Principal Issues
Whether a U.S. S Corporation (“S-Corp”) is required to file a Canadian income tax return, and the applicable filing and withholding requirements where such entity carries on business or earns income in Canada.
Position
A U.S. S-Corp may be required to file a T2 Corporation Income Tax Return in Canada where it is considered to be carrying on business in Canada pursuant to the Income Tax Act (the “Act”).
Where the S-Corp is not carrying on business in Canada, filing obligations may still arise in respect of Part XIII withholding tax or other specific provisions of the Act.
Reasons
Pursuant to paragraph 150(1)(a) of the Act, every corporation, including a non-resident corporation, is required to file a return of income for each taxation year where it is carrying on business in Canada.
The determination of whether a non-resident corporation is carrying on business in Canada is a question of fact, having regard to the definition of “business” in subsection 248(1) and the extended meaning in section 253 of the Act.
Factors relevant in determining whether a corporation is carrying on business in Canada include, inter alia:
- the place where contracts are concluded;
- the location of operations and assets;
- the place where services are performed; and
- the degree of commercial activity undertaken in Canada.
Where a U.S. S-Corp is carrying on business in Canada, it is generally required to file a T2 return, including applicable schedules such as Schedule 91 and Schedule 97, even where relief from taxation may be available under the Canada–U.S. Tax Convention.
Where the S-Corp is not carrying on business in Canada, it may not be required to file a return under Part I of the Act. However, withholding obligations may still apply in respect of certain payments made to or by the corporation, including amounts subject to Part XIII tax.
Pursuant to subsection 215(1) of the Act, a payer is required to deduct or withhold tax on certain payments made to non-residents, including interest, dividends, and other specified amounts, and remit such tax to the Receiver General.
Failure to withhold and remit such amounts may result in the payer being held liable for the tax, together with applicable interest and penalties.
Where a U.S. S-Corp is considered a resident of the United States for purposes of the Canada–U.S. Tax Convention, treaty benefits may be available, subject to the applicable provisions, including Article V (Permanent Establishment) and Article IV (Residence).
Limitations
The determination of filing requirements for a U.S. S-Corp is dependent on the specific facts and circumstances, including the nature and extent of activities carried on in Canada.
Information provided through the Dedicated Telephone Service does not constitute a binding determination of tax treatment.
Binding confirmation may only be obtained through an advance income tax ruling request submitted in accordance with CRA administrative procedures.
