If you are a Canadian corporation, then you are required to file a Corporate Tax Return each year. You may not owe tax in a particular year, but this is still a legal requirement. This form is complex and needs to be sent to the right tax office. In this article, we will discuss how to file your corporate tax return in Canada.
Corporations that operate through a Canadian permanent establishment (such as a branch) are subject to Canadian income tax
In general, corporations that operate through a Canadian permanent establishment (like a branch) are subject to the same Canadian income tax rates as Canadian subsidiaries. However, certain tax treaties may exempt the first $500,000 of a nonresident corporation’s cumulative income from branch tax. This can give relief to corporations at the early stages of operations in Canada.
Under the Income Tax Act, individuals are considered to be non-residents of Canada if they have a primary residence outside of Canada. In some cases, Canadian civil servants may also be deemed to be Canadian residents.
Canada’s tax treaties define the concept of a permanent establishment. A permanent establishment is generally a “fixed place” of business. Examples of permanent establishments include offices, factories, workshops, and farms. In addition, permanent establishments can be natural resources extraction sites. Building sites are also considered permanent establishments, if the project lasts longer than 12 months.
Income tax rates are calculated differently in each province. In addition to federal taxes, the provinces and territories impose their own taxes on business income. The federal rate is 7%, while the provincial and territorial rates are 12% and 11%, respectively.
Corporations that operate through a Canadian branch are also subject to Canadian income tax. If the Canadian branch is a non-resident, it will be liable for tax on its income from Canadian sources. However, if the non-resident corporation has a permanent establishment in Canada, it will only be taxed on the income derived from its Canadian branch.
Canadian income tax is imposed on interest expense paid by foreign subsidiaries. Under the current thin capitalization rules, a Canadian permanent establishment can only deduct interest expenses up to 60% of its total cost. In addition, debts related to the Canadian business should be deducted from the total cost.
Certain benefits, such as stock options, may be exempt from tax. However, the deductible portion of these benefits may not exceed CAD 500 million annually. The deduction amount is based on the fair market value of the underlying shares on the date of grant.
Corporations that make distributions of paid-up capital without incurring Canadian withholding tax
Corporations that make distributions of their paid-up capital without paying Canadian withholding tax must meet certain criteria to be eligible for this deduction. These criteria include being a CCPC incorporated in Canada, having a head office in the province, and having at least two employees, one of whom must be a full-time employee. These corporations must apply to the Department of Finance and the Treasury Board of Nova Scotia for a certificate of eligibility. The certificate can be applied for each tax year.
Corporations that make distributions of paid up capital without paying Canadian withholding tax are exempt from the federal income tax in most cases. In addition, they can deduct foreign investment profits and income. However, dividends from foreign affiliates are not taxed in Canada, and they may be eligible for a foreign tax credit. However, there are certain limitations related to foreign dividends, including the nature of the earnings and the amount of foreign taxes involved.
The corporation may also designate a portion of its taxable dividend as an eligible dividend. This designation is not considered an improper tax avoidance practice if it is made within three years of the first required date and in the opinion of the minister. However, the corporation must have the capacity to pay eligible dividends.
Corporations that are required to provide contemporaneous documentation to the Canada Revenue Agency
Corporations that engage in business with non-residents are required to prepare and submit contemporaneous documentation when requested by the Canada Revenue Agency (CRA). Corporations that fail to comply with this requirement may face substantial penalties, which can range from fines to dissolution proceedings. The requirement is also applicable to corporations within a multinational group.
Generally, a corporation that is required to provide contemporaneous documentation to the CRA must do so within three months of a tax assessment. Failure to provide the requested documentation may result in a failure-to-file penalty of CAD 500 per month to CAD 12,000 per failure.
A corporation that carries on business in Canada is required to keep records of all transactions, including payroll and income tax payments. It must also make those records readily available for audit. A failure to comply with a CRA request may result in a Federal Court order requiring compliance and a conviction for contempt of court.
A corporation that fails to provide contemporaneous documentation to the CRA may be subject to recharacterization under the ITA. This provision allows the CRA to recharacterise a transaction based on hypothetical circumstances. In other words, if the corporation had acted as an independent company, it would have received the same tax benefits.
A corporation that operates a branch in Canada must also provide contemporaneous documentation to the CRA. The accounting records of a branch may be more complex than that of a corporation’s Canadian subsidiaries. In addition, determining the relative contribution of each branch to the overall expenses may raise difficult questions. In such cases, preparing acceptable financial statements can become a practical challenge.
While the OECD Guidelines are deemed the most appropriate in determining whether corporations are required to provide contemporaneous documentation to their foreign counterparts, the CRA has found that profit split methodologies are the most effective for some transactions. Regardless of whether you are required to provide contemporaneous documentation, it is essential that your business choose the best methodology.
CRA requires companies to disclose their transfer pricing arrangements in accordance with applicable transfer pricing rules. For example, corporations that use foreign currency exchange to reduce their costs may be required to disclose the amount of foreign currency transactions, such as purchases or sales. It is important to disclose all transactions with non-resident entities and disclose the related transaction amounts. If you have questions, consult with a transfer-pricing advisor.
The CRA has increased its focus on transfer pricing in recent years, and documentation requirements have become more stringent. Corporations should prepare for audits by preparing a comprehensive transfer pricing documentation package. This package should include contemporaneous documentation, up-to-date intercompany agreements, and other supporting documents.
A private corporation controlled by Canadian residents may qualify as a CCPC. These corporations must prepare and submit contemporaneous documentation for their tax returns. This is a vital part of tax preparation. The deadline for most Canadian corporate tax filers is June 30, 2019.
