DOING BUSINESS IN CANADA PRESENTERS: ROBERT WATTS; ROLFE, BENSON LLP GLEN MACMILLAN; ADAMS & MILES LLP 1 Compiled by these AGN Canadian firms

General Description Population – 35 million Political system – parliamentary democracy Provinces – 10 provinces, 3 territories Currency – Canadian dollar (generally, trades around par with US$) 2

BUSINESS ENTITIES CORPORATIONS PARTNERSHIPS TRUSTS JOINT VENTURES SOLE-PRACTITIONERS 3

BUSINESS ADMINISTRATION Accounting and Auditing Requirements - Accrual accounting -Public companies must follow IFRS -Non-public companies may follow IFRS or “Accounting Standards for Private Enterprises” (i.e., GAAP for small businesses) -Audited statements generally only statutorily required for public companies (certain other statutory audits required usually by provincial legislation) -Non-statutory audit requirements may arise (e.g., at request of banks to monitor debt covenants) -Financial statements prepared for tax purposes must be on a non-consolidated basis -Audited financial statements not required for tax purposes 4

TAXATION Corporate Income Taxes – Combined federal and provincial rates vary from 25% to 31% depending on province in which business is carried on – Rates reduced to as low as 11% for Canadian- owned private corporations – Capital taxes have been largely eliminated – No city income taxes 5

TAXATION (continued) Personal Income Tax Rates: -Highest marginal rates vary from 39% to 50% depending on province of taxation -Taxable income based on the calendar year -Provincial taxation based province of residence on the last day of the year -Canadian residents taxed on world-wide income -Non-residents taxed on certain Canadian source income, subject to overriding treaty exclusions -Departure tax for Canadian residents emigrating from Canada based on fair market value of worldwide assets with some exemptions 6

TAXATION (continued) Capital Gains -Half taxable, half tax-free -Rule applies to corporations and individuals 7

TAXATION (continued) Losses -Carry back business losses 3 years or carry forward 20 years -Carry back capital losses 3 years or carry forward indefinitely but are only deductible from capital gains -Use of corporate losses subject to restrictions after change of control of a corporation -A deductible tax loss requires that the loss business was carried on with a reasonable expectation of profit; an issue that primarily affects individuals claiming business or rental losses 8

TAXATION (continued) Withholding Taxes: -Interest: Generally no withholding tax on arm’s length interest payments, regardless of creditor’s country of residence [note: Canada imposes a 1.5:1 thin capitalization restriction on interest bearing debt to equity] -Dividends: 25% non-treaty rate usually treaty reduced to 15% for individual shareholders and 5% for corporate shareholders -Royalties: 25% non-treaty rate generally treaty reduced to various lower rates -Pension income: 25% non-treaty rate generally treaty reduced to various lower rates -Management fees: 25% non-treaty rate generally treaty reduced to nil if parent has no presence in Canada 9

TAXATION (continued) Withholding Taxes (continued) -Services rendered in Canada by non-residents -15% withholding of income tax -Tax withheld applied as a credit to non-resident’s Canadian taxable income for the year -Treaties provide for full refund if non-resident has no permanent establishment in Canada -Waiver of withholding may be requested from CRA in advance, not generally recommended 10

TAXATION (continued) Withholding taxes (continued) -Rental income received by non-residents -Subject to 25% withholding tax on gross rents -May apply to CRA for reduction of withholding tax to 25% on net rental income -Must file annual tax return to be taxed on a net rental income basis -Rental losses only deductible from other rental income 11

TAXATION (continued) Withholding Taxes (continued) -Sale of Canadian real property by non-resident -25% withholding on gross proceeds unless clearance certificate received from CRA -Should request clearance certificate from CRA at least two months prior to sale date -Tax return must be filed at year end to calculate final capital gain and tax on sale of real property -Capital gain only half taxable -Treaties generally do not exempt real property capital gains from Canadian taxation 12

TAXATION (continued) Double Tax Treaties -Treaties in place with more than 90 countries -Generally follow the OECD model tax convention -Many treaties have comparable provisions for taxation of dividends, business profits, pension income, employment services, etc. -Canada’s treaty with the US far more comprehensive than any other treaties 13

TAXATION (continued) VAT/Sales/Other Taxes -Goods and services tax “GST” is Canada’s VAT -GST rate varies from 5% to 15% depending on province in which taxable supplies are made -Three provinces impose a separate, non-GST sales tax -Must separately register for non-GST sales taxes -Excise taxes/customs duties imposed on a variety of imported and domestic products -North American Free Trade Agreement generally provides for an open trade of goods among Canada, US and Mexico -Generally, no city sales taxes; cities and provinces also rely on property tax and land transfer tax 14

TAXATION (continued) Social Security -Canada Pension Plan contributions start at age 18 and continue until at least 60 and up to 70 years of age -Maximum CPP benefits currently about $12,000 per year -Old Age Security benefits commence at age 65 and maximum benefits currently about $6,500 per year -Other income supports such as welfare, employment insurance, income supplements for seniors, etc. -Canadians must generally save for retirement as government programs are intended to provide only a basic retirement income level -Various tax incentives available to encourage saving for retirement -Canada-wide health-care for all residents funded through income taxation and health specific employer and employee payroll taxes 15

TAXATION (continued) Federal v. Provincial -Calculation of provincial taxable income generally consistent with federal calculation -Separate provincial corporate tax return only required for Alberta and Quebec provinces -Tax return due dates, calculation of instalment payments, penalties and interest, etc. generally consistent -Federal taxable income is apportioned among provinces if business carried on in more than one province -Provincial apportionment based on a two factor formula of gross revenue and employee payroll per province 16

INVESTMENT INCENTIVES Tax Subsidies - Research and development tax credits -35% federal refundable tax credits for Canadian-owned private companies -20% federal non-refundable tax credits for foreign- owned companies -Various provincial credits also available to Canadian and foreign companies -Government appears to be recently studying the cost/benefit of these programs more closely 17

INVESTMENT INCENTIVES (continued) Other Incentives -Canada does not generally provide income tax holidays, grants or other incentives to companies entering the Canadian market -Canada tends to apply a “no favouritism” approach to new versus established businesses -Cities might provide local property tax relief or other incentives 18

COMMERCIAL/LEGAL Exchange controls – Canada has an open foreign currency economy – Most foreign currency transactions usually denominated in US$’s – Generally, only funds transferred to/from listed terrorist countries are subject to onerous regulatory and government reporting 19

COMMERCIAL/LEGAL (continued) Major Labour Laws -Labour legislation is generally determined by each province or territory -Minimum wage varies among provinces and is generally around $10 an hour -Mandatory vacation entitlements – vacation pay or weeks off in lieu of pay -Minimum severance pay for employees terminated without cause is generally one week per year of service but court settlements generally dictate higher awards for long service employees -Broad range of federal and provincial laws to protect workers from racism, sexual harassment and other forms of discrimination -Mandatory retirement at age 65 eliminated several years ago -Foreign workers generally require a visa and work permit 20

COMMERCIAL/LEGAL (continued) Political Stability -Generally considered among the most stable of countries -Historically reflected liberal politics and policies although a shift to more conservative views has occurred in recent years -Province of Quebec nationalists have aspirations for independence but wish to maintain economic association with Canada 21

COMMERCIAL/LEGAL (continued) Economic Stability -Generally considered among the most stable of countries -Strong banking system -US is Canada’s largest trading partner -Solid export markets for natural resources, such as oil and gas, timber, metals and minerals 22