International business: residence, foreign income and the global minimum tax

Even a small Canadian business can find itself operating across borders: a contract in North Dakota, a supplier in Germany, a customer in Japan or a shareholder who moves abroad. International tax is a large specialty, but every accountant needs its basic framework: who is resident in Canada and taxed on worldwide income, how non-residents are taxed, how tax treaties allocate taxing rights and relieve double tax, how Canada taxes income earned through foreign branches and foreign subsidiaries, and how the new global minimum tax affects large multinational groups. This lesson covers that framework, with Brandt Aerial Inc.'s first contract in the United States as the example.

Residence of corporations

Canada taxes residents on their worldwide income and non-residents only on certain Canadian-source income. A corporation incorporated in Canada after 26 April 1965 is deemed resident by subsection 250(4). A corporation incorporated elsewhere is resident in Canada under the common law if its central management and control is exercised in Canada, the test from De Beers Consolidated Mines v. Howe (1906), which looks at where the board of directors actually makes the strategic decisions. A corporation can therefore be resident in two countries, in which case the applicable treaty's tie-breaker rule decides; under the Canada-United States treaty, a dual-resident corporation is resident where it was created, or if that does not resolve it, the competent authorities decide. A corporation that ceases to be resident is deemed to dispose of its property at fair market value and must pay a departure tax on its surplus.

How non-residents are taxed

A non-resident is taxed under Part I of the Act on income from employment in Canada, from carrying on a business in Canada and from dispositions of taxable Canadian property, such as Canadian real estate and shares that derive their value principally from it. A purchaser of taxable Canadian property from a non-resident must withhold 25 per cent of the price unless the vendor obtains a clearance certificate under section 116. Passive income paid to non-residents, such as dividends, rents, royalties and interest paid to non-arm's length persons, is subject to Part XIII tax of 25 per cent of the gross amount, withheld by the payer and reduced by treaty. Under Regulation 105, a payer must also withhold 15 per cent of fees paid to a non-resident for services rendered in Canada, as a prepayment of any Part I tax; the non-resident can apply for a waiver if a treaty exempts the income, or file a Canadian return to recover it.

Treaties and permanent establishments

Canada has tax treaties with more than 90 countries, mostly based on the OECD Model Convention. A treaty does not create tax; it limits the tax each country can impose and provides relief from double taxation. Under the business profits article (Article VII of the Canada-United States treaty), a resident of one country is taxed by the other on business profits only if they are attributable to a permanent establishment (PE) there: a fixed place of business such as an office, branch or workshop, a building or construction site lasting more than 12 months, or a dependent agent who habitually concludes contracts. The Canada-United States treaty adds a services PE rule: services provided in the other country by an individual present there for 183 days or more in a 12-month period, or by the enterprise for 183 days or more on the same or connected projects, can create a PE. The treaty also caps withholding taxes and contains a limitation on benefits article. Canada has also adopted the OECD's Multilateral Instrument, which adds a principal purpose test to many of its other treaties.

Canadian businesses abroad: branches and foreign affiliates

A Canadian corporation can operate abroad through a branch or a subsidiary. A branch is part of the corporation, so its profits are included in Canadian income as earned, but they are not eligible for the small business deduction (the business is not carried on in Canada) or the provincial abatement (the income is not earned in a province), so the federal rate on them is 25 per cent before credits. Foreign income tax on the branch profits is creditable under subsection 126(2), limited to the Canadian tax on that income; unused business foreign tax credits carry back three years and forward ten. A foreign subsidiary in which the Canadian corporation holds at least 1 per cent, and with related persons at least 10 per cent, is a foreign affiliate. Its active business income is not taxed in Canada until it pays dividends, and dividends paid from 'exempt surplus', active business income earned in a country with which Canada has a treaty or tax information exchange agreement, are fully deductible under section 113, so they are effectively exempt. Dividends from taxable surplus are taxed with a credit for underlying foreign tax. Passive income of a controlled foreign affiliate, called foreign accrual property income (FAPI), is taxed in Canada as it is earned, to prevent deferral by parking investments offshore.

Transfer pricing and foreign reporting

When related parties in different countries trade with each other, the prices they use determine where profit is taxed. Section 247 requires transactions between a Canadian taxpayer and non-arm's length non-residents to be priced at arm's length, consistent with the OECD Transfer Pricing Guidelines, which the 2025 federal budget proposed to incorporate more explicitly. A 10 per cent penalty applies to large adjustments if the taxpayer did not make reasonable efforts to determine arm's length prices, evidenced by contemporaneous documentation; the budget proposed raising the threshold for the penalty from $5 million to $10 million and shortening the time to provide documentation on request from three months to 30 days. Canadian taxpayers must also file information returns: form T1135 if the total cost of their specified foreign property exceeds $100,000 at any time in the year, form T1134 for foreign affiliates and form T106 for transactions with non-arm's length non-residents exceeding $1 million. Penalties for late filing are significant even when no tax is owing.

Brandt Aerial Inc.'s contract in North Dakota

In 2027, Brandt Aerial Inc. inspects transmission lines in North Dakota for a US utility, earning $20,000 of profit on the $66,000 contract. Its crew is on site for 40 days. The program first tests the services PE rule, then considers a later, longer contract that does create a US PE, computing the foreign tax credit, and shows the Part XIII rates that would apply if the corporation paid dividends to non-resident shareholders. It ends with the size test for the global minimum tax.

# Brandt Aerial Inc. works in North Dakota: permanent establishment and the foreign tax credit
# (2026 rates; illustrative, federal tax only)
days_on_site = 40
pe = days_on_site >= 183          # Canada-US treaty services PE test (Article V(9)), simplified
us_profit = 20_000                # profit on the North Dakota inspection contract
print(f"Days on site: {days_on_site}. Services PE in the United States: {pe}")
print("No PE: the profit is taxable only in Canada, at Brandt Aerial's Canadian rates.")
print()
# Suppose a later contract runs 200 days and creates a PE
us_tax = 0.21 * us_profit + 0.0431 * us_profit       # federal 21% plus an assumed state rate
# Profit of a foreign PE is not from a business carried on in Canada (no SBD) and is not
# earned in a province (no 10% abatement, no Manitoba tax): 38% - 13% = 25% federal
cdn_rate_foreign_pe = 0.38 - 0.13
cdn_tax_on_us_income = cdn_rate_foreign_pe * us_profit
limit = cdn_tax_on_us_income                         # s. 126(2) limit, simplified
credit = min(us_tax, limit)
print(f"US tax on the PE's profit (federal + assumed state):  {us_tax:>9,.2f}")
print(f"Canadian tax otherwise payable on that profit (25%):  {cdn_tax_on_us_income:>9,.2f}")
print(f"Foreign business income tax credit allowed:           {credit:>9,.2f}")
print(f"Unused credit (carried back 3 or forward 10 years):  {us_tax - credit:>9,.2f}")
print()
# Part XIII withholding on dividends to a non-resident shareholder
for who, rate in (("No treaty", 0.25), ("US resident individual (treaty)", 0.15),
                  ("US company owning at least 10% (treaty)", 0.05)):
    print(f"Dividend of 10,000 to {who:<40} withholding {10_000 * rate:>7,.0f}")
print()
groups = {"Brandt Aerial Inc.": 0.6e6, "A multinational group": 2_000e6}
for g, revenue_eur in groups.items():
    print(f"{g:<24} revenue EUR {revenue_eur:>15,.0f}: subject to the global minimum tax? {revenue_eur >= 750e6}")

Days on site: 40. Services PE in the United States: False
No PE: the profit is taxable only in Canada, at Brandt Aerial's Canadian rates.

US tax on the PE's profit (federal + assumed state):   5,062.00
Canadian tax otherwise payable on that profit (25%):   5,000.00
Foreign business income tax credit allowed:            5,000.00
Unused credit (carried back 3 or forward 10 years):      62.00

Dividend of 10,000 to No treaty                                withholding   2,500
Dividend of 10,000 to US resident individual (treaty)          withholding   1,500
Dividend of 10,000 to US company owning at least 10% (treaty)  withholding     500

Brandt Aerial Inc.       revenue EUR         600,000: subject to the global minimum tax? False
A multinational group    revenue EUR   2,000,000,000: subject to the global minimum tax? True

Forty days on site is far below the 183-day threshold, and Brandt Aerial Inc. has no fixed place of business in the United States, so under Article VII the United States cannot tax the profit; Canada taxes it as part of the corporation's active business income. The utility may still require the corporation to provide Form W-8BEN-E claiming treaty benefits, and the corporation may need to file a US protective return. If a later contract lasted 200 days and created a PE, the United States would tax the $20,000 of attributable profit, at an assumed combined federal and state rate of about 25.3 per cent, $5,062. Canada would also tax it: as income of a business not carried on in Canada and not earned in a province, it would bear federal tax at 25 per cent, $5,000, and the foreign business income tax credit would eliminate it, leaving $62 of excess credit to carry over. The Part XIII rates show why treaty planning matters to non-resident shareholders. Finally, Brandt Aerial Inc.'s revenue is far below the €750 million threshold, so the global minimum tax does not apply.

The global minimum tax

The OECD/G20 Inclusive Framework's Pillar Two establishes a global minimum tax of 15 per cent on the profits of multinational groups with consolidated revenue of at least €750 million in two of the four preceding years. Canada enacted it in the Global Minimum Tax Act, which received royal assent on 20 June 2024. The Act imposes a qualified domestic minimum top-up tax (QDMTT) on low-taxed Canadian entities of in-scope groups, an income inclusion rule (IIR) that taxes Canadian parent entities on low-taxed profits of their foreign subsidiaries, both for fiscal years beginning on or after 31 December 2023, and an undertaxed profits rule (UTPR) as a backstop for fiscal years beginning on or after 31 December 2024. The effective tax rate is computed jurisdiction by jurisdiction from financial statement income, with a substance-based carve-out for payroll and tangible assets. On 5 January 2026, the Inclusive Framework agreed on a 'side-by-side' package under which groups whose ultimate parent is in a jurisdiction with a qualified side-by-side regime, so far only the United States, are exempt from the IIR and UTPR for fiscal years beginning on or after 1 January 2026, though still subject to QDMTTs; the package also added new safe harbours. How Canada will implement it was still being worked out in late 2026. Canada also repealed its digital services tax in 2025, after announcing its rescission in June 2025. None of this affects Brandt Aerial Inc., but it affects every large Canadian multinational and its advisers.