2 tax requirements for U.S. companies in Canada

U.S.-based business-owner clients who send staff into Canada may have Canadian tax exposure. Here are two to consider.

1. Goods and services tax

When a registrant charges a client GST, it remits payment to the government. When it pays expenses subject to GST, it gets an input tax credit equal to the amount paid (there some exceptions).

The tax goes by one of three names, depending on the province the company’s operating in. Some provinces have integrated their sales tax systems with the federal government’s GST. This Harmonized Sales Tax (HST) is administered federally, by CRA. In Quebec, it’s known as QST and handled by the Quebec government, requiring a separate return.

If your client isn’t Canadian, he may not be required to register for GST. But it’s often advantageous to register because it provides access to the input tax credit system.

2. Corporate income tax

Withholding

The first thing that happens when the company invoices for services rendered in Canada is that income tax is withheld at source. The company’s Canadian clients must withhold and remit 15% of any payments for services rendered in Canada. This withholding is not actual tax—it’s a payment on account of tax, which may be refunded. One major trap is cascading payments. If the company’s client pays a middleman, who then pays the company, withholding is required at each stage.

It’s possible to request permission from CRA to reduce or eliminate this withholding where it’s greater than the anticipated actual tax. Services rendered outside Canada are not subject to withholding or tax.

Actual tax

If the company has a Permanent Establishment (PE), it’s subject to Canadian tax. There are three main ways to have a PE:

• The company has an office or other physical place of business in Canada and
• The company has people working in Canada for more than 183 days in any 12-month period, working on a single project or a group of connected projects. Any portion of a day counts as a day, and any people in Canada on one day counts as a day.
• A two-part test: a. A person working for the company is present in Canada for more than 183 days in any 12-month period; and b. Canadian revenues exceed 50% of the company’s gross business revenue.