Corporate & Individual Taxation in Canada from the Perspective of Canada-Turkey Tax Treaty Tony Schweitzer November

Introduction Canadian resident corporations and individuals are taxable on their worldwide income. Non-residents of Canada are taxable on their income from Canadian activities and investments. Canada also imposes withholding tax on non-residents who receive dividends, certain interest payments, rents, royalties or certain management fees from Canada. November 20152

Introduction (Continued) The Canada-Turkey Tax Treaty prevents double taxation of the same income in both countries. The Canada-Turkey Tax Treaty also reduces withholding taxes. Canadian Federal tax rates are the same across the country. The provinces of Canada also impose income taxes on corporations and individuals residing or carrying on business within the province. Reductions and credits are permitted to encourage the development of business activity and employment in certain industries of the economy. Tax incentives are also available to encourage research and development in Canada. Individuals pay taxes in accordance with a progressive rate structure. November 20153

Tax Rates M&P IncomeActive Business IncomeInvestment Income Provinces British Columbia26.0% Alberta27.0 Saskatchewan Manitoba27.0 Ontario Quebec26.9 New Brunswick27.0 Nova Scotia31.0 Newfoundland and Labrador Territories Yukon Northwest Territories26.5 Nunavut27.0 November Combined Federal and Provincial/Territorial Tax Rates for Income Earned by a Corporation Resident in Canada Note: Significantly lower rates apply to Canadian-Controlled Private Corporations (CCPC’s) eg. Ontario 15.5% on active business income up to $500,000

Canadian Corporation A corporation incorporated in Canada is a Canadian resident for income tax purposes. It pays Canadian income tax on its worldwide income. This income is calculated in accordance with acceptable principles of business. Expenses reduce the income that is subject to income tax. The fact that a Turkish corporation owns a Canadian corporation which carries on business in Canada, does not mean that the Turkish corporation itself pays Canadian income tax. November 20155

Canadian Branch Operation The Turkish corporation may carry on business in Canada directly and not through a Canadian corporation. In this case under the Canada-Turkey Tax Treaty the profits which are attributable to a “permanent establishment” in Canada are taxable in Canada. The meaning of “permanent establishment” is set out in the Canada-Turkey Tax Treaty. A permanent establishment includes a branch, office, factory, workshop and other fixed places of business. November 20156

Choosing Between a Canadian Corporation and a Branch Operation If the Turkish corporation carries on business through a “permanent establishment”, it will be subject to income tax in much the same way as if it had been earned by a Canadian corporation. The use of a corporation is often found to be preferable, because it is a separate legal entity in Canada and this allows the separate accounting necessary for Canadian purposes. The use of a corporation may also be preferable for other reasons. After-tax profits of the Canadian subsidiary corporation distributed to the Turkish organization by way of dividend will be subject to Canadian withholding tax, (reduced under the Canada-Turkey Tax Treaty). November 20157

Canadian Distributors and Selling Agents Under the Canada-Turkey Tax Treaty, a Turkish business may carry on business in Canada without paying Canadian income tax, if it does not have a “permanent establishment” in Canada. The Canada-Turkey Tax Treaty has rules to determine whether there is a “permanent establishment” in Canada. A Turkish business does not have a “permanent establishment” in Canada if it has an independent sales agent in Canada. The Canadian agent must be independent of the Turkish business, and not devote all of its efforts to representing the Turkish business. A Turkish business will have a “permanent establishment” if it has a dependent agent in Canada, who has authority to negotiate contracts and does so. A Turkish business can store its products in Canada for purposes of display or delivery without creating a “permanent establishment”. November 20158

Joint Ventures and Partnerships A Turkish business may decide to enter into a joint venture with a Canadian business. The Canadian joint venture may be a Canadian corporation, which is owned by the Canadian and Turkish participants. In such a case, the Canadian corporation will be taxable on its income as a Canadian resident corporation. Alternatively, the joint venture may take the form of a partnership between the Canadian and Turkish participants. Canada taxes the profits of partnerships at the partner level and does not tax the partnership directly. Each of the partners of a partnership carrying on business in Canada is considered, for tax purposes, to be carrying on the business of the partnership in Canada. Therefore, if the Turkish business is a partner and the partnership has an office, factory or other permanent establishment in Canada, the Turkish partner will generally be taxable in Canada on its share of the partnership profits, as if it carried on the partnership business directly as a Canadian branch of the Turkish business. November 20159

Real Estate in Canada A gain on the sale of Canadian real estate is taxable in Canada. Pay 25% withholding tax on gross rental income or elect to pay tax as a resident of Canada. Exemption from tax because of principal residence exemption. November

Individual Income Tax Considerations Canadian residents are taxable on their worldwide income. A non-resident of Canada is taxed on employment income earned in Canada, income from carrying on business in Canada or gains from the disposal of “taxable Canadian property” (such as real estate). If a Turkish business transfers an employee to Canada, the Canadian income tax consequences will depend upon whether or not the employee becomes resident in Canada for income tax purposes. Residence rules are set out in the Canada-Turkey Tax Treaty (called the “tie-breaker” rules) and these rules allocate residence to either Turkey or Canada. November

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