International expansion can be a very profitable proposition for many companies. Proactive planning on any global expansion will ensure tax issues are proactively dealt with and managed.
Published: May 29, 2017
Updated: May 29, 2017
Canadian companies looking to grow often need to look beyond our borders. Given the highly mobile nature of people, processes, and intellectual property in the tech industry, if not done carefully, global expansion can result in unintended tax consequences.
1. Creating a taxable presence in the foreign jurisdiction:
- Some people refer to this concept as nexus; regardless of how it's described, it can create a taxable event for the Canadian company.
- To have a taxable presence in a foreign jurisdiction means there is some level of activity taking place in that foreign jurisdiction. Unfortunately this threshold is often not very high and can include many routine business activities.
- Common examples include meeting/soliciting with customers, hiring local employees, and using sub-contractors to perform certain services (e.g. development, coding, etc.)
2. Does the foreign jurisdiction have a tax treaty with Canada?
- Tax treaties are an important concept in the world of international taxation. Essentially, the treaty is like a referee and has the final say as to which jurisdiction has the right to tax the income.
- In addition, the treaty sets a higher threshold than a "taxable presence" in order to be subject to tax - this is known as a Permanent Establishment (PE).
- Once you create a PE, you are taxable in that jurisdiction.
- A PE can be a physical location, such as office space, an employee's home office, or a place where contracts are signed and concluded. Certain tax treaties can deem a PE to exist when services are being performed for a certain length of time in that country (as with the Canada-U.S. Tax Treaty).
- If you are operating in a jurisdiction that Canada does not have a treaty with (as with certain "tax haven" jurisdictions), it is much easier to cause that foreign entity to be taxed in Canada, therefore negating any benefits created from the off-shore structure that was developed. For example, this could happen if the decisions about how the foreign entity is operated are made by Canadian residents in Canada.
3. Ensuring you maintain your Qualified Small Business Corporation (QSBC) status
- A Canadian Controlled Private Corporation (CCPC) creating PEs in foreign jurisdictions can jeopardize its QSBC status.
- Why is it important to be a QSBC? When the Canadian resident shareholder sells the shares of the CCPC, the first $835,000+ can be tax free in Canada (known as the Capital Gains Exemption Limit (CGEL)). If a CCPC loses its QSBC, the CGEL will not apply and the share sale may result in actual cash tax payable.
- Having a PE in a foreign jurisdiction or having foreign subsidiary of a CCPC can taint a QSBC status.
- If the PE or the foreign subsidiary's fair market value will be greater than 10% of the overall company, the CCPC will lose its QSBC status. This will result in real cash tax payable on a share sale.
- Fortunately, with proper planning and structuring, is it possible to maintain your QSBC status while operating in foreign jurisdictions.