Canadian Branch Profit Tax

Doing what is legally best for your business and its advancement into Canada, given Canada's strict tax-related rules.

Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Canada imposes a distinct "branch profits tax" on non-resident corporations that carry on business in Canada through a branch. The branch profits tax is an additional tax (Part XIV tax) that is levied on top of the regular Part I corporate income tax that the branch pays on its Canadian-source income. The calculation starts with the branch's after-tax income and then makes adjustments to account for the amount of profits that are reinvested in Canada.

Purpose of the Branch Profit Tax

• The branch profits tax is designed to create a level playing field between foreign corporations operating in Canada through a branch and those operating through a Canadian subsidiary. When a Canadian subsidiary pays dividends to its foreign parent company, those dividends are subject to a non-resident withholding tax. The branch profits tax is intended to replicate this withholding tax on profits that a branch repatriates to its foreign head office.

How the Branch Profit Tax Works

• The branch profit tax is applied to the after-tax profits of the Canadian branch that are not reinvested in the Canadian business. The amount subject to the tax is determined by making adjustments to the branch's taxable income earned in Canada.

Tax Rate for the Branch Profit Tax

• Statutory Rate: The standard branch profits tax rate is 25%.

• Reduced Rate: This rate is often reduced under Canada's bilateral tax treaties. For example, under the Canada-US tax treaty, the rate is typically reduced to 5%, which is the same as the reduced dividend withholding tax rate under that treaty.

Exemptions and Reductions

• Many tax treaties also provide for exemptions or a threshold amount below which the branch profits tax does not apply. For instance, the Canada-US tax treaty exempts the first $500,000 (Canadian dollars) of cumulative branch profits from the tax.

• Certain industries are also exempt from the branch profits tax, including those whose principal business in Canada is transportation, communication, or mining iron ore. Special rules also apply to non-resident insurers.

Key Considerations re Branch Profit Tax

• Branch vs. Subsidiary: The branch profits tax is a major factor for foreign companies to consider when deciding whether to establish a Canadian branch or a Canadian subsidiary. A branch may be preferable if the business is expected to incur losses in the short term, as those losses might be deductible against the parent company's income in its home country. However, once the branch becomes profitable, it will be subject to the branch profits tax, which can be a significant cost.

• Reinvestment in Canada: The tax is only levied on profits that are not reinvested in the Canadian business. A non-resident corporation can reduce or eliminate its branch profits tax liability by retaining earnings and using them to acquire property for its Canadian operations.

• Filing Requirements: A non-resident corporation with a Canadian branch must file a Canadian T2 corporate income tax return and complete a specific schedule (Schedule 20) to calculate any branch profits tax owing.

To learn more about how our law firm stands apart when it comes to expanding your business into Canada, in what we do differently from most larger law firms and how this can properly protect and advance your Canadian commercial venture, contact our law firm today for a confidential initial consultation at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.  

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