doing business in canada - Davies Ward Phillips & Vineberg LLP

Québec has legislation that limits the deductibility of financing costs to the amount of income generated by theinvestment. This rule only applies to individuals subject to tax in Québec.Income from SharesTaxable dividends received by a Canadian resident corporation from a "taxable Canadian corporation" aregenerally fully deductible to the recipient corporation (subject to certain anti-avoidance rules), permittingdividends to pass up through a chain of taxable Canadian corporations without taxation. A taxable Canadiancorporation is any "Canadian corporation" (including any corporation incorporated in Canada) that is notexempt under the Tax Act by reason of special rules applicable in limited circumstances (e.g., Crowncorporations, pension corporations).Dividends received by an individual are taxable, subject to the dividend tax credit, which reduces the effectiverate of taxation on dividends paid by a taxable Canadian corporation and is intended to compensate (partially)for underlying corporate tax paid by the dividend payer. The dividend tax credit for certain "eligible dividends"paid after 2005 more fully compensates individual shareholders for the underlying corporate tax paid.Dividends received by a Canadian resident corporation from a non-resident corporation are included in income,subject to certain deductions permitted under the Canadian foreign affiliate rules and subject to the foreign taxcredit rules. The foreign affiliate rules are complex but, in general terms, provide that earnings from an activebusiness carried on by a foreign affiliate in a jurisdiction with which Canada has a tax treaty, or in a non-treatyjurisdiction that has agreed to exchange tax information with Canada, may be repatriated to Canada free ofCanadian tax. This regime affords some tax planning opportunities for Canadian-based multinationalenterprises. Canada has announced the negotiation of several tax information exchange agreements. However,at present, none have come into force.Conversely, under the foreign affiliate rules, Canadian residents are required to include their share of the"foreign accrual property income" (passive income or income deemed to be passive) of a controlled foreignaffiliate whether or not distributed to the Canadian resident.Canadian residents are also required to include, in certain circumstances, an amount of deemed income inrespect of an interest in any “offshore investment fund property”.A shareholder of a Canadian private corporation, whether resident in Canada or non-resident, is generallyentitled to the return of share capital free from Canadian tax (including Canadian withholding tax). This is animportant planning point for non-residents acquiring shares of a Canadian private corporation, especially sincecapital may be returned without first distributing earnings and profits by way of dividend.DepreciationTaxpayers are permitted deductions ("capital cost allowance") at prescribed rates in respect of depreciableproperty used in a business, including machinery and equipment, buildings and certain intangible property.Land is not eligible for tax depreciation. Capital cost allowance is generally computed by reference to theaggregate undepreciated capital cost of various asset classes and not the undepreciated capital cost of eachindividual asset.A similar deduction is permitted in respect of eligible capital expenditures incurred for the purpose of earningincome from a business, including purchased goodwill.Resource ExpendituresCanadian resource expenditures (other than expenditures related to the acquisition of tangible property whichwould generally be treated as depreciable property) are classified as either Canadian oil and gas property84 Tax Considerations