5 Ways for Americans to Navigate Tax and Accounting Issues in Canada

American businesses can see enormous opportunities in Canada. The close proximity and similar demographic makes it a natural place to begin international expansion. But you shouldn’t overestimate the similarities between Canada and the US – there are real differences, and that’s especially true when it comes to tax and accounting. Here are the five things you need to look out for when your business is expanding into Canada.

Sales Tax in Canada

Sales tax is simpler in Canada than in the US, which makes conducting business there slightly smoother. That’s because, while American sales tax can be levied at the city and county level, as well as the state level, in Canada sales taxes are applied by provinces [1] alongside a 5% national Goods and Services tax [2]. However, Canadian sales tax can vary quite widely from province to province. As an indication, the current rate in Alberta is only 5% (since Alberta imposes no provincial tax at all, only the national sales tax) [3], while in Nova Scotia it’s as high as 15% [4]. These rates can change, but this still demonstrates the wide gulf it’s possible to have between sales tax rates in different provinces – so it’s worth researching them now.

Corporate Tax Rates in Canada

Canadian corporate tax is tricky to understand, but is slightly simplified compared to the American system. In the US, corporate tax has eight different bands, with significant variation between them. Corporate tax is only 25% at its lowest level, and 39% at its highest (between $100 000 and $335 000); though it’s often cited as 35%, this elides the complexity of the actual tax system [5]. In Canada, however, there are only two tiers of tax, a lower small business rate and a higher rate [6]. Canadian corporate tax has two parts: federal and provincial, with the higher federal rate currently set at 15% and additional provincial rates ranging from 10% to 16% [7].

The Canada-US Tax Treaty

Both Canada and the US only tax resident corporations, so if you relocate to Canada you won’t have to pay corporate tax in the US as well [8,9]. Ordinarily, if you aren’t resident in Canada, you will have to pay corporate tax on business conducted in Canada, as well as a 25% tax after tax income [10]. However, under certain circumstances, you may be eligible under the Canada-US tax treaty. If your business isn’t considered a permanent establishment in Canada, you can apply for an exemption from Canadian corporate tax under the terms of the treaty [11].

Capital Gains Tax in Canada

In the US, you must pay capital gains tax on the total increase in value after disposing of an asset, though various deductions can apply, including deductions for losses [12]. In Canada, however, only 50% of the gain is taxable [13], which makes the system an appealing one for businesses looking to move into Canada. While in the US, most people will only have to pay 0% or 15%, the maximum is 20%, with additional taxes raising it as high as 28% [14], Canadian capital gains tax ranges from 7.5% to 16.5% [15]. This makes Canada’s capital gains tax system a comparatively friendly one.

Filing American Tax Returns in Canada

American citizens are obliged to file tax returns, even if they aren’t US residents [16] – so if you relocate to Canada, you will still have to submit a tax return to the IRS. However, while you must still make the filing, there are a number of arrangements in place to ensure that you are unlikely to be liable to actually pay additional tax, beyond what you’ve already paid to the Canadian government. For example, there is a Foreign Earned Income Exclusion (FEIE) in place to exclude income below a fixed limit from American taxes. This doesn’t apply to unearned income like capital gains, however [17].

Growing into Canada from the US is a smart way to expand internationally, but negotiating the tricky tax and accounting differences between the two is not straightforward. At Galvin International we can work with you, giving your business access to our team of on ground support and network of local contacts to make coping with Canadian taxes simple. If you’re planning on entering the Canadian market, please get in touch to find out how we can help.

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