Canada

In Canada, the basic federal corporate tax rate is 38%. This rate is generally reduced by a 10% federal tax abatement for income earned in a Canadian province or territory and a 13% general rate reduction on eligible income subject to the general rate, resulting in a net federal corporate tax rate of 15%.

Other federal corporate tax rates, subject to certain conditions, include:

• 9% on income of a Canadian-controlled private corporation (CCPC) eligible for the small business deduction;
• 38.67% on certain investment income of a CCPC, subject to the refundable tax regime;
• 7.5%, or 4.5% where the small business rate would otherwise apply, on qualifying zero-emission technology manufacturing income, with these rates to be phased out beginning in 2032; and
• an additional 1.5% on the taxable income of banks and life insurers subject to a CAD 100 million exemption shared among group members.

Provinces and territories also levy corporate income tax, with rates varying by jurisdiction. For example, Ontario’s general corporate tax rate is 11.5%, yielding a combined federal-provincial general corporate tax rate of 26.5%. Ontario also provides a 3.2% small business rate, resulting in a combined federal-provincial small business rate of 12.2% for qualifying corporations.

Canada enacted a global minimum tax in 2024 through the Global Minimum Tax Act (S.C. 2024, Chapter 17, section 81), which implements the OECD’s Pillar Two framework. Pillar Two is part of the OECD’s Two-Pillar Solution addressing the digitalization of the economy and seeks to ensure that large multinational enterprise (MNE) groups are subject to a 15% minimum effective tax rate in each jurisdiction in which they operate.

Generally, the global minimum tax applies to qualifying MNE groups with consolidated annual revenue of EUR 750 million or more in at least two of the four preceding fiscal years.

Canada’s global minimum tax rules include a Qualified Domestic Minimum Top-up Tax (QDMTT) and an Income Inclusion Rule. Although proposed, an undertaxed profits rule has not yet been enacted.

The regime also provides for safe harbor rules, including the QDMTT safe harbor, simplified calculations safe harbor, and transitional safe harbors.

Income

The taxation of income in Canada depends on residence status. Residents are generally taxed on their worldwide income from all sources, including employment, business, and property income.

Non-residents, however, are generally taxed only on specified Canadian-source amounts, including employment income earned in Canada, business income earned in Canada, and taxable capital gains from dispositions of taxable Canadian property. Certain Canadian-source passive amounts paid to non-residents are subject to withholding tax.

In computing taxable income, an unapplied non-capital loss may generally be carried back three years and carried forward 20 years.

Capital gains

Canada’s capital gains inclusion rate is 50%. Generally, one half of a capital gain is included in income as a taxable capital gain, and one half of a capital loss is treated as an allowable capital loss. Certain exceptions apply, including some gifts of publicly listed securities.

Generally, allowable capital losses are deductible only against taxable capital gains. Net capital losses may be carried back three years or carried forward indefinitely.

Net taxable gains are included in determining taxable income.

Foreign-source income

As mentioned, residents are typically taxed on worldwide income, including foreign-source income. Relief from double taxation may be available through foreign tax credits and applicable treaties.

Non-residents are generally not taxed in Canada on foreign-source income.

Canada’s principal indirect tax is the federal goods and services tax (GST) imposed under Part IX of the Excise Tax Act. Pursuant to subsection 165(1), GST applies at a rate of 5% to taxable supplies of property and services made in Canada. Additional provincial tax applies to taxable supplies made in participating provinces, resulting in the harmonized sales tax (HST). For example, Ontario’s HST is 13%, comprising the 5% federal portion and the 8% provincial portion.

Canada also imposes excise taxes and excise duties on certain products. For example, excise taxes apply to certain petroleum products and fuel-inefficient vehicles, while excise duties apply to products such as beer, cannabis products, spirits, tobacco products, vaping products, and wine.

In addition, Canada imposes customs duties and tariffs on imported goods.

Other federal indirect taxes include the Luxury Tax on certain vehicles and the Air Travellers Security Charge.

At the provincial level, indirect taxes include the Quebec Sales Tax, a value-added tax, and the retail sales taxes imposed by British Columbia, Saskatchewan, and Manitoba. Many provinces and some municipalities also impose land transfer tax on transfers of real property.

In Canada, withholding taxes are applied mainly in two ways:

• source deductions on employment-related and certain other payments; and
• withholding on certain amounts paid to non-residents.

Source deductions on employment income and other payments

Under Part I (subsection 153(1)) of the Income Tax Act (R.S.C., 1985, Chapter 1 (5th Supplement), (ITA)), every person paying listed amounts must deduct or withhold on account of federal income tax and remit to the Receiver General on account of the payee’s tax liability. The specified amounts include certain salary, wages, or other remuneration, pension benefits, commissions, retiring allowances, and other enumerated amounts. Remittances must be made at the prescribed time, which depends on the remitter type. Employers must also make payroll deductions, including on account of provincial or territorial income tax, Canada pension plan contributions, and employment insurance premiums.

Non-resident withholdings

Part XIII of the ITA imposes withholding tax on certain amounts paid or credited to non-residents. Under Part XIII, a non-resident person is generally subject to a 25% withholding tax on certain Canadian-source amounts paid or credited by a person resident in Canada, including certain interest, dividends, royalties, rents, and pensions.

Although the tax is imposed on the non-resident recipient, the payer or withholding agent must deduct or withhold the tax and remit it to the Receiver General on the non-resident’s behalf. Remittances are generally due by the 15th day of the month following the month in which the amount was paid or credited. The payer or withholding agent must also report the payment and the tax withheld on a NR4 information return, which is generally due by the last day of March following the relevant calendar year, or, in the case of a trust or estate, within 90 days after the end of the tax year.

The 25% statutory default rate may be reduced or eliminated under specific provisions of the ITA or an applicable tax treaty.

Paragraph 153(1)(g) of the ITA and section 105 of the Income Tax Regulations also generally require a 15% withholding on payments to non-residents for services performed in Canada. This withholding requirement is subject to exemption, waiver, or relief. The deadline for remittances generally mirrors that for the Part XIII withholdings. The payer must also file a T4A-NR information return.

Canada has a General Anti-Avoidance Rule (GAAR) set out in section 245 of the ITA. The preamble in subsection 245(0.1) states that the GAAR applies to deny the tax benefit of avoidance transactions that result in a specified “misuse or abuse” while not preventing taxpayers from obtaining tax benefits contemplated by Parliament. The preamble also explains that the GAAR is intended to strike a balance between the government’s responsibility to protect the tax base and the fairness of the tax system and taxpayers’ need for certainty in planning their affairs.

The GAAR analysis generally asks whether there is a “tax benefit,” whether there is an “avoidance transaction,” and whether the transaction results in a misuse of the provisions of the ITA or other relevant legislation or an abuse having regard to the legislation as a whole.

“Tax benefit” is defined broadly and generally includes:

1. a reduction, avoidance or deferral of tax;
2. an increase in a refund of tax; and
3. a reduction, increase or preservation of an amount that could at a subsequent time be relevant for computing the amounts or result in the effects of (a) or (b).

An “avoidance transaction” is a transaction that results in a tax benefit, or forms part of a series that results in a tax benefit, unless it may reasonably be considered that obtaining the tax benefit is not one of the main purposes for undertaking or arranging the transaction.

As part of the “misuse or abuse” assessment, a significant lack of economic substance in an avoidance transaction is deemed to be an important consideration that tends to indicate that the transaction results in misuse or abuse.

If the GAAR applies, the Minister may determine the tax consequences as are reasonable in the circumstances to deny a tax benefit. Further, for undisclosed “GAAR transactions,” the Minister may have an extended period to reassess and may also apply a penalty.

The types of issues we regard as frequently leading to tax controversies in Canada relate to:

• unreported income;
• transfer pricing;
• characterization disputes, including income versus capital;
• GST/HST disputes;
• tax credits;
• shareholder benefits;
• anti-avoidance disputes;
• foreign reporting obligations;
• limitation periods for reassessment; and
• imposition of gross negligence penalties.

In the criminal law context, alleged tax evasion and tax fraud also give rise to significant tax disputes and prosecutions. These offenses may carry substantial fines and terms of imprisonment. These matters are often handled by counsel at regulatory criminal tax boutiques; however, there are select larger firms, including Miller Thomson, with specialists dealing in this subject area.

In Canada, the legislative frameworks governing the process and resolution of federal tax controversies generally include:

• the Canada Revenue Agency (CRA) audit, objection, and appeal regime; and
• court proceedings.

The following analysis is based on federal income tax.

Federal income tax disputes are governed by sections 231.1 and 231.2 of the ITA which grant the CRA broad audit and information-gathering powers. Under section 165 of the ITA, a taxpayer who disagrees with an assessment may object by filing a notice of objection. Individuals (other than certain trusts) generally have the later of one year after the filing-due date and 90 days after the notice of assessment to submit the objection. The deadline for taxpayers other than individuals is generally 90 days after the notice of assessment was sent. After an objection, a CRA appeals officer is assigned, and the taxpayer typically can make further submissions. Ultimately, the Minister must reconsider the assessment and either reassess, vary, vacate, or confirm such, and notify the taxpayer of the decision.

The main appeal route from the CRA objection decision is to the Tax Court of Canada under section 169 of the ITA. A taxpayer may appeal once the Minister confirms the assessment or after 90 days have elapsed since the objection was filed without a decision being rendered. Once the Minister has issued the confirmation or reassessment, the taxpayer generally has 90 days to file an appeal. Substantively, income tax proceedings are guided by the ITA, jurisprudence, and CRA administrative publications. Procedurally, proceedings are governed by the Tax Court of Canada Rules and relevant practice directions.

After Tax Court proceedings, the taxpayer may generally appeal to the Federal Court of Appeal as of right, and then to the Supreme Court of Canada with leave. Of note, certain administrative or discretionary decisions are brought to the Federal Court by judicial review rather than to the Tax Court.

Alternative methods for resolving federal tax controversies may ensue during the CRA audit, objection, and appeals processes or by settlement during litigation.

Taxpayers may contact the CRA to clarify the basis for a proposed or issued assessment and provide the requisite information. As explained above, taxpayers may also engage in the formal objections and appeals processes during which their matters may settle.

Mediations during the CRA appeals process may occur where the dispute is factual but are relatively uncommon.

Ultimately, principled settlement during litigation may be facilitated by way of a settlement conference or through informal communications between parties.