected based on the number:
– Company name should end with either of
- Societe par actions de regime federal
– Company that has to be registered at the central level should be either in English or French or both combined.
– Selected company name should not be similar, misleading or mean negative to the names of other companies already registered.
– In such scenario where the name is similar then the companies registering at the central level may have a number added to their name by which the incorporation process can be completed swiftly for the Articles of Incorporation. The company can choose a trade name by which it can be known to its customers for daily transactions.
Number of Shares
Shares of a company incorporated in Canada can be owned by any individual, entity or trust. Shares of the company are considered as a legal property which can be sold or purchased with commercial value. The limitations of selling or purchasing of the shares can be referred in the acts, articles, by-law, or shareholders agreements in which it is defined. The important thing is the initial number of shares allotted to the shareholders than the total number. For e.g., if there are two shareholders with the capacity of 50% interest in the corporation then it is meaningless whether they are only 10 or 10000 shares each. Ultimately both the shareholders should receive equal amount of shares of the company. Along with the shares, shareholders get three types of rights which includes: a) voting rights b) dividend rights and c) property rights (in case the company is dissolved). The rights can also be bifurcated as per the class of shares. As per the Articles of Incorporation, shareholders can be issued unlimited number of shares for the each class defined by the company. Different classes of shares can be named as – common, preference, or non-voting or just list it simply Class-1, Class-2, Class-3. It is mandatory to have at least one shareholder for the private company incorporation. Companies can also have multiple shareholders but not more than 50 shareholders. The company should have the complete address of the resident shareholders.
Canadian – Business Numbers
Every company is assigned a 15 characters of business number when it is registered with the Canada Revenue Agency (CRA) for filing the GST/HST or other company income taxes, which helps in identifying it for tax process. The 15 character number assigned to the companies are used for company income tax, import/export, payroll deductions, and GST/HST.
Below are the list of documents which are provided at the time of company incorporation:
- Company that has been incorporated will get the Certificate of Incorporation which has the details of jurisdiction under which the company will be considered, date of company’s establishment and the constituting statue of the company.
- Company will also receive the copy Articles of Incorporation along with other documents which needs to be submitted to the government departments or authorities.
- Company will also be given the minutes and resolution of the company which has to be duly signed by the persons against their names as it will appear on the minute book.
- Company will also receive the customized share certificate for all the shareholders of the company with the name, class and number of shares.
- Company will also receive the By-laws which are set of rules defined to be followed by the company and the executives to manage the operations of the company, directors and shareholders as well as the third parties.
- Company will also receive the NUANS report or the state department’s name search report which is ever is applicable as per the incorporation of the company and availability of the company name.
- The minute book of the company should be kept in discrete in which all the corporate transactions and records should be maintained for instant reference in future.
After Incorporation Canada
We have listed the steps below which should be followed once you have received the incorporation certificate. After the below stages are completed, you can start your business transactions.
Corporate Minute Book
As per the law, it is mandatory to maintain certain company records and kept at the registered company address. The mandatory documents includes the corporate minute book and the copy all necessary documents that have been submitted for the registration of the company. The minute book of the company should have the following documents: register of the directors’, register of the shareholders of the company, register of the securities, bylaws of the company, all minutes of meetings of the company, and the documents or forms which has been submitted at the government departments.
The minute book of your company should be an instant reference book that includes all the required company documents and transactions that has been done. It is mandatory that it is up to date and organized properly.
Complete corporate bylaws, organizational minutes and issue shares
The details of the company’s major transactions and documents are recorded in the minute book of the company.
The set of bylaws of the company is defined to govern the terms & conditions of the company as well as the rights & roles of the officers of the company.
The minute book of the company can be developed by meeting the company directors and shareholders or referring the signed resolution of the directors and shareholders.
The purpose of the first meeting is:
- To approve the company incorporation documents
- To accept the bylaws defined for the company
- To recruit directors of the company
- To recruit the officers for the company
- To allocate the shares to the shareholder
- Accept the resolutions defined for the company
Set up a corporate Bank Account
The company should have its own bank account. In order to open the bank account for the company, bank will require a copy of the company incorporation certificate, article of incorporation, and specific banking resolutions be passed and documented.
In order to procure certain permits or licenses it is important that your company has the Business Number which is provided by the central government for GST, company income tax, import/export, and payroll deductions for the employees.
In order to collect or remit PST for workers’ compensation insurance, employer health tax, and required state/municipal licenses, the company has to be registered for PST.
One of the major benefits of incorporating your company at the central level is that you’re your company has been registered no other company can use the same name in any of the states of Canada to incorporate as yours.