September 13, 2016
Tax Series | 

Growing beyond borders? A guide to new tax terrains

Expanding your company’s operations into a different province or even country can be a significant step in your growth trajectory, but the process itself can be overwhelming.

When it comes to taxes, here’s what you need to consider:

New province, new rules

From an income tax perspective, you must first establish whether your company will have what’s referred to as a “permanent establishment” in the new province, because this will determine which provinces you will be taxed in. This may in turn influence your choice of structure for your expansion.  

Having a permanent establishment generally means the presence of a physical location, but can also apply if you have an employee or agent in the province, hold and distribute inventory there, or bring in significant amounts of equipment.

One of the biggest practical tax issues your company is likely to face when opening a new branch is provincial sales tax (PST). Rules for provinces like B.C., which has both PST and GST, can be convoluted and different from provinces that have HST (Harmonized Sales Tax), or only GST (Goods and Services Tax). You’ll also need to determine what services and activities are subject to PST (i.e. equipment you bring into the province on a temporary basis).

Before making the move, familiarize yourself with the legal regulations associated with operating in the new province.

Be structure savvy — branch or subsidiary?

Opening a “branch” normally suggests you will operate under the same legal entity, with tax filing and payment obligations in multiple jurisdictions.

The popular alternative structure, in which a new legal entity is created to operate in a new jurisdiction, is commonly referred to as incorporating a “subsidiary.” A subsidiary determines its own tax filing and payment obligations depending on where it operates.

Each option has advantages and disadvantages, so be sure to discuss them with your financial and legal advisors. For instance, within Canada, creating a new subsidiary may not offer significant tax advantages but could still be the best course of action in cases where there are specific ownership or other legal requirements in a particular province — or if there are concerns about potential liabilities that need to be compartmentalized.

Cross-border expansion

Opening a U.S. branch may be woven into your growth strategy, but Canadian and U.S. taxes don’t always integrate well. Each state has its own tax regulations, which can lead to complex issues, such as needing to remit sales taxes to the state, even if you aren’t required to file income tax returns in that state.

Expanding into the U.S. (or other foreign jurisdictions) is significantly more challenging to structure on a tax effective basis and requires specialized assistance. Often companies that expand into the U.S. enlist a U.S. resident advisor to help them, but tax inefficiencies can arise when advisors don’t understand taxation on both sides of the border. You should consider relative corporate tax rates, withholding taxes incurred when repatriating funds to Canada, as well as compliance and transfer pricing requirements.

If your firm is considering cross-border expansion, ensure you consult an advisor who understands both Canadian and U.S. tax. And even if your growth is closer to home, it’s advisable to involve your accountant early on in the process to ensure success.

Marlin Miller, CPA, CA, is a partner at Collins Barrow Calgary LLP, where he develops and implements tax planning strategies for partnerships and corporations.

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This blog is based on an article written for Canadian Consulting Engineer magazine.