There are a number of ways in which you can establish a Canadian corporate presence. This blog post will go over the most common setups, discuss tax implications, and provide a more detailed roadmap into setting up in Canada.
Before we begin, it’s important to note that every company is different, and thus it’s always a good idea to talk to a lawyer to get advice that is specific to your particular circumstances.
Canada has 10 provinces and three territories. Corporate law and employment law are largely similar across the country (with the exception of Quebec).
Foreign companies looking to set up a presence in Canada can choose to incorporate either under the Federal corporate statute, or under a specified province’s statute. Incorporating federally is usually recommended unless you have a very specific reason for wanting to incorporate under in one particular province.
The most common forms of incorporation in rough order of complexity are:
- Canadian Sales representative
- Canadian Subsidiary
- Branch Office
Canadian Sales Representative
If the activities that you wish to conduct in Canada are quite limited and relate mostly to offering products/services for sale, it is possible to avoid setting up a permanent establishment in Canada. This usually means that you do not have any presence in Canada – you merely have engaged agents to expand sales, but all the business activities (and money flows) happen outside Canada. This is often a precursor to setting up a more permanent establishment in Canada, as companies may want to better understand the market before committing.
The advantage of this approach is that you are not subject to Canadian tax on business profits.
A subsidiary is a separate legal entity (as opposed to a branch office), and thus there is a clear separation between the parent and the subsidiary. As a general rule, a Canadian subsidiary will have limited liability, and any claims made against the subsidiary do not extend to the parent.
Dealing with local authorities, lenders, banks, employees etc. is also usually easier for a subsidiary as it is no different from any Canadian company.
Setting up a subsidiary either Federally or most provinces (barring British Columbia and Nova Scotia) requires a resident Canadian (Permanent Resident or Citizen) director.
A Branch Office requires only an extra-provincial license (which is straightforward and inexpensive to obtain) and has no requirement to have resident Canadian directors. However, a Branch Office is not considered an independent entity and will open up the head office to Canadian liability. This may or may not be an advantage, depending on how your organization is otherwise structured.
Branch offices have consolidated financial statements with the parent and thus can take advantage of various tax benefits. On the flip side, preparing these statements can be difficult since determining income earned in Canada can be tricky.
In most cases, it is usually better to set up the Canadian entity as a subsidiary corporation.
Frequently Asked Questions
Should I incorporate Federally or in a particular province?
The two forms are substantially similar and there are no significant cost differences. The two big differences are:
- Federal incorporation requires a resident Canadian director
- Federal incorporation provides stronger legal name protection (however, a provincially incorporated company can get their name trademarked)
How long does it take to incorporate?
Usually 24 hours. The incorporation documents need to be submitted online, and you usually get a certificate of incorporation within 24 hours.
Are there tax benefits to incorporate in a different province to where my office will be?
No. The determination of the applicable tax rate will be made based on your principal place of business, not your province of incorporation. In general, it is better to incorporate either federally or in the province where the majority of your business activities will take place.
What are the applicable taxes and withholdings?
Businesses in Canada need to pay both federal income tax as well as provincial income tax. The federal tax rate in 2020 is 25%, while each province sets its own rate which is usually around 10-12%. Ontario has 11.5%, BC has 12%, etc.
Witholding & Deductions
In addition, employers in Canada are required to withhold and remit certain amounts to the Canadian Revenue Agency from an employee’s gross salary. These withholding vary by province. Employers are usually required to withhold and remit amounts for Income Tax, Employment Insurance (EI) and the Canada Pension Plan (CPP).
EI is currently calculated as 1.58% of the gross salary, and must be deducted from gross salary and remitted to the CRA by the employer on the employee’s behalf. The maximum amount of EI that needs to be withheld and remitted on behalf of the employee in 2020 is $856.36. In addition to the employee’s portion, the employer is required to remit 1.4 times the amount withheld from the employee, to a maximum of $1,198.90 for each employee.
CPP must also be calculated and deducted from an employee’s gross salary. CPP is calculated at 5.25% of gross salary to a maximum amount of $2,898.00 in 2020. An employer is required to contribute the same amount (5.25% of the employee’s gross salary to a maximum of $2,898.00), so that the total remitted to the CRA is 10.50% of gross salary to a maximum of $5,796.00 for each employee.
In addition to these withholdings, there may be additional provincial withholdings that are applicable.
The Federal Government charges a 5% Goods and Services Tax (GST). In addition to this, there are provincial sales taxes to consider.
- British Columbia – 7%
- Saskatchewan – 6%
- Manitoba – 8%
- Quebec – 9.975%
The provinces of Newfoundland and Labrador, New Brunswick, Nova Scotia, Ontario and Prince Edward Island apply a harmonized sales tax (HST) that combines the GST and the Provincial Tax. Ontario’s HST is 13%, while all the other provinces listed above charge 15%
Alberta is the only province that does not impose a Provincial Sales Tax.
Setting up a company in Canada is quite simple and has many advantages. We hope that this blog post helps you better understand your options. Talking to a lawyer is always a good idea.
If you have more questions, get in touch with me at [email protected]