DOUBLE TAXATION
Contact Neufeld Legal for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The term double taxation describes the situation where the same income is taxed twice. In a Canadian context, this phenomenon manifests in two primary ways: Corporate/Shareholder Double Taxation (internal to the domestic tax system) and International Double Taxation (involving two different countries).
A. Corporate/Shareholder Double Taxation (The Domestic Challenge)
The most common domestic form of double taxation arises from the legal separation between a corporation and its owners (shareholders).
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Taxation 1: The Corporate Level A corporation is considered a separate legal entity. As such, it is required to pay corporate income tax (federal and provincial) on the profits it earns.
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Taxation 2: The Shareholder Level When the corporation chooses to distribute its after-tax profits to its shareholders in the form of dividends, those shareholders must then report the dividend income on their personal tax returns and pay personal income tax on it.
This process - where the initial profit is taxed by the government, and the resulting distribution is taxed again—is the essence of corporate double taxation.
The Canadian Integration System: To mitigate this inherent unfairness, Canada employs a complex mechanism known as the tax integration system. The goal of this system is to ensure that income earned through a corporation and distributed to a shareholder is ultimately taxed at approximately the same rate as if the individual had earned the income directly. This is achieved primarily through the use of the Dividend Tax Credit (DTC), which attempts to give the shareholder credit for the tax already paid by the corporation.
B. International Double Taxation (The Cross-Border Challenge)
International double taxation occurs when two different countries assert the right to tax the same stream of income. This is especially relevant in Canada because:
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Source-Based Taxation: Most countries (including Canada) tax income that is sourced or earned within their borders.
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Residency-Based Taxation (Canada): Canada taxes its residents on their worldwide income, regardless of where it was earned.
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Citizenship-Based Taxation (e.g., U.S.): The United States taxes its citizens on their worldwide income regardless of residency, which creates a significant overlap with Canadian residency taxation.
For an individual who is a Canadian resident earning income in a foreign country, or vice versa, the income could be subject to taxation in both jurisdictions.
Mitigation through Tax Treaties: Canada has signed numerous Double Taxation Treaties (such as the Canada-U.S. Tax Treaty) with other nations to avoid this outcome. These treaties primarily resolve the issue by:
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Establishing "tie-breaker rules" to determine which country has the primary right to tax.
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Allowing residents to claim a Foreign Tax Credit (FTC) on their Canadian tax return for income tax paid to a foreign government on the same income.
Without proper planning and application of these treaties, individuals and multinational businesses would face prohibitively expensive taxation on cross-border transactions, effectively impeding international trade and investment.
So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, contact our law firm to schedule a confidential consultation with a lawyer experienced in the legal intricacies of business incorporation and commercial business development at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
