Why choose Canada for your market expansion?
With a population of over 41 million people, Canada offers a substantial consumer base. Here are some other key reasons Canada remains a priority destination for market expansion:
All that being said, companies looking to expand into Canada have many tax considerations to keep in mind—not doing so can result in financial penalties or missed financial gains, both of which can affect the success of your entry into Canada.
Tax considerations for your expansion strategy into Canada
Taxation in Canada can be complex for foreign companies entering the market. Working with local tax professionals can provide foreign companies with the insights they need to ensure their entry exceeds their goals. Keep these tax considerations in mind:
Determine whether you have a taxable presence in Canada
Foreign corporations must determine if they have a taxable presence in Canada, known as “carrying on business” in Canada. A foreign corporation is considered to have a taxable presence if it carries on business in Canada or disposes of taxable Canadian property. This compliance obligation applies even if the corporation is eligible for treaty-based exemptions from income taxes payable. The threshold for “carrying on business” is relatively low, activities such as sending employees to Canada, using Canadian sales agents, or performing services in Canada can trigger income tax filing requirements and potential tax liabilities.
Find out what Canadian corporate income tax rates are
If your business has a taxable presence, it will be subject to Canadian corporate income tax. The federal tax rate is 15%, however provinces and territories also levy corporate income tax. For example, foreign companies carrying on a business in the province of Ontario will be subject to a combined effective tax rate of 26.5%.
Establish the business structure for your Canadian entity
The choice of business structure for your Canadian operations is a critical decision with significant tax implications. Two primary options include establishing a branch or incorporating a Canadian subsidiary:
- Branch: A branch is a direct extension of the foreign parent company and can operate in Canada without creating a new legal entity. Canada has a branch tax in which foreign companies operating through a Canadian branch may be subject to a 25% tax on profits that are not reinvested in Canada, though this tax may be reduced under an applicable tax treaty. Note that branch tax is in addition to Canadian federal and provincial corporate income tax.
- Incorporated subsidiary: Businesses can create a new legal entity with incorporation under federal or provincial law in Canada. The entity will be subject to Canadian corporate income tax and any distributed profits may be subject to a 25% dividend withholding tax, which may be reduced under an applicable tax treaty.
Learn the ins and outs of Canadian tax treaties
Canadian tax treaties are designed to prevent double taxation and include specific provisions that determine which country has the right to tax a business. For example, under the Canada U.S. Tax Treaty, some U.S. companies may be exempt from Canadian income tax if their business activities do not create a permanent establishment in Canada. However, the treaty does not provide an exemption from Canadian sales tax obligations, such as GST/HST or provincial sales taxes, which may still apply depending on the nature of the business.
Canada has tax treaties with many countries that are currently active.
Understand how transfer pricing works in Canada
Any transactions between a Canadian entity and a foreign entity within the same group of companies must adhere to transfer pricing regulations. This requires transactions to be conducted at arm’s length prices in accordance with The Organization for Economic Cooperation and Development (OECD) guidelines to ensure the correct amount of profit is reported in Canada. The Canada Revenue Agency heavily monitors transfer pricing transactions and penalties are severe for non-compliance.
Learn how withholding taxes work in Canada
Canada imposes withholding taxes on certain payments made to non-resident individuals and corporations, including Regulation 105 (for payments to non-resident service providers where services are physically rendered in Canada) and Regulation 102 (for employment income paid to non-residents rendering employment services in Canada).
A 25% withholding tax generally applies to payments such as management fees, dividends, interest, rent, and royalties made to non-residents, regardless of whether the payer has a taxable presence in Canada. However, this withholding tax rate may be reduced under an applicable tax treaty.
It is important to consult with a tax professional to ensure compliance and avoid penalties.
Don’t forget about the global minimum tax rules
The global minimum tax imposes a 15% minimum top-up tax on corporations generating more than EUR€750 million in global revenue. This initiative, adopted by over 130 countries including Canada, aims to ensure that corporations pay their fair share in taxes in the countries they operate in.
The tax implications of financing your Canadian operations
The structure of how you finance your Canadian operations, whether through equity alone or with a combination of debt and equity, can affect your tax liability. Both thin capitalization rules and Excessive Interest and Financing Expenses Limitation (EIFEL) rules aim to limit the deductibility of interest expense on debt owed to non-resident related parties.
- Thin Capitalization Rules: Limit the amount of debt a Canadian corporation can use for tax purposes. If the debt-to-equity ratio exceeds 1.5:1, a portion of interest expense may be denied, increasing taxable income.
- EIFEL: Restrict deductible interest expenses to 40% (or 30% in later years) of taxable EBITDA, potentially limiting tax deductions.
To optimize your tax position, carefully evaluate your financing strategy when deploying capital.
Indirect tax considerations for foreign companies entering the Canadian market
Canadian sales taxes should be top of mind for businesses operating in Canada as they impact every transaction. To ensure a smooth entry into the Canadian market, consider these key questions:
How do Canadian sales taxes apply to our products or services?
The Canadian sales tax system is a hybrid of the European value-added tax (VAT) system and the U.S. Sales and Use Tax (SUT) system. This system consists of the federal Goods and Services Tax, Harmonized Sales Tax (GST/HST), and provincial sales taxes (PST).
The GST is a 5% VAT-based tax at the federal level that applies to most goods and services supplied in Canada. In addition to collecting tax from customers, businesses can also claim recoveries of tax they incur on their inputs, known as input tax credits (ITCs), subject to restrictions and the type of activities they are engaged in. Some provinces have adopted HST, combining the 5% GST with a provincial component to create a single combined VAT. HST rates vary from 13% to 15% depending on the province.
Four provinces in Canada have their own mandated sales tax. Quebec has a VAT-style tax that mirrors the GST/HST at a rate 9.975% which is collected in addition to the 5% GST on taxable supplies. BC, Saskatchewan, and Manitoba have a consumer-based sales taxes similar to U.S. SUTs. The rates are 7%, 6%, and 7%, respectively.
Companies carrying on business in Canada need to understand the unique registration, collection, and reporting requirements that they are subject to.
Navigating customs and tariffs in Canada
Canadian customs and tariffs can significantly impact a business's bottom line, if not managed effectively. And, given ongoing trade disputes, tariffs are subject to frequent changes and can be complex to navigate. When importing goods commercially into Canada, 5% GST is generally applied to the value for duty of commercially imported goods. Many businesses are eligible to recover this tax—putting them at a competitive advantage compared to companies that do not recover the tax appropriately.
With tariffs, there is a lot to consider and a lot to get wrong. The value for duty of the goods can vary greatly based on classification, value, and country of origin. Understanding the nuances of tariff classification in Canada and whether any of the 15 trade agreements apply is important for remaining competitive.
Do we have the capacity to manage the rapidly changing Canadian tax landscape in-house?
Staying on top of tax changes can be challenging and cumbersome, especially if your team doesn’t have local expertise on board. As Brian Morcombe, BDO Canada’s Indirect Tax Practice Leader notes, “Foreign multinationals need to consider the fact that, like in all countries, tax legislation and regulations change constantly and staying on top of those changes is very challenging. In addition to filing returns accurately and on a timely basis, in-house compliance requires significant resources, including training team members on the nuances of Canadian sales tax legislation and regulations, maintaining that knowledge amidst ongoing changes, liaising with tax authorities during examinations and audits. This leaves little time to focus on tax planning strategy, potentially increasing business risk and unnecessary increased net tax liability.” Foreign companies relying on local tax expertise and compliance professionals can potentially mitigate these issues.
Expand your business into Canada with the right support
To attract investments in innovation and drive growth, federal and provincial governments provide numerous incentives for both domestic and foreign companies. Is your business aware of these financial supports?
Is intended to encourage R&D investment in Canada. With SR&ED tax incentives, companies can claim a tax deduction or earn an investment tax credit, and foreign-owned companies could be eligible for a federal tax credit of 15%.
Foreign companies have unique considerations when claiming these tax benefits, they must be able to show a clear link between their R&D activities and Canadian intellectual property (IP). The R&D activities must primarily take place in Canada. Licensing agreements or intercompany agreements can demonstrate where R&D is taking place and the allocation of IP rights. BDO SR&ED specialists can work with foreign companies to ensure they have enough eligibility in Canada to be able to make a SR&ED claim to maximize their tax benefits.
Non-resident companies can take advantage of the many industry-specific tax credits that may apply to them when making an entry into the Canadian market. Tax credits such as the Clean Technology Investment Tax Credit and the Canada Film or Video Production Tax Credit can provide a number of financial benefits.
Avoiding the high cost of non-compliance and opportunity loss
Non-compliance with Canadian tax rules can lead to significant penalties, ranging from monetary fines to criminal charges, depending on the offense.
Unlike other parts of the world, Canada has strict deadlines for filing income taxes. Foreign companies operating in Canada have to file a corporate income tax return within six months after their year-end, with no extensions available. Missing this key deadline could result in significant financial penalties, such as $25 per day up to a maximum of $2,500 per year. Interest is accrued on unpaid taxes, increasing the overall tax liability.
It’s important for foreign companies to be aware that there is no statute of limitations for failure to comply with filing tax returns in Canada. The penalty remains with the business until the matter is corrected. However, Canada does offer a voluntary disclosure program for tax errors and omissions, which can provide relief of certain penalties.
Beyond tax penalties, foreign companies also run the risk of missed financial gains if they don’t fully understand Canadian taxation and tax credits. For example, by not being aware of a business grant, companies may lose out on thousands of dollars—a significant opportunity loss. Additionally, failing to take full advantage of tax credits can result in a competitive disadvantage.
Leverage BDO’s global reach and local knowledge
When considering a business expansion into Canada, the question often arises: "Where do I even begin?" BDO can be your trusted partner throughout your journey.
Our global network of offices in 166 countries and territories allows us to provide a truly international perspective, combined with deep local knowledge. Our team can help you optimize your tax position, ensure compliance with tax laws, and maximize government incentives.
We understand that every business is unique. Before recommending any solutions, we thoroughly evaluate your specific needs and goals. If a Canadian expansion isn't the best fit, we'll be transparent about it.
By working with BDO, you can confidently navigate the Canadian market and achieve your long-term objectives.
Brian Morcombe
Partner, Indirect Tax Practice Leader
Laura Ball
Partner, International Tax
Jennifer Running
Director, Credits & Incentives
Manson Ng
Senior Manager, International Tax Services
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The information in this publication is current as of March 26, 2025
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.