In so far as the attractiveness of a country's investment climate is determined by factors such as access to sizeable markets, labour force quality and availability, capital costs, regulatory environment, and business infrastructure, Canada could certainly be seen as one of the world's front runners. The country has a small but relatively affluent domestic market, and shares close economic ties with the US. A well developed and efficient transportation infrastructure and plenty of natural resources (including arable crops, timber, crude oil and natural gas, copper, zinc, iron ore, and fish!) offer support to the business community, and in annual Global Competitiveness Reports, Canada's information technology and communications infrastructure usually figures highly.

But there are other factors to be considered - how attractive is the taxation regime for foreign investors, both on a corporate and a personal level? What are the incentives on offer in terms of taxation and government assistance? In this article we will be looking at the ways in which foreign corporations can do business in Canada, and the taxation implications of each choice.

Canadian Subsidiary Corporation

Another, perhaps more usual way of doing business in Canada for a foreign corporation is to establish a Canadian subsidiary corporation. The subsidiary will be subject initially to a combined federal and provincial corporate income tax of up to 38% (as corporate taxation rates do vary from province to province), and then to withholding taxes (which vary according to applicable double tax treaties) on the repatriation of dividends to the home country. However, there is no obligation to repatriate Canadian after tax profits, and if left to accumulate in Canada, they may eventually be realised by the sale of shares in the subsidiary corporation. Although the shares sold in this eventuality would undoubtedly be classed as 'taxable Canadian property', and would thus fall under the Canadian capital gains net, tax treaties, if they exist between Canada, and the foreign entity's home country may again save the day.

The use of a subsidiary corporation is generally more convenient for registration, administration and compliance purposes, and the foreign parent company will be insulated to a certain extent, in that its liability will usually be limited to its investment in the subsidiary. A subsidiary also provides a greater degree of flexibility, in that Canadian corporate reorganisation rules can be utilised to permit reorganisation without immediate tax consequences. However, non-residents seeking to finance Canadian subsidiaries often prefer to do so through debt rather than equity in order to maximise interest deductions against Canadian income (called 'thin capitalisation'), and Canadian tax laws restrict the degree to which this device can be used. The thin capitalisation rules are sometimes a powerful reason for not incorporating in Canada.