Country report Canada

Economic overview

Canada is a high-income country, rich in natural resources, whose economy is highly integrated with that of the United States. They represent both the main supplier country, with about 50% of imports, and the main destination country of exports, with a share of 73.5% of the total.

Until before the economic crisis following the pandemic, the economic system was in a phase of expansion and the Gross Domestic Product had been growing for several years: + 1.5% in 2016, + 3% in 2017, +1.8 % in 2018, + 1.6% in 2019. In 2020, following the effects of the pandemic, GDP stood at -5.1% and is expected to return to positive territory (+ 4.0%) in 2021.

Growth in recent years has been aided by an expansive monetary policy, with an interest rate close to zero from mid-2015 to mid-2017. However, the pace and extent of economic expansion prompted the Central Bank to gradually raise the interest rate starting from the end of 2017, to contain the inflationary pressure and put a stop to the growing real estate speculation which, thanks to the low cost of money, had mainly invested the large centers of the country.

Since the beginning of the pandemic, the Central Bank has resumed its expansionary policy, bringing the interest rate to 0.25%. Low interest rates allowed the government to carry out an expansionary budget policy, realizing an expected budget deficit of CAD -381 billion in 2020, equal to over the entire amount of public spending in one year.

Main sectors of industry

A primary sector is cereal cultivation and the exploitation of forest resources. Industry and tertiary activities are highly developed.

Canada also ranks first in the world in the production of hydroelectric power and exports about 14% of it to the United States. Only the province of Quebec, where dams have been built on the St. Lawrence River, produces an extracted amount of energy equal to 61%. Instead, renewable energy is equal to 38% of energy, making the French-speaking province one of the most virtuous areas of green energy.

The main industries are mechanical industries, such as aeronautics, aerospace and automotive, textile and food industries, paper production, iron and steel processing, the manufacture of high-tech machinery and machine tools. The electronics industry is also important, linked to the military, aerospace, transport and telecommunications sectors.

Similarly to other developed countries, the tertiary sector is very developed in fact in the cities there are numerous banks, trading companies, communication companies and tourism operators.

Taxation for businesses in Canada

Due to the rules that provide for the federal tax abatement and the general tax reduction, the effective tax rate of corporate income tax in Canada is 15%, compared to a theoretical rate of 38%. To calculate the weight of corporate taxation in Canada, however, the provincial-territorial taxes must be added to the federal taxation.

As a general rule, companies resident in Canada are subject to corporate income tax (CIT) on worldwide income. Non-resident companies are subject to tax on income arising from conducting a business in Canada and on capital gains arising from the sale of taxable Canadian properties. Under the law governing income tax, a corporation incorporated in Canada (at the federal or provincial / territorial level) is considered to be resident in Canada.

A company not incorporated in Canada will be regarded as resident in Canada under Canadian law if its central management and control is exercised in Canada.

The place where central management and control of a company is exercised generally coincides with the seat of the board of directors.

Canadian tax treaties generally state that the corporate profits of a non-resident corporation are not subject to Canadian tax unless the non-resident corporation conducts business in Canada through a permanent establishment (PE) located domestically and corporate profits are attributed to it.

On the basis of the various tax treaties, a PE is generally defined as a fixed place of business through which the activity of the non-resident company is carried out in whole or in part, a place of management, a branch, an office, a factory and a workshop; a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

Persons without the residency requirement subject to taxation only the income produced in the national territory in addition to 50% of the capital gains realized for the sale of certain assets specified by Canadian legislation and a withholding of 25% in the event of distribution of profits paid by resident companies. 

Investing in Canada

Canada is also the country where the times and procedures required to open a business are the fastest, with only two days, according to data released in 2016 by the World Bank.

Among the G7 countries, the Canadian economy is the economy that, in the long run, offers the best growth prospects, at the fastest pace even higher than that of the United States, as highlighted in the report of the Global Interim Economic Outlook, of February 2016.

Employment growth, on the other hand, has been in second place among those recorded in the G7 countries over the last 10 years.

In an attempt to reconcile the needs of foreign investors with the need to remain competitive, Canada is able to offer very low operating costs and the lowest corporate income taxes, among those applied in the G7 countries, in addition to provide tax incentives and benefits to companies interested in investing locally.

The program, developed by the Federal Government, in favor of foreign companies operating in the Research and Development sector, is proving to be extremely advantageous, thanks to the provision of tax credits and tax incentives. Incentives are provided, in particular, for direct costs incurred by companies, in the context of experimental development, applied research, engineering activities, design, operational research, analysis, programming, data collection and testing. Access to the program and the related tax benefits can be requested both by the foreign parent company of a company, which operates in Canada, and by the Canadian subsidiary. A wide range of additional incentives at both federal and provincial levels are also available to foreign companies wishing to invest in Canada.

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