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Legal Guide

If business is to be carried on in Canada through a branch operation having a permanent establishment, it will be subject to income tax in much the same way as if it had been earned by a subsidiary, as outlined above. However, it is important to note that, in the case of a resident of a country with which Canada has a tax treaty, generally, that person may carry on business in Canada without attracting Canadian income tax, provided no permanent establishment is maintained in Canada. See also the discussion below under the subheading “Canadian distributors and selling agents”. In addition, whether a non-resident decides to carry on business in Canada through a subsidiary or through a branch, appropriate federal and provincial income tax returns will need to be filed and, in support of these filings, the Canadian operation will be required to keep appropriate books and accounting records in Canada.

On a long term basis, the use of a subsidiary is often found to be preferable, if for no other reason than the existence of a separate legal entity in Canada encourages and facilitates the separate accounting necessary for Canadian purposes, and the determination of acceptable cross-border pricing. On the other hand, the ability of the non-resident to use Canadian source start-up losses may encourage the use of a branch operation, until the Canadian business becomes profitable. Subsequently, branch assets, other than real property, can be transferred to a Canadian subsidiary on a tax-free basis for Canadian purposes, provided the appropriate tax elections are made. Before a foreign corporation transfers assets to a Canadian subsidiary, caution should be taken since it could trigger taxes in the foreign corporation’s country of residence. Whether a business comes to Canada as a branch or subsidiary could impact the valuation of imported goods. For customs purposes, it is generally the transaction value (being the value at which goods are sold to the Canadian importer) that forms the value for duty (i.e. the base upon which customs duties are calculated). However, where goods are transferred to a Canadian branch, a sale has not taken place and, consequently, the transfer price may not form the value for duty and another value, such as the selling price in Canada less certain adjustments, may become the value for duty. Likewise, since the federally imposed Goods and Service Tax (GST), Québec Sales Tax (QST) or Harmonized Sales Tax (HST) is payable on the duty-paid value of imported goods, the tax payable depends on the customs valuation of the goods. For more information regarding these taxes, see the discussion below under the section “Commodity tax considerations”.

In certain circumstances, where the parent corporation is a US corporation, an “unlimited liability company” (“ULC”) is often considered. A ULC is a hybrid entity for US tax purposes and as a result may enable the tax attributes, such as start-up losses, of the ULC to be used for US tax purposes.

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