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Introduction

  • In general, Canada recognizes four types of entities for income tax purposes: individuals, corporations, partnerships and trusts.

Individual Tax

  • Canadian citizens/residents are subject to tax on their worldwide income.
  • The Canadian federal government uses a marginal income tax system and each province/territory imposes income taxes based on the table below (shown at the highest marginal rate).
Province/Territory Salary, Interest, Pension, etc. Eligible Dividends Dividends Other than Eligible Dividends Capital Gains
British Columbia 43.70% 26.11% 33.71% 21.85%
Alberta 39.00% 19.29% 27.71% 19.50%
Saskatchewan 44.00% 24.81% 33.33% 22.00%
Manitoba 46.40% 32.27% 39.15% 23.20%
Ontario 49.53% 33.85% 36.47% 24.77%
Quebec 49.97% 35.22% 38.54% 24.99%
New Brunswick 43.30% 22.47% 30.83% 21.65%
Nova Scotia 50.00% 36.06% 36.2% 25.00%
Prince Edward Island 43.37% 28.70% 41.17% 21.69%
Newfoundland/Labrador 42.30% 22.47% 29.96% 21.15%
Yukon 42.40% 19.29% 30.41% 21.20%
NW Territories 43.05% 22.81% 29.65% 21.53%
Nunavut 40.50% 27.56% 28.96% 20.25%

 

Withholding Tax

  • Non-residents are subject to withholding tax on income received from Canadian sources.
  • The default withholding rate is 25%.The U.S.-Canada tax treaty allows for reduced withholding rates as follows:
    • Interest – 0%.
    • Dividends – 15%
    • Royalties – 0%
    • Pensions and Annuities – 15%
  • U.S citizens/residents who intend to rent property in Canada are subject to a non-resident withholding tax of 25% on gross rental income. However, when the rental income is considered investment income as opposed to business income, the 25% withholding tax is applied to net rental income. In addition, if there is a rental loss no withholding is required.

Corporate Tax

  • If a corporation operates in Canada and has a permanent establishment in Canada, it is subject to
  • Canadian corporate tax.Corporate tax rates depend on the location (province/territory) in which the business operates as well as the nature of the income received.
    • The two types of income to be considered are active business income (“ABI”) and investment income (“non-ABI”).
    • There is a third factor to be considered which is based on the ownership of the corporation: Canadian-controlled private corporation (“CCPC”) vs. a private corporation vs. a public corporation.
    • Businesses with income less than 500,000 Canadian dollars annually are subject to reduced rates.
  • Corporations can also be subject to value-added taxes based on the value of goods and services supplied or imported into Canada.
  • The following table lists the highest corporate marginal tax rates based on the source of income received:
Province/Territory CCPC – ABI (Small business limit) CCPC – ABI in Excess of Small Business Limit Non-CCPC with ABI
British Columbia 13.50% 25.75% 25.75%
Alberta 14.00% 25.00% 25.00%
Saskatchewan 13.00% 27.00% 27.00%
Manitoba 11.00% 27.00% 27.00%
Ontario 15.50% 26.50% 26.50%
Quebec 19.00% 26.90% 26.90%
New Brunswick 15.50% 25.00% 25.00%
Nova Scotia 14.50% 31.00% 31.00%
Prince Edward Island 14.64% 31.00% 31.00%
Newfoundland/Labrador 15.00% 29.00% 29.00%
Yukon 15.00% 30.00% 30.00%
NW Territories 15.00% 26.50% 26.50%
Nunavut 15.00% 27.00% 27.00%

 

Canadian Retirement Plans

  • On October 7, 2014, the IRS announced that certain U.S. citizens and residents with interests in two types of Canadian registered retirement plans are no longer required to annually file Form 8891, reporting theirinterests in such plans and the contributions made to them.
  • Eligible U.S. citizens and residents holding interests in a Canadian registered retirement savings plan (“RRSP”) or a registered retirement income fund (“RRIF”) will be treated as having made an election under the U.S-Canada Income Tax Treaty to defer U.S. income tax on income accruing in the retirement plans until a distribution is made.

Owning Canadian Property

  • There are no restrictions for non-residents purchasing real estate in Canada, though they may become subject to Canadian income tax as discussed below. If you are considering purchasing or selling Canadian property, please do not hesitate to call us regarding the potential tax implications.
    • Property Taxes – A transfer tax that varies from province to province can be around 1% on the first $200,000 and 2% in excess.
    • Goods and Services Tax (GST) – New home purchases are subject to GST. The GST doesn’t apply to resale homes.
    • Taxes on Rental Property – The Canadian Income Tax Act requires that 25% of the gross property rental income is remitted each year. However, non-residents can elect to pay 25% of the net rental income.
    • Selling Canadian Property – When a non-resident sells Canadian property, there is a 50%withholding tax. U.S. citizens/residents must report the capital gain to the IRS; however, if the gain has been taxed in Canada, it can be can be claimed as a foreign tax credit.

 

 

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