How businesses can approach Canada’s cross-border tax law

The need to grow and expand compels many companies to establish their presence in foreign markets. However, this also comes with new challenges such as navigating cross-border tax law. This is why every lawyer’s due diligence involves consolidating tax laws to figure out if a cross-border expansion would benefit a business. 

This article provides an overview of cross-border tax law for businesses such as partnerships and corporations. This will include the implications of these tax laws and the possible consequences of failing to comply with regulations. 

Who is affected by cross-border tax law? 

Cross-border tax laws apply to businesses that derive income or have financial interests in two different countries. For purposes of this article, one of those countries is in Canada. However, the extent of taxes applied depends on the business's residency. 

Corporate resident 

A corporation is considered a “resident” of Canada if it falls under any of the following criteria: 

• incorporated after April 26, 1965, in Canada 

• incorporated before April 27, 1965, but during any tax year after April 26, 1965, it carried on business in Canada or a resident under common-law principles 

• under common law, a corporation is a resident of Canada if this is where central management and control of the business occurs 

Corporate non-resident 

A corporation is considered a non-resident if it does not meet any of the requirements stated above. If there is an existing tax treaty, then the treaty would control the definition of a “resident.” Hence, a corporation incorporated after Aril 26, 1965, may still be a non-resident if there’s an existing agreement between Canada and the source country. 

Here’s how corporations are viewed for legal purposes: 

What are cross-border tax arrangements? 

Cross-border tax arrangements are the tax strategies developed after considering the tax implications of operating in different countries. Generally, this refers to tax treaties established between countries. However, it can also include taking advantage of tax credits or deductions imposed by a host country for certain industries. 

Here are just some of the cross-border tax law implications that could be factored in when preparing cross-border tax arrangements. 

Zero-emission technology manufacturers 

The most recent legislation is allowing reduction of corporate income tax (CIT) rates by 50 percent until 2031. This applies to eligible income derived from zero-emission technology in manufacturing and processing. To get this reduction, however, 10 percent of a company’s gross revenue from Canada must be from eligible zero-emission technology manufacturing and processing. 

Tax abatement 

Tax abatement amounts to 10 percent and is deducted from the federal CIT for both resident and non-resident corporations.  

Tax treaties 

Tax treaties are perhaps the most important factor when it comes to cross-border tax law. Since these treaties are specific in application, their provisions usually trump CRA provisions. Canada is currently engaged in multiple tax treaties, both multilateral and bilateral. Here’s an overview of some of the treaties: 

• Canada – USA Treaty – this is made to avoid double taxation. Under this agreement, both countries allow foreign income tax credit for income tax paid to the other country 

• Canada – Hong Kong Treaty – under this agreement, income is only payable on the profits derived from the business established in each respective country  

• Canada – Philippine Treaty – this is also meant to prevent double taxation. One of the conditions is that the foreign corporation may only be taxed for profit generated in Canada 

• Canada – New Zealand Treaty – for purposes of business tax, the foreign corporation may only be taxed on profits derived by the permanent establishment in Canada 

For specific issues, you can check our list of Lexpert-ranked best cross-border tax law attorneys. 

What are cross-border taxes? 

Cross-border taxes are the tax implications that occur when a company operates in two different countries. There are three possible laws that govern these taxes: the laws of the host countries and the treaty between them, if any. 

In Canada, residency determines the total amount of cross-border tax imposed by the Canada Revenue Agency (CRA). Here’s a simple look: 

• Corporate residents are taxed based on their CIT on worldwide income. This means that the income generated inside and outside of Canada are taxed. 

• Corporate non-residents are taxed based on income derived from Canada only. Taxable Canadian property sold by non-residents are also subject to capital gains tax. 

However, the cross-border tax law mentioned above is general in application. Like all countries, Canada categorizes businesses further for purposes of imposing tax. Factors affecting computation include the industry, the product or service of the business, branches in the country, and existing treaties. 

Provincial or territorial rates also apply on top of the federal rates. Here’s an overview of the different business taxes paid by corporations. 

For a deep dive into cross-border tax law, look through our Legal FAQs page and bookmark this page for updates. 

Of course, that is just a small snapshot of taxes payable by corporations operating in Canada. Another interesting development is Canada’s Global Minimum Tax (GMT) which applies to large multinational enterprises (MNE). Under this, qualified MNEs must pay a minimum of 15 percent effective tax rate.  

Note that some taxes are unique to an industry, which is why cross-border tax law can be confusing. To gain more insight, it always helps to have the best cross-border tax lawyers to help with the process. 

What are common cross-border tax law issues for businesses? 

Cross-border tax planning is critical if you want to minimize the cost of payable taxes. Corporations that fail to plan for taxes may find themselves facing the following problems: 

Tax evasion 

It's often said that tax is the lifeblood of a State, which makes the government very strict with tax evaders. Hence, these treaties actually help ensure that taxpayers can’t hide behind confusing or conflicting tax laws. With a common approach to taxation, governments can guarantee that payments are made by non-resident corporations. 

Cross-border tax issues happen when there are no existing treaties. This makes it difficult for companies to harmonize Canadian laws with their home-countries leading to evasion of taxes or double taxation. 

Double taxation 

Double taxation happens when cross-border tax laws do not complement each other. The term refers to two taxes paid over the same income. A classic example is when a resident corporation pays taxes on its global income. Afterwards, it pays taxes again for income derived from a specific country where it operates. 

Being taxed double for the same income is often a deterrent for corporations looking to expand. A common solution for this is tax treaties. With tax treaties, tax obligations can complement each other, which can encourage foreign businesses to enter the country.  

Here’s a great simple explanation for double taxation: 

Fines and penalties 

With or without treaties, tax laws can be very confusing. This is especially true for corporations with multiple types of income. When filing, you need to be mindful of what tax to pay but also when to pay it. 

Even if unintentional, filing a late return already incurs a penalty of 5 percent of the unpaid tax. Lateness of one complete month adds a 1 percent penalty and will run until 12 months. 

If the CRA has to issue a demand to file a return, the penalty will be doubled. Hence, a 10 percent fine will be due on unpaid tax and 2 percent on each complete month of delay. 

Non-resident corporations are also subject to failure to file a penalty of $100 and $25 for each day of delay. The applicable treaties may also carry specific penalties for violating corporations. 

Base erosion and profit shifting (BEPS) 

Generally, tax avoidance has no legal consequences. However, tax avoidance that defeats the spirit and purpose of the law, like BEPS, is punishable.  

Multinational companies perform BEPS by shifting profit from one high-tax country to a low-tax country. For example, a corporation in Canada may choose not to declare profits made in the country. Instead, they will declare these profits in their establishment in a low-tax country.  

As a result, the tax liability of the company in Canada is reduced. This circumvents the law because while income is declared, it is not declared in the country where it was generated. 

Transfer pricing disputes 

The movement of goods and services from one jurisdiction to another could be the subject of a tax audit. Specifically, cross-border tax law authorities could question the accuracy of pricing as products move from one corporation to another. This could also be an issue when factoring in currency exchange rates. 

These issues faced by cross-border corporations are on top of the common complexities such as filing deadlines, forms, and documentation. 

What are the best practices to minimize the impact of cross-border tax? 

Tax avoidance and tax evasion are both punishable under the CRA. However, that doesn’t mean that corporations have zero recourse to help minimize the impact of taxes. Here are some of the best lawful cross-border tax practices: 

Tax planning 

Before even entering the Canadian market, corporations are advised to plan out their tax structure. By doing so, corporations can plan for, apply for, and benefit from lawful tax avoidance practices applicable to businesses. It can also help prevent time-consuming audits or even investigations. 

Jurisdiction-specific tax team 

Every multinational corporation should have a tax team specific to each country they pay taxes to. This helps prevent confusion and makes it easier to consolidate if necessary. A jurisdiction-specific team can also focus more on tax implications, possible deductions, and write-offs.  

Treaties 

Leveraging heavily on treaties should be a common practice in all multinational corporations. In fact, corporations capable of lobbying for treaties should do so in order to create harmonized guidelines.  

Stay updated 

Consistently watching out for new tax issuances is a great way to avoid mistakes when filing. It also helps corporations ensure the correctness of their accounting practices.  Note that tax laws are consistently evolving. They could change from one administration to the next, which means that staying updated is a full-time concern. 

Multinational corporations are exposed to an added layer of tax complications in the form of cross-border tax law. However, by staying ahead of tax regulations and using treaties effectively, corporations can give themselves room to grow across borders. 

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