What Canadian taxes apply when a non-resident buys a business in Canada?

A non-resident buyer meets two different groups of tax questions. One group is triggered by the seller’s residence at closing. The other follows from owning the business afterwards, and that is the group covered here. The Income Tax Act sets Part XIII tax on certain payments to non-residents and Part XIV tax on non-resident corporations, and the Excise Tax Act sets a GST/HST election for the purchase of a business. The seller’s side is covered in the holdco answer.

Dividends paid to a non-resident owner

Section 212(2) of the Income Tax Act charges a non-resident person Part XIII income tax on a taxable dividend (other than a capital gains dividend within the meaning of subsection 130.1(4), 131(1) or 133(7.1)) or a capital dividend that a corporation resident in Canada pays or credits, or is deemed by Part I or Part XIV to pay or credit, to that person. If a non-resident buyer owns the Canadian corporation that runs the business, dividends of those kinds paid to that owner fall within the section. The Act fixes the rate, so confirm the current figure with an adviser rather than relying on a summary.

Who has to withhold

Under section 215(1), the person who pays, credits or provides an amount on which Part XIII tax is payable must, despite any agreement or law to the contrary, deduct or withhold the tax. Under section 215(6), a payer that fails to do so is liable to pay the whole amount that should have been withheld. The CRA’s guide T4061 says the Canadian payer or withholding agent is responsible for withholding and remitting the tax and for reporting it on an NR4 return. The same guide says the rate can be reduced, or an exemption given, under the Act or a tax treaty between Canada and another country, so check the treaty that applies to the payee.

Branch tax on a non-resident corporation

Part XIV of the Act applies a separate tax. Section 219(1) requires every corporation that is non-resident in a taxation year to pay a tax for that year, worked out from its taxable income earned in Canada and the other amounts the subsection adds, less the amounts it deducts. Section 219(2) exempts some corporations, and section 219(4) removes the tax for a non-resident insurer. It is worth asking about where a non-resident corporation, rather than a Canadian one, holds the business or its assets directly.

The GST/HST election on the purchase

Under section 167(1) of the Excise Tax Act, where the recipient of a business is acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as necessary to carry it on as a business, the supplier and the recipient may make a joint election, except where the supplier is a registrant and the recipient is not. Under section 167(1.1), where they elect and the recipient, if a registrant, files the election with the Minister by the deadline stated there or a later day the Minister determines on application, no tax is payable on the supplies under the agreement other than those the subsection lists.