A non-resident is liable to taxation in Canada on its income from a business carried on in Canada. The determination of whether a non-resident carries on business in Canada is based on a number of common law tests articulated in Canadian and British jurisprudence and deeming provisions in section 253 of the Income Tax Act. The deeming provisions found in section 253 of the Income Tax Act complement the common law tests by deeming certain activities of a non-resident to constitute carrying on business in Canada.
Generally, the threshold for carrying on business in Canada is very low and a non-resident is likely to be found to be subject to tax in Canada on the income from its business activities in or with Canada, even if such activities have a minimal economic connection to Canada.
Where a non-resident provides services in Canada, the Canadian client is required to withhold and remit 15 percent of the revenue to the Canada Revenue Agency (CRA) pursuant to Regulation 105. However, if the non-resident is eligible for relief pursuant to a tax treaty, the non-resident or the Canadian client may apply for a waiver from this requirement.
A non-resident person (such as a foreign corporation) carrying on business activities in Canada would have to rely on treaty relief in Articles 5 (Permanent Establishment) and Article 7 (Business Profits) in order to limit its income tax liability in respect of any income from a business carried on in Canada. According to Articles 5 and 7, a non-resident carrying on business in Canada may be subject to income taxation only if it carries on business through a permanent establishment in Canada, and only to the extent of its net profits attributable to such permanent establishment.
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