1 May 1997 External T.I. 9624205 - SUMMARY OF CANADIAN TAX SYSTEM

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Summary of Canadian Taxation of Corporations and Partnerships

Position:

General Comments Provided

Reasons: N/A

		962420
XXXXXXXXXX	David R. Senécal

Attention: XXXXXXXXXX

May 1, 1997

Dear Sirs:

Re: Taxation of a Corporation Resident in Canada

Your letter of July 1, 1996, to Ms. Micheline Aucoin at the Canadian Embassy in Bonn, has been forwarded to us for consideration and reply. We apologize for the delay in responding to your request for general information regarding the taxation of a company incorporated in Canada and in which a resident of Germany is a shareholder.

Corporations are not treated for Canadian tax purposes in the same manner as are Limited Liability Companies or Limited Partnerships under U.S. domestic tax legislation. In Canada, corporations are considered as separate persons taxed in their own right and, if resident in Canada, are subject to Canadian tax on their worldwide income. A corporation will be considered to be resident in Canada for income tax purposes either if it is deemed to be resident in Canada (i.e., based on its being incorporated in Canada) or if it is factually resident in Canada based on the common law test of the location of its central management and control.

The general rate of tax to be paid on the taxable income of all corporations is 38%. The federal tax payable is reduced by an amount equal to 10% of the corporation's taxable income earned in a province or territory of Canada in recognition of provincial income taxes. The provincial rate varies from province to province, but on the whole lies between 15% and 17% with lower rates for small businesses. There is a federal surtax of 4% of the basic federal tax. Further reduction in the rate is possible by means of a small business deduction and a manufacturing and processing profits deduction.

The Income Tax Act also provides for a tax known as the Tax on Large Corporations. This is a tax on capital but which, in effect, is a corporate minimum tax. It is levied at a rate of 0.225% of capital in excess of $10 million employed in Canada. Taxable capital is generally computed as follows:

Share capital $xxx
Add: contributed surplus $xxx
retained earnings and other
surpluses xxx
reserve funds xxx
loans and advances xxx
other indebtedness outstanding
for more than 365 days xxx xxx

Capital xxx
Less: allowance for investments in
other corporations xxx

Taxable capital $xxx

Non-resident withholding tax applies to every amount that a person resident in Canada pays or credits, or is deemed to pay or credit, to a non-resident person as, on account or in lieu of payment of, or in satisfaction of certain specific items enumerated in the Income Tax Act. The statutory withholding rate is 25%, but this is often reduced under bilateral income tax treaties. The tax is on gross payments or credits without deduction for expenses. The withholding tax would apply in the case of dividends paid by a Canadian corporation to a shareholder which is a resident of Germany. The rate of tax would be reduced to 15% pursuant of Article 10 of the Canada-Germany Income Tax Agreement (the "Agreement"). The tax is withheld and remitted by the Canadian payor and is a final tax. Consequently, the German shareholder would not be required to file a Canadian tax return with respect the dividends received from the Canadian company. Relief from double taxation will be provided by Germany in accordance with its domestic tax laws and paragraph 2 of Article 23 of the Agreement.

Partnerships are not defined in the Income Tax Act. In order to determine whether a particular relationship is a partnership, reference must be made to the definitions contained in the various provincial Partnership Acts. Generally, these statutes define a partnership as a legal relationship between two or more persons who carry on a business in common for the purpose of profit. Partnerships can be formed by individuals, corporations or a combination of individuals and corporations.

The Income Tax Act provides that the income of a partner is to be computed at the partnership level as if the partnership was a separate person resident in Canada. However, the income, once calculated by the partnership, is not taxed at the partnership level but is allocated to the partners according to the terms of the partnership agreement. The partners then include their share of the partnership income in their income for the year. The income that flows to each partner retains its original character or source. Depending on whether the partner is a corporation or an individual, the income will subject to tax at the corporate tax rate described above or at the following graduated rates applicable to individuals:

OF THE
BUT NOT AMOUNT
OVER OVER THE TAX RATE IS: OVER

$ 0 $29,590 $ 0 + 17% $ 0
29,500 59,180 5,030 + 26% 29,590
59,180 - 12,724 + 29% 59,180

A surtax of 3% of federal tax is also added after taking into account any applicable credits and where the basic federal tax after deducting any applicable credits and before adding the 3% surtax exceeds $12,500, an additional surtax of 5% of the basic federal tax in excess of $12,500 is applicable.

In addition to the federal tax above, an individual who resides in or has income earned in any of the provinces is also subject to provincial income tax. Except for Quebec, which collects its own tax, each province imposes a tax that is expressed as a percentage of the federal tax otherwise payable. The provincial tax rate ranges from 45.5% to 69% of the federal tax depending on the province concerned.

There is no additional tax payable when the income is actually distributed to the partners. However, Canada does impose an additional branch tax on non-resident corporations carrying on business in Canada. This federal tax, without a provincial counterpart, is charged in addition to any Part I tax mentioned above and is imposed at a rate of 25%. The branch tax is intended to put the branch in the same position as a Canadian subsidiary which must withhold tax on dividends paid to a foreign parent. Where the entity is considered as being a partnership for Canadian tax purposes, the branch tax will also apply to any of the partners which are non-resident corporations on the basis that the partners are considered to carry on the business of the partnership. The rate is subject to any overriding provisions within any tax treaty and will be reduced to equal the treaty rate which applies to direct dividends. In the case of a corporation which is a resident of Germany, the rate would be reduced to 15%.

The partnership itself does not file a tax return but must file an information return. The partnership is also required to provide each partner with an information slip for filing purposes containing information as to the partner's income or loss of the partnership for the fiscal period. In the case of a non-resident partner would be required to file a Canadian tax return with respect to that partner's share of the partnership income.

The role of this department is limited to the administration of the Income Tax Act in accordance with the provisions thereof. As such, we are not in a position to comment on the particular merits of investing in Canada through a corporation versus those of investing here through a partnership.

We trust that our comments will be of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch