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Legal Guide

A foreign company that is not resident in Canada is subject to Canadian income tax on income earned from any business carried on in Canada. If a business is carried on in Canada through a branch operation, the income attributable to that branch will be subject to income tax in much the same way as if it had been earned by a subsidiary. The method of calculating income subject to tax and the rates will be as outlined above. However, the majority of Canada’s bilateral tax treaties provide, generally, that the business profits of a foreign enterprise carrying on business in Canada will only be taxable in Canada if they are attributable to a permanent establishment PE situated in Canada. PE is defined to include branches, offices, agencies and other fixed places of business of an enterprise. Under the Canada-US Treaty, the provision of services in Canada may constitute a permanent establishment in Canada commonly referred to as a "services PE".

An additional tax, commonly referred to as “branch tax”, will also be payable. Branch tax is payable at the rate of 25 percent of the after-tax profits of the branch operations not being reinvested in Canada. Branch tax is roughly equivalent to the withholding tax, which would be payable on dividends paid by a Canadian subsidiary to its foreign parent organization. The rate is reduced under certain tax treaties to 10% or 15%. Under the Canada-US Treaty, the rate has been further reduced in certain circumstances to 5% of after-tax profits. In addition, certain treaties, such as the Canada-US and Canada-UK treaties, provide for an exemption from branch tax. Under the Canada-US Treaty, the exemption is in respect of the first $500,000 of branch profits net of prior years’ losses. Under the Canada-UK Treaty, the exemption is in respect of the first $500,000 or £250,000, whichever is greater, of branch profits net of prior years’ losses.

A foreign entity should determine whether its own jurisdiction will permit a foreign tax credit in respect of Canadian income tax payable, including branch tax.

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