Doing Business in Canada: 5 Mistakes Foreign Companies Make

03 Jul 2018

Howard Lerner

When a country has as much to offer as Canada, it is easy to see why hundreds of foreign investors want to set up operations here.

 
Canada is among the top countries in the G-20 for business, with costs up to 14.6% lower than all other G-7 countries according to "Invest in Canada".
 

It also remains one of the most profitable and welcoming places in the world for international business and foreign direct investment.

As a trusted advisor, I have been approached by business owners whose primary struggles in Canada come down to a bigger, more important issue than costs: a lack of understanding of the Canadian tax rules.

Here are the 5 most common mistakes business owners need to keep in mind when bringing business into Canada. 

1. I do not have to pay taxes in Canada as my business is not yet incorporated in Canada.

Foreign companies providing services or goods in Canada are very likely to be subject to both, income tax and sales tax regardless of whether the business is incorporated or not. If you provide services that are not incorporated, your Canadian customers could be "on the hook" to withhold 15% tax on your invoice and remit that tax to the CRA on account of branch income tax.

2. I do not have to file tax returns in Canada for my Canadian operations as I pay taxes in my US company.

Business must file tax returns in the country that they operate and could be subject to taxes in multiple countries.

3. I do not have to "leave" any profit in my Canadian company since I can choose which country I can leave it in.

If you have two or more companies in multiple countries as part of a group and they buy/sell goods or services between each other, then you cannot choose which country will be home to your profit. Profit has to be distributed and taxed in each country based on reasonableness. Reasonableness is often established with an "economic transfer pricing study". This type of study looks at many economic factors to determine pricing and profitability.

4. I do not have (or need) to register for payroll taxes in Canada although I have employees resident in Canada.

Once you engage people to work for you, one of your obligations as an employer is to pay them correctly. In Canada, this means registering with Canada Revenue Agency (CRA) to properly withhold payroll tax and remit to the government on time.

5. I do not have to set up a separate Canadian company since I am continuing to use my US company.

CRA has the right to audit the foreign company which is "carrying on" business in Canada via a branch rather than through a separate Canadian company.