How do I get profits home from my foreign subsidiary at lowest cost?
There is no single channel that is always the least expensive, which is why the work is done as a combination rather than a choice between four options. A dividend, an interest payment, a service fee and a repayment of capital each carry their own withholding rate, each differs in whether the paying company gets a deduction for it, and each requires the foreign entity actually to be doing something consistent with the payment. The combination that wins depends on what the entities do, how much accumulated profit there is, and over how many years you are prepared to move it.
Can I charge a management fee instead of paying a dividend?
Only where the services are real and priced as an unrelated party would price them. A service fee is attractive because it is generally deductible to the payer, which a dividend is not, and it may carry a different withholding treatment. But it is the channel with the highest substance requirement of the four. Somebody has to have performed identifiable work, and the charge has to correspond to what they did. A fee that does not risks being denied a deduction where it is paid and taxed anyway where it is received, which is the worst of both outcomes.
Should I take everything out in one year or spread it out?
Spreading usually wins. A single large distribution is measured against one year's rates, one year's credit position and one year's capacity to absorb tax already paid abroad, and concentrating the income is exactly what pushes a shareholder into an outcome that a smaller annual amount would not have produced. Sequencing also lets you use more than one channel — some capital back, some dividend, a fee for services genuinely performed — where a single event forces everything down one route. The constraint is usually patience, and occasionally a transaction that has already fixed the date.
What paperwork does each repatriation channel need?
Each channel is supported by different records, and the time to create them is before the payment rather than after a question about it. A dividend needs a resolution and confirmation that the company had profits available to distribute under its own law. Interest needs a loan agreement, support for the rate having been set on arm's length terms, and a record of what was advanced and when. A service fee needs an agreement, a description of the work and evidence that it was performed for the paying company rather than for its shareholder. A return of capital needs the corporate record of what was subscribed and what has already been given back.
The foreign company has almost no staff — does that matter?
Yes, for several of the channels. Substance is what supports a payment being what you call it. A service fee needs someone to have performed the service. Interest needs a lender that genuinely carries the risk of the loan. A treaty rate on a dividend can depend on the recipient being more than a conduit for someone else. Where a company exists mainly on paper, the channels that require substance narrow, and what is left is usually a dividend at whatever rate the treaty allows. Settling this before the payments start is far easier than defending them afterwards.
How much of a foreign dividend arrives without further tax at home?
It depends on the earnings behind it rather than on the dividend itself. A company's accumulated profits are not all of one character, and the surplus rules look through to what the paying company earned in deciding how much further tax attaches to the distribution. Two companies can pay identical dividends and produce different results for the same shareholder. That is why the position is worked out before the distribution is declared, rather than after the money has arrived and the amount has already been fixed. The answer is a computation, not a rate you can look up.
Are foreign trusts taxable in Canada?
They can be. Canada's deemed-resident-trust rules can pull a non-resident trust into the Canadian tax system where there is a resident contributor or, in some cases, a resident beneficiary — taxing it as though it were resident here. Separate reporting applies to transfers or loans to a non-resident trust and to distributions and debts from one. The planning point is that contributing to an offshore trust from Canada rarely achieves what the brochure suggests. See non-resident trusts.
Which business structure has double taxation?
The corporation — specifically a US C corporation, where profit is taxed to the company and the dividend again to the shareholder. Sole proprietorships, partnerships and LLCs treated as flow-throughs are taxed once, in the owners' hands. Across borders that tidy answer breaks: an entity treated as a flow-through in one country can be opaque in the other, which produces a mismatch neither system planned for. See LLC against corporation for Canadians.
