BUSINESS PROFITS

RULES UNDER THE INCOME TAX ACT

General Rules

In general, a non-resident who "carries on business in Canada" in a year is subject to tax in Canada on that year under Part I of the Act, on the profits derived from that business.

Where only a portion of the business is carried on in Canada (e.g. a Canadian branch), the profits reasonably attributable to the activities carried on in Canada will be subject to tax on Canada.

The determination of whether or not a non-resident carries on business in Canada in a year will be based both on common law rules (mainly derived from UK tax cases; emphasizing such factors as place where contract completed) as well as deeming rules found in the Act. For example, under paragraph 253(b) of the Act, a person will be deemed to be carrying on business in Canada if that person "solicits orders or offers for sale in Canada through an agent or servant".

Branch Tax

A special tax is payable by a non-resident corporation which carries on business in Canada. This tax, which is levied under Part XIV of the Act, is usually referred to as the "branch tax". The intention of the branch tax is to put a foreign corporation which carries on business in Canada via a branch in roughly the same position as if a Canadian subsidiary were used.

In general terms, the tax is equal to 25% of the profits earned in Canada (after normal federal and provincial income taxes) that are not retained in the Canadian branch.

RULES UNDER CANADA'S TAX TREATIES

Jurisdiction To Tax

Canada's tax treaties generally preclude Canada from taxing the business profits of a non-resident unless the profits are attributable to a "permanent establishment" in Canada (or, in the case of "independent personal services", a "fixed base").

Although those treaties do not apply for provincial tax purposes, the end result under provincial tax laws is generally the same.

It should be noted that Canada's tax treaties typically allow Canada to tax the income earned by a non-resident athlete or entertainer in Canada, even in the absence of a permanent establishment or fixed base.

Branch Tax

Canada's tax treaties usually provide some relief from the application of the branch tax, both in terms of the rate, as well as in terms of a cumulative exemption. The application of these rules for a number of major countries is outlined below.