Treaty based corporate tax return in Canada

Mar 8, 2021

Hello, I am Olivier Wagner. I have been preparing US tax returns since 2012 and today I will discuss a topic that applies on both sides (the US and Canada). But I’ll be talking about a foreign corporation that has some sort of presence in Canada but doesn’t rise up to be a permanent establishment.

Most tax treaties provide that if a corporation, a tax resident of the other country (2), operates in a country (1) without a permanent establishment, they wouldn’t be subject to income tax in the country (1)

Generally speaking, a permanent establishment would be a place of business where contracts are signed, decisions are made. Whereas a warehouse for instance would be specifically excluded.

In addition to avoiding income tax, taking advantage of the tax treaty and filing a protective tax return would allow you to apply for two waivers:
1) ITA Regulation 105.
Requires Canadian customer to withhold 15% of the invoice.
Only a prepayment, not final tax liability
2) ITA Regulation 102 waiver
Exempt employees from income personal tax filing and withholdings if treaty conditions are met

By filing a protective, treaty-based tax return, the corporation will take the position that it didn’t have a permanent establishment in Canada, it will also start the statute of limitation that the CRA would have to audit the corporation.

Until next time,
Olivier Wagner

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