By: Haroon Khan, CPA, CA (Canada), CPA (USA)
If you’re a foreign corporation, partnership, or an overseas individual, considering doing business in Canada, this blog post is tailored for you. We aim to provide clarity on the topic of taxes as there seems to be some confusion. Some people mistakenly believe that if you’re exempt from tax due to the Tax Treaty Between Canada and their home jurisdiction then there are no compliance requirements for you in Canada. However, that’s not accurate. In this blog, we will discuss an example of a company that learned the importance of Tax compliance the hard way.
The Tale of a Costly Error
I had a client from Austria, who wanted to start a business in Canada. I will be referring to this company as Company X. Due to their negligence of not handling Canadian compliance appropriately, they were approached by the Canada Revenue Agency, and Company X suffered losses amounting to approximately $400,000. How did such an unfortunate thing happen? Let’s explore.
Receiving Correspondence from CRA
It all began when Company X received correspondence from the CRA (you know those folks who seem to have lots of sources than your favourite gossip magazine!) instructing them to fulfill their payroll withholding tax requirements for the years 2018, 2019, and 2020.
Now you might be wondering how the CRA found out that the Austrian entity was carrying on business in Canada. So, this is how it started, a Canadian customer reported a payment made to Company X on the T4A-NR slip. The customer imposed a 15% withholding Tax as the Austrian Company did not obtain the Regulation 105 waiver. Thus, notifying CRA about an Austrian company conducting business in Canada.
Payroll Withholding Tax
Due, to Company X not receiving timely tax advice they had to pay what is known as “payroll withholding tax” on behalf of their employees. Think of it as setting aside a portion of your employee’s earnings and giving it to the government. It’s not all bad, this money eventually gets returned to the employees if they qualify for an exemption from Canadian taxes due to the Canada-Austrian tax treaty upon filing individual tax returns.
Additionally, the company could have completely sidestepped paying this withholding tax if they had obtained waivers like RC473 and/or Regulation 102.
The Major Issue: Financial Loss
Things didn’t go well for Company X because many of their employees left without traceability. They were unable to locate them. This implies that the CRA couldn’t refund Company X for the withholding tax because the employees had to file their tax returns in Canada to claim the exemption available under the Canada-Austrian tax treaty. As a result, Company X suffered losses by paying unnecessary taxes and being unable to recover that money due to employee departures.
So, if you’re considering venturing into business endeavours remember this; regardless of your situation it is crucial to acquaint yourself with tax regulations. Do not presume exemption from taxes. Do not find yourself in a situation like Company X did – facing the reality of the significance of taxes. Seek advice, gain an understanding of the rules, and position yourself for success, within the realm of business!
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