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Legal Guide

Canada imposes corporate and personal income tax on its residents and on non-residents who carry on business in Canada, are employed in Canada or sell property situated in Canada. Canadian resident individuals and corporations are taxable on their income, including capital gains earned anywhere in the world. Non-residents of Canada are generally only taxable on their income from Canadian activities and investments, including gains on the sale of certain types of Canadian investments.

All of the provinces of Canada also impose income taxes on corporations and individuals residing or carrying on business within the province. Historically most provinces impose a capital tax on corporations. However, in recent years provincial capital tax has been eliminated or curtailed. Currently, Saskatchewan, Manitoba, Quebec, Newfoundland and Labrador, Prince Edward Island and New Brunswick impose a limited capital tax on specific entities including, in some cases, financial institutions, insurance corporations, and provincial commercial Crown corporations. The other provinces impose no capital tax. Canada also imposes a 25 percent withholding tax on non-residents who receive dividends, certain interest payments, rents, royalties or management fees from Canada. The Canadian payor of any such amounts is liable for withholding and remitting this tax on behalf of the non-resident recipient. Canada has entered into tax treaties with numerous countries, in order to prevent double taxation of the same income in two countries. Generally, tax treaties address which country is entitled to tax particular forms of income in a variety of specific situations.

Tax treaties may also eliminate or reduce withholding tax. For example, the Canada-US Tax Convention (the “Canada-US Treaty”) eliminates withholding tax on most interest and reduces the rate on dividends to 15 percent or 5 percent depending on the circumstances.

Recent changes to the Canada-US Treaty have also been made to facilitate treaty relief for hybrid entities (such as partnerships and limited liability companies) while ensuring that hybrid entities do not take undue advantage of the Canada-US Treaty.

Federal tax rates are uniform across the country, with certain reductions and credits intended to encourage the development of business activity and employment in certain industries of the economy, and in economically depressed regions of Canada. Tax incentives are also available to encourage research and development in Canada. The provinces establish their own rates of tax and, in some cases, rules for the computation of taxable income. For 2014, the combined federal and provincial tax rate on general active business income (including surtax) for corporations ranges between 25 percent and 31 percent, depending on the province.

Individuals pay taxes in accordance with a progressive rate structure which imposes higher rates of tax on higher levels of taxable income. For 2014, the maximum combined federal and provincial rate for individuals ranges between 39 percent and 50 percent, depending on the province.

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