A subsidiary incorporated in Canada will be considered to be a Canadian resident for income tax purposes. It will be subject to Canadian income tax on its income earned anywhere in the world from any source, subject to a credit for foreign taxes paid on non-Canadian income.
Where a corporation carries on business through a permanent establishment in a province, the rate
of federal tax imposed on a corporation’s taxable income (including surtax) is 15 percent.
Particular consideration should be given to loan transactions between the Canadian subsidiary and its foreign parent, and to interest charged in respect of such loans. Under the current “thin capitalization rule”, a portion of any interest which the Canadian subsidiary might pay to its foreign parent on amounts owing by it to the parent, may be disallowed as a deduction in computing the subsidiary’s income. In general terms, if the ratio of the debt (owing to the parent or other non-resident affiliate) to the equity (paid-up capital, surplus and retained earnings) of the Canadian subsidiary does not exceed 1.5-to-1, no amount of interest expense will be disallowed. On the other hand, if the debt to equity ratio exceeds 1.5-to-1, the interest on the excess debt will be disallowed and instead, treated as a dividend to the non-resident (which would be subject to withholding tax at the applicable rate for dividends). The subsidiary could borrow from arm’s length financial institutions without offending the thin capitalization rule; however, in these cases, specific anti-avoidance rules are not in place to prevent back to back loans using an arm’s length intermediary lender. These new rules are worded broadly and can capture many arms’ length lending arrangements for Canadian corporations with specified non-resident shareholders.
Because the profits of a Canadian subsidiary or branch can be affected by the cost at which it buys from or sells to related parties, the Income Tax Act (Canada) provides detailed rules governing the accounting of such transactions for tax purposes. In general, transactions between non- arm’s length persons (such as a parent and its wholly-owned subsidiary) are deemed to take place at fair market value, without regard to what is in fact paid. For instance, if a parent sells goods or provides services to its subsidiary at more than the fair market value of the goods or services, or if the subsidiary sells goods or provides services to its parent at less than fair market value, the subsidiary is deemed to have paid or received fair market value for income tax purposes.
Recently enacted “foreign affiliate dumping” rules dissuade the use of Canadian corporations in structures where the Canadian resident corporation has both a non-Canadian parent and a non-Canadian subsidiary. In such cases, if the Canadian corporation does not have a sufficient level of Canadian management and is not financed with a sufficient amount of equity, its investment into the non-Canadian subsidiary could result in dividends being deemed to be paid to its non-Canadian parent.
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CASL also prohibits installing a “computer program” – including an app, widget, software, or other executable data – on a computer system (e.g. computer, device) unless the program is installed with consent and complies with disclosure requirements. The provisions in CASL related to the installation of computer programs will come into force on January 15, 2015.
On April 7, 2014, the Minister of the Environment issued a Notice with respect to hydrofluorocarbons (the “Notice”), pursuant to the Canadian Environmental Protection Act, 1999. The Notice imposes reporting requirements on those who imported, exported, or manufactured certain hydrofluorocarbons (“HFCs”) from 2008 and 2012. A non-exhaustive list of HFCs subject to these reporting requirements can be found in Schedule 1 of the Notice.
In an interesting decision, the Human Rights Tribunal of Ontario has ruled that an employer is not liable for discriminatory and harassing texts sent by a rogue employee to another of its workers.