Despite a country’s domestic rules, where there is a tax treaty between countries, the provisions of the treaty determine the country that gets primary taxing jurisdiction of each source of income. Foreign business income, where there is a tax treaty between the source and residence countries, is generally taxed based on the location of the Permanent Establishment to which the income is attributed. The source of foreign business income is generally the place where the business is “carried on”. It is a question of fact where a business is carried on. Generally, it is the place where the operations are carried out or the profit-generating activities take place.
Whether or not a business has a Permanent Establishment in a country can be a complex question. Generally a PE exists if the business maintains an office or physical location from which the business is regularly conducted in the other country.
When no PE exists in the other country, the tax treaty might protect business income from taxation in the source country. In Canada, business income attributable to a foreign PE is subject to a federal surtax of 48% on the associated taxes payable. This is in place of provincial taxes.
There are many ways to structure how Canadian residents earn income in or from foreign jurisdictions. The most efficient tax structure will depend on the nature of the activities and the source of the income. An international tax expert will be able to help you structure your business affairs to reduce you organization’s overall tax burden.