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Cross-Border Tax: A New Level of Complexity


​​​​​​​​​Moving into foreign markets can be a source of enormous opportunity for Canadian real estate and construction firms. It can also be a source or tremendous frustration, as companies grapple with the complexities of cross-border taxation. Without adequate preparation, companies can find themselves paying higher tax rates — and generating lower returns. Early tax planning can help businesses avoid these risks and make the most of their cross-border ventures.

New Opportunities, Cross-Border Headaches

Most Canadian real estate developers, owners and investors tend to be locally focused, and the same can be said of most of the country’s construction companies and engineering and architectural firms. These companies have a deep knowledge of local economic conditions and market dynamics; over the years they’ve also built up a solid understanding of how Canada’s taxation system affects their business. They know what they’re dealing with.

At some point, Canadian companies may move into a foreign market in pursuit of an exciting growth opportunity. Unfortunately, things don’t always go according to plan. Companies can quickly become overwhelmed in a world of unfamiliar business practices, legal issues and tax rules. Currency fluctuations and shifting business conditions can rapidly change a project’s economics. The result? A host of new business and tax headaches back home in Canada.​

​This article is part of a series on key tax issues facing Canada’s real estate and construction companies.

​ ​ Read other articles in the series.​ ​​

Managing the Tax Integration Challenge

Tax integration is one of the most complex aspects of doing business internationally, an area that requires a high level of sophistication. Companies active across borders want to ensure they’re minimizing their total tax bill and paying an optimized effective tax rate across domestic and foreign operations. Ideally, this will be a lower overall rate; in a worst-case scenario it would be equal to the company’s domestic effective tax rate. Unfortunately, inadequate planning can result in a company paying a higher effective tax rate overall after venturing abroad.

Conducting business in more than one country also creates challenges for companies as they try to repatriate funds from their foreign operations to Canada. Revenue authorities in Canada and around the world have ramped up efforts to maximize tax revenues and minimize leakage, and they are especially alert to the movement of funds across borders. Unprepared, companies can inadvertently get involved in a tax dispute on one or both jurisdictions.

Planning, Preparation Essential

Companies should never underestimate the cost and complexity of doing business abroad. But that shouldn’t discourage companies from pursuing promising opportunities. Careful planning and preparation can help Canadian real estate and construction companies avoid tax disputes and sub-optimal returns on their cross-border efforts — and increase the likelihood of success.

  • Start planning early. Proper planning can make all the difference, but it can take time to put the necessary structures in place to ensure cross-border operations and finances work smoothly. Make sure the foreign venture is structured right from to outset.
  • Don’t rely on gut instinct and existing experience. The skills and experience that drove a company’s domestic success are no assurance of smooth sailing in foreign waters. Company owners and their management teams need to acknowledge they have a lot to learn.
  • Get up to speed on the foreign market. Companies need to develop a good understanding of what they’ll face before they close a cross-border deal. What legal, tax and regulatory rules will apply in the new jurisdiction? What hindrances or barriers will the company likely encounter? What are the risks of doing business in the new market? What tax treaties or other agreements are in place? Knowing the answers can help leaders make far better business decisions.
  • Get advisors with the right experience. Tax planning for cross-border businesses is highly sophisticated and complex. Tackling it on your own is risky and even your existing business advisors may not have the knowledge and experienced needed to support your foreign initiatives. You may need to expand your advisory team, adding those with proven knowledge and experience helping companies do business in your chosen market.

Keep your business objectives foremost

Doing business in foreign markets can open up new routes to growth for many Canadian real estate and construction companies, but navigating the complexities of cross-border taxation can be perilous. Planning ahead, with the support of advisors who understand the business and tax rules of the jurisdiction you’re heading into,can help companies achieve their goals.

For more information, contact:

Eddy Burrello, CPA, CA
T: 647.943.4081
E: [email protected]

Glenn Willis, CPA, CA, CPA, CMA
T: 416.515.3850
E: [email protected]

This is the fourth in a series of MNP perspectives on key tax issues facing Canada’s real estate and construction companies. Future pieces will explore important tax considerations at play in business succession planning, tax cost minimization, valuations and business consolidation. Click here to read the next​ article in the series.

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