Growing Your Business Outside of Canada - Tax and Other Considerations
Many businesses eventually look outside of Canada's borders to find customers for the goods they sell and the services they provide. Canadian businesses often find themselves very competitive on the world markets - especially with our friendly neighbours to the South in the United States of America. Other businesses, however, find the thought of expanding beyond the familiar local markets to be daunting because of the unknown business and taxation implications of growing their markets abroad. Every business that is selling goods or services to customers outside of Canada must make inquiries into their obligations related to financial reporting and taxation for the foreign jurisdictions in which they are conducting business. Also, if your Canadian business is subcontracting work to non-resident individuals or corporations, there may be some hidden tax requirements for you. Here, then, is a brief summary, from the perspective of a tax accountant, of some of the things that must be considered when selling abroad or sourcing goods or services outside of Canada.

Commodity or Sales Taxes

Most businesses are aware of their obligations to register for GST and provincial sales taxes in Canada. These taxes must be collected and remitted by businesses who provide taxable goods or services within Canada, or within the province in which the business is located. In addition, many foreign jurisdictions will require you to register your business to collect local sales taxes if you delivery goods into their jurisdiction or provide services while the service-provider is physically in their jurisdiction to provide the services. Other foreign jurisdictions only require registration to collect local sales taxes when you are "carrying on a business" in their jurisdiction, or have a "permanent establishment" there.

For example, if you are selling office equipment and are shipping it to a customer located in the United States, but you do not have an office or warehouse in the United States, then many States would not require you to collect and remit State sales taxes. I would, however, be up to your customer to self-assess the tax owing. Other States will require you to register to collect their sales taxes where the sales are made to "consumers" (not businesses) located in those States.

The concept of "carrying on a business" is not easily defined, but usually implies some degree of repetitive transactions involving concluding sales contracts in a given jurisdiction, maintaining a sales force there, advertising or holding bank accounts etc.

Income Tax on Profits

Similarly, it is possible that any profits you make on sales outside of Canada may be taxed in that foreign jurisdiction. In some foreign countries, however, income tax may only be payable if you have a "permanent establishment" there, or otherwise "carry on a business" in that jurisdiction. The United States usually follows rules similar to these. Even though income tax may not be payable in the United States, you may none-the-less be required to file an income tax return and claim exemption from US income tax using the provisions of the Canada - US Tax Treaty. Significant penalties can be levied if such returns are not filed - even when there is no tax owing.

Customs Issues

Any time goods cross the border between Canada and the United States (or other countries where the shipment is made by air or sea), such goods may be subject to a customs duty or sales tax. Such taxes are usually paid for by the "importer of record" which is often the Canadian business that is exporting the goods. Prior to exporting goods out of Canada, you should consult with a reputable customs broker to determine the amount of duties and taxes that will be levied, and who is responsible to pay for them. Often, the responsibility can be shifted to the foreign customer, which saves the Canadian business from an unwanted expense.

Immigration Issues

Prior to traveling to a foreign country to conduct business, you should ensure that you've checked with the immigration department of the country you are traveling to. Depending upon the work that you will be doing there, and the length of time you will be staying, certain visas or work permits are required to be obtained in advance of your trip.

Internet Based Businesses

It is increasingly common for businesses to deliver services, or electronic merchandise via the Internet. Taxing authorities from around the world are still in the early stages of developing a protocol to ensure each country involved in the transaction can extract its fair share of income taxes and sales taxes on each transaction. There is a major concern by governments around the world that sales of consumer products that can be down-loaded over the internet may escape tax altogether. As a result, governments are becoming increasingly vigilant about tracking down such businesses to ensure they are properly registered. If your business works over the Internet, you should become familiar with the taxing rules for each country in which your customers reside.

Importing Goods and Services

Perhaps your business does not make sales outside of Canada, but you import goods or services for use in your business here in Canada. Any taxable goods that are imported will be subject to GST (and in some provinces, provincial sales tax) payable to Canada Revenue Agency at the time of importation by the "importer of record". If your business is the importer of record, then you will be paying such taxes. You therefore need to ensure that you are able to minimize the impact of these taxes on your business wherever possible.

If you are buying services from non-residents of Canada, you may be required to self-assess the GST and/or provincial sales taxes on the value of those services, unless you are importing them for use in your "commercial activities". In addition, you may be required to withhold an amount on account of Canadian income taxes from the payment to the non-resident supplier for those services. The rate of income tax withholding can be between 15 and 50% depending on the country where the service provider is located.

Conclusion

Extending your business' boundaries outside of Canada can be exciting and profitable - but be sure to first research all of the taxing implications of doing so. Failure to properly report or file income taxes or sales tax documents can often lead to significant monetary penalties.

Garth Steele, CA, Welch & Company LLP

For more information about Welch and Company LLP and the Welch Consulting Group visit the website at www.welchandco.ca and www.welchconsultinggroup.ca.