If you are a foreign investor and consider opening a business in Canada, the tax benefits and financial advantages of owning a company in this country will surely be one of your questions. Canada maintains a competitive business tax environment in which foreign owners can take advantage of many of the tax benefits that might help reduce overall tax burdens.
Below are five key tax benefits that may apply to foreign owners of a Canadian company, including tax treaties and deferral opportunities, as well as corporate tax advantages. Whether you’re about to incorporate a business or have already done so, it’s these key tax benefits which you should know about in order to maximize your investment in Canada.
1. Access to Canada’s Tax Benefits &Treaties
Claim of a Tax Treaty Benefits
One of the major tax benefits available to foreign-owned companies operating in Canada includes the utilization of Canada’s vast network of tax treaties. Canada has signed a tax treaty with more than 90 countries that have mutual interest in not double-taxing but offering better tax rates within the country for overseas business investors. Check if your country has tax benefits and tax treaties with Canada.
How Tax Treaties Work
A tax treaty is an agreement between two countries that provides how taxes will fall on income derived from one country by a resident of another. For foreign owners of a business, a tax treaty can reduce or even eliminate withholding taxes on income- eg, dividends, interest, and royalties-paid out of a Canadian company to foreign-based shareholders.
Example of Tax Treaty Benefits
For instance, the tax treaty between Canada and your country of residence could reduce withholding tax on dividends paid to foreign owners from 25% to a lower, probably 15%, or even 5%, depending on the specific treaty. This will greatly enhance your returns and minimize the overall tax burden on the income earned from Canada, and can be great tax benefits!
2. Competitive Corporate Tax Rates
Competitive tax rates for businesses were revealed in the Canadian corporate tax system and extremely advantageous for foreign owners.
Lower Corporate Tax Rates for Canadian Companies
Federal corporate tax rates in Canada are very low compared to most other developed nations. As of recent updates, the general corporate tax rate is 15% at the federal level, and to this is added provincial taxes, which can also vary by jurisdiction. Certain provinces, like Alberta, even have an even lower rate, so Canada would be in a great position to hold a business and have tax benefits. Get more details about tax rates – corporation tax rates
Small Business Deduction
If your company is a Canadian-Controlled Private Corporation, then you will qualify for the small business deduction. That will bring down the federal tax rate to 9 percent on the first $500,000 of active business income, significantly lowering your taxes.
These foreign owners can thus leave more of their earnings in the company, taking advantage of these lower tax rates, and are thereby better positioned to reinvest in business growth and expansion.
3. Tax Deferral Opportunities
Canada allows businesses to defer taxes on retained earnings, which can be significant tax benefits for foreign owners.
How Tax Deferral Works
If a Canadian company does not pay out all its earnings as dividends to its shareholders, the company is only required to pay tax on the income earned. Secondly, foreign owners may benefit from tax deferral by leaving profit within an entity; this delays a tax liability by withdrawing funds, typically as dividends.
Opportunities for Reinvestment and Growth
The ability to defer taxes offers the owners who are foreign investors the chance to reinvest the retained earnings in the business for growth without having to experience the immediate tax consequences that would result if the earnings were distributed to the various shareholders.
4. Access to Canada’s R&D Tax Incentives
Probably one of the biggest reasons a foreign business owner should consider innovating and expanding into Canada is the tax incentives available for research and development activities in Canada.
Scientific Research and Experimental Development (SR&ED) Tax Credit
The SR&ED tax credit is a program providing government refundable and non-refundable tax credits to the companies performing R&D. These credits can be huge, amounting to up to 35%, depending on the province, of eligible R&D expenditure.
Why R&D Tax Credits Are Useful
If your Canadian business is working on technological innovation, product development, or even enhancement of processes, you may be able to claim part of your R&D expenditures back in the form of tax credits. These in turn will reduce the total amount of your tax liability and create a financial incentive to grow and innovate.
5. Tax-Deferred Growth in a Canadian Registered Pension Plan
Foreign business owners may also be able to avail themselves of the tax-deferred growth of Canada’s pension plans, especially if they decide to contribute to a Canadian Registered Retirement Savings Plan.
Tax-Deferred Retirement Savings
RRSPs are tax-deductible, and you can reduce your taxable income by the amount you invest into it. Since the funds grow in the RRSP, they are only taxed upon withdrawal, thus giving your investments an avenue to grow tax-deferred.
Foreign Owners and RRSPs
Even as a foreign owner, you could contribute to an RRSP provided you have earned income in Canada. It may provide further opportunities for tax deferral while you save for your retirement.
Learn more about the benefits of registering a business in Canada.
Example of the Tax Benefits for a Non-Resident Who Incorporates in Canada
There are numerous tax benefits available to foreigners opening a company in Canada, provided they properly structure their business and take advantage of Canadian tax laws. The following is a specific example of one way it might work:
Scenario: A tech entrepreneur is opening a software development company in Canada.
1. Choosing the Business Structure:
The entrepreneur decides to incorporate the firm in Canada. Incorporating will provide corporate income tax advantages, including lower potential rates and utilization of certain Canadian tax credits.
Federal vs. Provincial Incorporation:
They incorporate this business federally because of its expanded scope of operation, but they must also register it in Ontario because of its huge market.
2. Utilization of the Small Business Deduction- SBD:
For Canadian-controlled private corporations, the Small Business Deduction applies, which reduces the general corporate income tax rate applying to the first CAD 500,000 of active business income to approximately 9-12% federally, depending upon the province.
For a business to become CCPC, the corporation should be controlled by residents of Canada. The entrepreneur, however, may partner with a trusted resident in Canada or make arrangements for management that involves a Canadian resident.
3. Utilization of Scientific Research and Experimental Development Tax Credits:
Canada offers very generous tax credits in the case of companies operating in research and development. If the company develops novelty software, it might apply for SR&ED tax credit by claiming up to 35% refund of qualifying R&D expenses.
Eligible costs might include salaries for developers, materials, and overhead.
4. Export Development Tax Incentives:
If a company is planning to sell software internationally, it will enable them to consider tax incentives and programs provided by both the Canadian Revenue Agency and provincial governments.
For example: the entrepreneur will receive finance and insurance benefits for international operations through the Export Development Canada services.
5. Avoidance of Double Taxation:
If the entrepreneur is from a country that has a tax treaty with Canada, their income cannot be doubly taxed through the treaty. They also plan their taxes properly to utilize treaty benefits, especially in repatriating profits to their home country with an accountant’s help.
6. Location-Based Tax Benefits:
Some provinces offer additional benefits. For instance:
- British Columbia: Provides credits for digital media companies.
- Quebec: Provides extremely large R&D tax incentives, as well as digital innovation benefits.
Steps Taken to Ensure Compliance and Optimization
- Hiring a Canadian tax professional to understand qualification issues for deductions and credits.
- Keeping a proper and fairly detailed record of all the business activities, especially for those involved in any SR&ED claim.
- Register for a Goods and Services Tax (GST)/Harmonized Sales Tax (HST) account (where required) to take advantage of input tax credits available for business expenses.
The tax benefits and planning, if used in a more focused manner, could substantially reduce the effective tax burden of the entrepreneur, while he enjoyed all benefits accruing from Canada’s favorable business environment and skilled manpower.
Frequently Asked Questions
1. What is a Tax Treaty Benefit?
A tax treaty is a benefit provided by agreement between two countries to avoid double taxation and reduce withholding taxes for cross-border income. Foreign business owners can claim these benefits in order to reduce the taxes paid on the gain of dividend income, royalties, and interest earned from a Canadian company.
2. What Tax Benefits am I entitled to claim?
If you are a foreign owner setting up your company in Canada, there are a number of taxes you are entitled to claim, including the following:
- Reduced withholding tax rate on dividends, interest, and royalties due to the tax treaties in place.
- Competitive corporate-income-tax rates applied to business income.
- Tax deferral on earnings retained in the company.
- Have access to R&D tax credits if your business involves qualifying research activities. Tax-deferred growth through pension plans in Canada, such as the RRSP.
3. What kind of businesses can I open as a foreigner?
As a foreigner, you can open most types of businesses in Canada such as:
- Sole proprietorships
- Partnerships
- Corporations-with foreign ownership being possible, too.
However, some industries happen to have additional regulatory approvals, and some areas in specific business activities may be restricted for foreign ownership for instance, portions of the telecommunications or even transportation sectors. Take a look at this guidelines for a non-resident on how to set up a corporation in Canada.
What are the Requirements to Open a Business in Canada as a Non-Resident?
- Generally speaking, the steps to open a business in Canada as a non-resident are usually: Register your business with the Government of Canada for incorporating or trade name.
- Provide a Canadian business address and, in the case of corporations, possibly a resident Canadian director.
- Obtain a business number that uniquely identifies a business for tax purposes.
- Comply with provincial or federal regulations based on the type and location of the business. Apply for necessary business permits or licenses, depending on the nature of your business.
Conclusion:
Owning a Canadian firm as a foreigner can bring a lot of tax benefits that will help to substantially enhance your business’s profitability. From tax treaties that minimize withholding taxes, competitive Canadian corporate tax rates, and tax deferral opportunities, you can take full advantage of your financial benefits. Be it in tech, taking advantage of R&D credits, or availing yourself of tax-deferred retirement savings, Canada is a friendly environment in which foreign investors find it very attractive to invest. Understanding and utilizing such tax benefits will enable foreign owners to expand their business and accomplish financial success in the Canadian market in the long term. If you are thinking of opening an offshore company in Canada, it would be better to consult a tax professional who could advise on how to manage this complex tax system in the best possible way.