Liability for Tax and Income Determination

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Liability for Tax and Income Determination
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The Canadian Tax System

• The system has 2 parts
• 1. Determines who pays tax
• 2. How income is calculated to determine tax

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Sources of Canadian Tax Law

• Statute Law - Income Tax Act (ITA)
• Common Law
• International Tax Conventions or treaties
• treaties override the Act

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Who is responsible for Canadian Tax Law?

• Department of Finance has the responsibility for
  the law BUT Revenue Canada (now Canada Customs
  and Revenue Agency) has the responsibility to
  administer it.

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The Entities

• Individuals
• proprietorships
• partnerships
• Corporations
• partnerships
• joint ventures
• Trusts

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Corporate ownership

• You have to always remember that for corporate
  law purposes a corporation is a separate person -
  apart from its owners
• This is often difficult for small business owners
  to grasp.

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• Ultimately the individual and the corp will be
  integrated as profits flow to the corp and then
  to the shareholders

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Individual (taxable)
Ind pays tax only on income paid out by corp
Business Corporation (taxable)
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Individual (taxable)
Ind pays tax on profits of the proprietorship
Business proprietorship (not taxable)
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Resident Individuals and Corporations

• Canada taxes on residency and taxes residents on
  their world income.
• Non-residents may be taxed on Canadian source
  income
• Residency is not defined in the ITA- the defn
  evolved through the courts.

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Individuals

• The courts have held it is a question of fact
  where you are resident
• Factors examined include
• amount of time spent in Canada
• motives
• length of contract
• club memberships

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• Licenses
• where your family resides
• asset ownership
• Intention is important
• Residency is determined annually
• Look at continuing state of relationship with
  Canada.

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Sojourner rule

• If an individual visits Canada for more than 183
  days in a calendar year, they are deemed
  residents of Canada for the entire year.
• Part year residents are only taxed for the part
  yr they are resident in Canada.

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Corporations

• Less complicated to determine residency
• Incorporated in Canada after April 27, 1965- res
  of Canada
• Before that date look at mind management
• It is irrelevant where the shareholders live.

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Dual Jurisdictions

• Tax Treaty applies

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Non-resident ind Corp

• Transactions started completed in the foreign
  host country- generally taxed on a net basis
• Transactions originate in one country conclude
  in another- generally taxed on that source of
  income

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Decision Making the Residency Issue

• How to expand in foreign markets will be in part
  determined re the tax implications of the set up
  examined.

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Direct sales

• Individual

Corporation A
_Canada___________________________________________
___ Foreign country
DIRECT SALES
No Permanent establishment in Foreign country- no
tax in foreign country
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Foreign Branch

• Individual

Corporation B
_Canada___________________________________________
___ Foreign country
Foreign Branch
Permanent establishment in Foreign country- taxed
in foreign country.
Not taxed separately in Canada.
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Foreign Corporation

• Individual

Corporation B
_Canada___________________________________________
___ Foreign country
Foreign Corp B
Permanent establishment in Foreign country- taxed
in foreign country.
Not taxed separately in Canada - will pay tax on
dividends received.
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Case Analysis

• Bendana Corp