Page 1 Establishing Business in Canada - Workshop Brion Hendry, CPA, CA Partner BDO Canada LLP Harry Chana, CPA, CA Partner BDO Canada LLP May 17, 2016 Leon Efraim Partner Thomas, Efraim LLP Barristers & Solicitors Marcelo König Sarkis, P. Eng. Partner Prima IP

Soft Landing Page 2 Agenda How to enter Canada Different types of business entities IP – Overview in Canada Canadian Tax System Income tax rates and withholding tax rates Reg 105 and Reg 102 withholdings Canadian business entities Financing considerations Acquisition planning Payroll taxes VAT – HST/GST Workshop

Soft Landing Page 3 How to enter Canada ▪ VISA ▫ Temporary Worker ▪ PERMANENT RESIDENT ▫ Federal skilled Worker Program ▫ Canadian Experience Class ▫ Federal Skilled Trades ▫ Start Up Business Class ▪ ENTREPENEURS AND SELF EMPLOYED PERSONS ▫ Investors ▫ Entrepreneurs ▫ Self Employed

Different types of Business Entities ▪ Types of business entities - Sole Proprietorship - Partnership - Corporation - Limited Liability Partnership - Extra Provincial Registration ▪ Considerations - Requirement for a Canadian director - Canadian agent/Registered address - Officers Soft Landing Page 4

IP Overview in Canada ▪ Types of IP Instruments ▪ Best Practices & Avoidable Mistakes Practical Tips Soft Landing Page 5

OVERVIEW OF CANADIAN TAX SYSTEM Page 6 Soft Landing

OVERVIEW OF CANADIAN TAX Canada is a federation made up of 10 provinces and 3 territories Federal and provincial governments each have taxing jurisdiction Federal tax applies throughout Canada Provincial tax is imposed on activities within the province Most provinces have a collection agreement with the federal government who administers collection of tax Corporations are subject to the following taxes: -Canadian federal income tax; -Federal goods and services tax (GST or HST); -Social security tax; plus -Provincial taxes of varying nature Page 6 Soft Landing

TAX ADMINISTRATION Tax returns due within 6 months after the fiscal year-end (no concept of extensions) 5% late filing penalty on tax payable Alberta & Québec require a separate provincial corporate income tax return Tax is payable in installments on the last day of each month with the balance payable on the last day of the second month following the end of the tax year It is possible to prepare tax returns in a functional currency other than CAD (including US$) in certain circumstances CRA may reassess a return within 4 years of the Notice of Assessment date and an additional three years for transactions with non-arm’s length non-residents. There is no limit for reassessment in the case of fraud or misrepresentation, and no limit where no tax return is filed. Soft Landing Page 7

OPERATING LOSSES AND GROUP LOSS TRANSFERS No tax consolidation filing in Canada Loss utilization tax planning for a related group (i.e., loss transfers via intercompany transactions, mergers, liquidations, etc.) No carryover of tax losses on incorporation of a Canadian branch Net operating losses can be used to offset against current year profits -Three-year carry back and 20-year carry forward period against profits of other years Capital losses may only be deducted against capital gains -Capital losses may be carried back three taxation years and forward indefinitely Special rules applicable on direct or indirect acquisition of control of a Canadian corporation that limit use of losses Page 9 Soft Landing

LIABILITY TO CANADIAN TAX Under Canadian domestic tax law, non-residents are subject to income tax on taxable income earned from: -being employed in Canada -carrying on business in Canada, or -disposition of taxable Canadian property Threshold for carrying business in Canada is low, based on common law tests such as place where contracts are concluded, place of operations from which profits arise, etc. Page 9 Soft Landing

LIABILITY TO CANADIAN TAX A non-resident person is also deemed to carry on business in Canada if the person: -produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs, in whole or in part, anything in Canada whether or not the person exports it without selling it before exportation, -solicits or offers anything for sale in Canada through an agent or servant, or -Disposes of Canadian resource property or real property Canada and Brazil have signed Tax Treaty for elimination of double tax that may override domestic tax law Canada-Brazil Treaty – Brazil resident person that carries on business in Canada only taxed in Canada if the Brazil entity has a “permanent establishment” in Canada – higher threshold Soft Landing Page 10

CANADIAN INCOME TAX RATES AND WITHHOLDING TAX RATES Page 12 Soft Landing

COMPUTATION OF TAXABLE INCOME Taxable income calculation: -The business profits generally computed on an accrual basis in accordance with ordinary commercial principles - starting point is pre-tax accounting income on financial statements -Profit Allocation issues are complicated when dealing with a Canadian branch -Deductions from income are generally only permitted for expenses or outlays that are made or incurred for the purpose of earning income from the business, are not on account of capital (except as expressly permitted), and the amount of which is reasonable in the circumstances Adjustments to Taxable Income: -Tax depreciation is optional deduction – can defer deduction and claim in later years if beneficial -Intercorporate Dividends from Canadian corporations received by another Canadian corporation generally not taxable -Intercorporate Dividends from foreign corporations received by corporation resident in Canada - both exemption and credit system available to offset -Taxable capital gains (50% taxable and 50% exempt) -Meals and entertainment – only 50% deductible -Other adjustments Page 13 Soft Landing

FEDERAL AND PROVINCIAL/TERRITORIAL General Corporate Tax Rates Page 14 Jurisdiction Active Business Income Manufacturing and Processing Income Investment Income Federal rates: 15.0% Provincial rates: Alberta12.0 British Columbia11.0 Manitoba12.0 New Brunswick12.0 Newfoundland and Labrador Nova Scotia16.0 Ontario Prince Edward Island16.0 Québec11.9 Saskatchewan Yukon Northwest Territories11.5 Nunavut12.0 Soft Landing

WITHHOLDING TAX RATES Income Type Domestic Withholding Rate Canada-Brazil Withholding Rate Dividends 25% 15.0% Interest25%/0% 2 15% Royalty25%25%/15% Page 15 Soft Landing

REG 105 AND REG 102 WITHHOLDINGS Page 16 Soft Landing

REGULATION 105 Example Withholding by Canco to non-resident client (USco) for services performed in Canada BUT also by USco to its NR subcontractors performing services in Canada Brazil Canada Canco Brazil NRsubcontractors 15% $ services 15% $ services Page 17 Soft Landing

REGULATION 102 Withholding Payroll Taxes Payments from Canadian or non-resident employers to non-resident employees in respect of services provided in Canada are subject to payroll withholdings Includes taxable benefits and tax equalization payments Includes director fees if services are performed in Canada No treaty relief from requirement to withhold for payroll taxes Waivers from Regulation 102 withholding are available: -Must apply along with Regulation 105 waiver -Should be applied for 30 days before services are performed in Canada Penalties and interest apply for failure to withhold or late withholdings. Canadian/non-resident employers are required to file T4 Returns and provide the T4 Slip to employees by Feb 28 of following year -Penalties apply for late filing this return Non-resident employees required to file personal income tax return to calculate liability for Canadian personal tax subject to relief under the treaty Page 18 Soft Landing

CANADIAN BUSINESS ENTITIES Page 19 Soft Landing

CONSIDERATION FOR INVESTING IN CANADA Organizational structure of Canadian operations Structure of investor (i.e. Multi-national, private fund, etc.) Tax risk profile of foreign taxpayer Type of entity (i.e. Corporation, branch, partnership) Financing issues related to entity Repatriation of funds to foreign jurisdiction Application of tax treaties Withholding tax issues Foreign exchange issues Compliance requirements Corporate law considerations Commodity taxes Customs implications Employee tax related concerns (i.e. payroll taxes, employee vs. independent contractor) Soft Landing Page 19

CHOICE OF COMMERCIAL ENTITY Business is generally conducted by the following types of business entities: Canadian corporation: -Under domestic tax law, corporations incorporated in Canada are deemed resident in Canada and subject to taxation on their worldwide income Foreign corporation managed in Canada: -Foreign companies will be Canadian resident (under domestic law) and subject to domestic taxation where the company is centrally managed and controlled in Canada -Though consideration would also need to be had for “tie breaker” provisions in the Treaty Branch of foreign corporation: -Subject to Canadian income tax on taxable income attributable to a permanent establishment in Canada (foreign profits not taxable in Canada) -Subject to branch tax on notional distributions of retained earnings -Ability to utilize start-up losses in home country Page 21 Soft Landing

FINANCING CONSIDERATIONS Page 22 Soft Landing

Interest generally deductible provided borrowed funds used to generate income Transfer pricing rules – related party interest expense must not exceed arm’s length terms and conditions Purpose of the thin cap rules is to discourage excessive leverage by non-resident shareholders THIN CAP- THE BASICS Foreign Parent (“Parent”) Can Co Debt Interest Soft Landing Page 22

This is an example of when proposed rules would apply The loan from the Intermediary would be regarded as a loan from a specified non-resident shareholder Result: Only $150 of interest-bearing debt would be permissible Any interest paid on the additional $850 of debt ($1,000 - $150) will not be deductible and will be deemed to be a dividend paid to the Parent subject to WHT BACK-TO-BACK LOAN RULES – EXAMPLE Loan or pledge of property of $1,000 Intermediary Loan of $1,000 Foreign Parent (“Parent”) Can Co PUC = $100 Soft Landing Page 23

ACQUISITION PLANNING Page 25 Soft Landing

STRUCTURING CANADIAN ACQUISITIONS Asset Purchase Purchaser acquires specific assets and assumes only identified liabilities Limited tax due diligence Step up tax cost of assets creating higher future tax shield Purchase price allocation (opposite to vendor) Assumption of defined liabilities Elections to transfer reserves Commodity tax issues Retention/Access to existing management? Page 26 Soft Landing

STRUCTURING CANADIAN ACQUISITIONS Share Deal Purchaser is acquiring Target’s entire tax history Level of due diligence should be commensurate with purchase objectives Should not be insignificant amount of tax due diligence Special Considerations on acquisition of control (i.e., loss streaming) Basis step up available in Canada on a share deal in some cases Page 27 Soft Landing

STRUCTURING CANADIAN ACQUISITIONS Using A Canadian Acquisitionco Foreign Acquiror PUC = NIL Facts: Target paid-up capital (“PUC”) = NIL Target Acquisition Price = $100 Future Distribution from Canadian Target = $100 Consequences: Return of $100 acquisition capital subject to 5% withholding where Canadian Target acquired directly. But, no withholding if Acquisitions used and directors of Acquisitionco return PUC to shareholders. PUC = $100 Canadian Target Canadian Acquisitionco Foreign Acquiror Page 28 Soft Landing

PAYROLL TAXES Page 29 Soft Landing

Payroll Tax Each Corporation providing salaries and/or wages to employees is required to register for Payroll. The Company is required to withhold from the employee and remit: CPP – Canadian Pension Plan – Employee and Employer Portion EI – Employment Insurance – Employee and Employer Portion Income tax – Employee Portion Where applicable (Total Salaries and Wages above $400,000 CDN) EHT – Employer Health Tax – specified percentage must be paid Soft Landing Page 30

GOODS & SERVICES TAX (GST) HARMONIZED SALES TAX (HST) Page 31 Soft Landing

Value Added Tax (HST/GST/PST) Types of VAT: HST – Harmonized Sales Tax GST – Goods and Services Tax PST – Provincial Sales Tax VAT – depends on the provinces you are operating in Annual sales determine reporting period: HST (Ontario) reporting periods are: -Monthly (annual taxable supplies of greater than $6m) -Quarterly (annual taxable supplies of > $1.5 m and < or equal to $6m) -Annually (annual taxable supplies of less than $1.5, quarterly instalments may be required) Soft Landing Page 32

OVERVIEW CANADIAN SALES TAX LANDSCAPE Page 33 Upcoming changes: Newfoundland increasing to 15% on Jul 1 New Brunswick increasing to 15% on Jul 1 PEI increasing to 15% on Oct 1 Soft Landing

Workshop Reviewing your companies consider the following: -Type of corporation to be set up -Location within Canada where it will be established -Year end selection -Financing – are you taking money form the parent company -Repayment of funds to Brazil -Expected employees -Directors -Questions? Soft Landing Page 34