Can profits from my foreign company reach Canada without further tax?
Some of them can, and which ones depends on bookkeeping done long before the payment. Exempt surplus is the pool holding a foreign affiliate's active business earnings from a treaty or agreement country, and dividends paid out of that pool can generally come to Canada without further Canadian tax. The words doing the work are active business and treaty or agreement country. Earnings failing either test sit in a different pool with a different result. So the answer to the question is not a rate. It is whether the surplus accounts show a balance in the right pool when the dividend is paid.
What makes earnings exempt surplus rather than another pool?
Two characteristics of the earnings themselves: what the affiliate did to earn them, and where. Earnings from carrying on an active business qualify in principle, and income from holding property does not. The business also has to be carried on in a country Canada has the relevant treaty or agreement with, which is a question about the country rather than about the company. Both tests are applied to the earnings of each year as they arise, not to the company as a whole, so one affiliate's accounts can show balances in more than one pool at the same time.
Does my foreign company's country need a tax treaty with Canada?
A treaty, or a comparable agreement, yes, because that is part of what defines the pool. The point that gets missed is which country is the relevant one. It depends on where the business is carried on and where the affiliate is resident, and those are not always the same place. A company incorporated in one jurisdiction, managed from a second and trading in a third needs each of those questions answered before its earnings can be allocated. Where the answer comes back no, the earnings are not lost. They go to a pool whose distribution is treated differently.
Who decides which pool a dividend comes out of?
Not the shareholder, as a general matter. The pools are drawn on in a set order rather than at the payer's choice, so a dividend cannot simply be declared to come from the favourable one. That has a consequence worth knowing before a distribution is planned: if the accounts have not been prepared, nobody can say what the dividend consists of, and the position then defaults to whatever can be evidenced after the event. The sequence is decided by the rules and by the balances. The part within your control is having those balances computed and supported.
Do I need surplus accounts if I never take a dividend?
You need them for the year the dividend eventually happens, and they cannot be built then out of nothing. Each year's earnings are sorted into pools as they arise, on that year's facts: what the business did, where it was carried on, what tax it bore. Reconstructing that a decade later means recovering foreign accounts and assessments that may no longer be accessible. Clients who maintain the accounts annually treat a distribution as an arithmetic exercise. Clients who do not treat it as a research project, and sometimes find the favourable pool cannot be evidenced at all.
How do I prove the earnings came from an active business?
With the affiliate's own records, read for what the company actually did. That means the ledgers rather than the summary accounts, along with contracts, payroll records if there were employees, premises, and the ordinary evidence that a business was being carried on rather than assets held. Where the affiliate has both a trade and an investment portfolio, the evidence has to support a split, stream by stream. It is worth assembling while the people who ran the company are still available to explain it. The pool is only as durable as the papers standing behind the classification.
What happens if the two countries disagree about which of them can tax me?
The treaty has a procedure for exactly that. You apply to the competent authority in your residence country, which takes the case up with its counterpart, and the two negotiate a position that removes the double taxation. Some treaties add binding arbitration if they cannot agree. It is slow and it runs on documents, so the practical work is preserving the record and filing protective claims while the clock runs. See our treaty work.
What is cross-border tax?
Cross-border tax is what applies when income, assets or people touch more than one tax system at once — someone living in one country and earning in another, a company selling or hiring abroad, a family holding property in a second country. The work is rarely one country's rules applied harder; it is reconciling two sets of rules and claiming the relief that stops the same income being taxed twice at full rates. See what we do.
