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Considering a Project in Canada? Early Preparation Is the Key.


Living in a border state, many contractors consider projects in Canada.  Yet they do not often consider the taxation, licensing and legal requirements of doing business in Canada.  Here are important items to consider when bidding work in Canada:

Will you have permanent establishment?  A business that has permanent establishment, as defined in the U.S./Canada tax treaty, may be liable for Canadian federal and provincial income taxes.  A permanent establishment designation can be triggered by the following:

  • A fixed place of business, such as an office;
  • An agent in Canada who has the authority to conclude contracts on behalf of the company;
  • A construction or installation project site in Canada if the project lasts more than twelve months;
  • Providing certain services for an aggregate of 183 days or more in a twelve month period.

Does withholding apply? The Canada Revenue Agency requires Canadian companies to withhold 15% tax on payments to foreign individuals or businesses.  In certain circumstances, a withholding waiver is available.

Do I have to register for GST/HST?  GST (Goods and Services Tax) and HST (Harmonized Sales Tax) are value added taxes that are applied to most property and services in Canada.  Registration is required for every person engaged in a trade/business in Canada.  The current tax rate in British Columbia is 12%.  However, payers can claim input tax credit to recover these taxes if their purchase is used in a commercial activity.

Do I have to set up a separate Canadian entity?  If you have permanent establishment in Canada, you can operate as a “branch” of your existing U.S. entity.  However, certain advantages may apply if you set up a separate entity in Canada (i.e. Corporation, Partnership, ULC – Unlimited Liability Companies).  In addition, the type of Canadian entity you chose can affect U.S. taxes.

Can I send U.S. employees to Canada? Yes, however, permanent establishment rules apply.  If U.S. employees are taxed in Canada, they may be eligible for a foreign tax credit and foreign earned income exclusion in the United States.  A U.S. employee may be taxed in Canada if the following apply:

  • Employee earns over $10,000 per year in Canada
  • Employee is in Canada for more than 183 days (rolling)
  • Wages are deductible by the employer with a permanent establishment

It is important to contact an immigration attorney well before the project begins to address visa and immigration requirements.  Also, if an employee has a criminal history, including Driving Under the Influence (DUI), he/she may not be allowed over the border.

How do I manage Canadian payroll?   Payroll taxes, matching pension plan contributions and employment insurance premiums exist in Canada as in the United States, so similar handling is required.  Also, there is no concept of “At Will Employment” in Canada.

We advise that all the items listed above be factored when preparing a bid.  Contractors will benefit from a long lead time to prepare for a project in Canada.  Getting situated in accordance with Canadian rules often takes longer than anticipated.  Early preparation is the key.