International trade: Figuring out the right approach for Canada

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A UK company may establish a business presence in Canada through either a branch or a subsidiary company. For many reasons, including taxation, most foreign companies in Canada choose to set up a subsidiary rather than a branch operation.

By Helen Cowley, tax partner at Cassons.

A subsidiary is a separate legal entity that is controlled by a parent company, typically through share ownership. Any profits of a Canadian subsidiary that are repatriated to the UK parent company will be paid as a dividend.

Assuming the Canadian subsidiary is tax resident in Canada it will be liable to Canadian taxes on its worldwide income. A non-resident company operating through a Canadian branch will only be liable to Canadian taxes on business profits generated by that branch.

Canadian corporate income tax (CIT) is collected separately by both the federal government and the provincial or territorial governments. The basic federal rate of CIT is currently 38 per cent but a provincial abatement of 10 per cent and a general rate reduction of 13 per cent can bring the federal tax rate down to 15 per cent in some cases.

In addition to federal CIT, provinces and territories impose their own taxes on income generated from business activities in those jurisdictions. The provincial abatement to federal tax will not be available for foreign income but neither should that income be liable to provincial and territorial taxes.

Provincial and territorial tax rates can vary between 2.5 per cent and 16 per cent depending on the type of entity, its trading activity and the level of business income generated. This may be an influencing factor on where in Canada you decide to do business but of course commercial considerations are likely to be the deciding factor.

The Canadian subsidiary may pay some or all of its after-tax profits to its UK parent company, in which case a withholding tax will be payable. The standard rate of Canadian withholding tax on dividends is 25 per cent but in the case of a UK subsidiary company this should be reduced through the Canadian / UK double tax treaty to 5 per cent.

If you would like to establish a presence in Canada without setting up a subsidiary company then you can instead register a branch of your existing UK company, although there will be withholding tax implications of a non-Canadian resident generating branch profits in Canada.

Whatever structure is chosen, you will also need to consider how the Canadian taxes interact with UK taxes and the treaty reliefs available to eliminate double taxation.

The Canadian corporate tax regime can be complicated and the choice between a branch and a subsidiary will depend on many factors including tax and regulatory matters. If you are considering carrying on a business in Canada then it is imperative that you take specialist advice from Canadian advisers before deciding on the appropriate structure.