Branch tax Canada: 25% under Part XIV, 5% for US companies

What rate does branch tax charge under each treaty?

Every corporation that is nonresident in a taxation year pays Part XIV tax of 25% of its taxable income earned in Canada, adjusted by the additions and deductions in ITA 219(1), on or before its balance due day laws-lois.justice.gc.ca. It roughly matches the withholding a Canadian subsidiary would face when it pays dividends to its foreign parent. Treaties cut the 25%, and some exempt the first $500,000 of cumulative earnings.

Sources for the table: the US convention canada.ca, the UK convention canada.ca and its 2003 protocol canada.ca, the Dutch canada.ca, Swiss canada.ca, Irish canada.ca, Japanese canada.ca, French canada.ca, Mexican canada.ca and Hong Kong texts canada.ca. Read the full article for your client's country before filing; the treaty country list shows which treaties are in force.

When a treaty caps dividend withholding but says nothing about branch tax, ITA 219.2 reads the Part XIV rate as the treaty rate on dividends a Canadian corporation pays to a parent that owns all its shares laws-lois.justice.gc.ca. The treaty must apply on the last day of the taxation year.

Several treaties also reach gains on Canadian real property. France applies its 5% branch tax to a French company's gain on Canadian immovable property whether or not it has a permanent establishment here canada.ca, and the Hong Kong text covers earnings from that property for a company trading in immovable property canada.ca.

How does Schedule 20 build the Part XIV base?

You compute Part XIV on Schedule 20, and the result goes on line 728 of the T2 canada.ca. The schedule follows ITA 219(1) line by line canada.ca.

Line 510 starts at $500,000 the first time the corporation is subject to Part XIV, and line 520 carries the unused balance to next year canada.ca. Track that balance across years and across associated companies in the same or a similar business, because the US, UK, Dutch, Swiss and Irish treaties reduce it by amounts those companies already claimed canada.ca.

The excluded gains on line 099 come from ITA 219(1.1). For Part XIV, taxable Canadian property is read as if it covered only property used or held in, or held as inventory of, a business carried on in Canada laws-lois.justice.gc.ca. The full definition in ITA 248(1) also covers Canadian real property and certain shares laws-lois.justice.gc.ca, so a gain on investment real estate or shares is in taxable income earned in Canada but stays out of the branch tax base.

Worked example: a US company with an Ontario branch pays nothing in year one and $33,500 in year two

USco runs an Ontario branch with a calendar year end. Its taxable income earned in Canada is $1,000,000 in 2026, all of it general rate income. Federal tax is 15% after the abatement and the general rate reduction, and Ontario's higher rate is 11.5% canada.ca, so Part I and Ontario tax total $265,000, the same 26.5% shown on the corporate tax rates by province page. Its qualified investment in property in Canada is $300,000 at both year ends. Assume 2027 repeats 2026 exactly.

Without a treaty, the same branch would pay 25% of $435,000, or $108,750, in 2026 and 25% of $735,000, or $183,750, in 2027. The 2027 jump has nothing to do with higher profit. It comes from the 2026 allowance being added back while the investment stayed flat, so only growth in qualified investment keeps sheltering profit year after year.

Why does the investment allowance only defer branch tax?

ITA 219(1)(j) lets the corporation deduct an amount up to its Regulation 808 allowance for investment in property in Canada, but only if it was carrying on business in Canada at the end of the year, and 219(1)(g) adds the prior year's claim back laws-lois.justice.gc.ca. The deduction is optional: claim the lesser of the qualified investment and the amount that brings the base to nil canada.ca.

Qualified investment is the cost amount of land and depreciable property in Canada used in the business, Canadian inventory, receivables from the business, resource pools and allowable liquid assets, minus reserves, amounts still owing for those assets and expenses, a share of interest bearing debt and unpaid Part I and provincial tax laws-lois.justice.gc.ca. Allowable liquid assets are the lesser of the year end balance and 4/3 of the average month end balance, so cash parked at year end doesn't inflate the allowance canada.ca.

The trap is the year the branch stops. With no business carried on at year end, no allowance can be deducted, yet last year's claim still comes back into the base, so years of deferred profit are taxed at once. A nonresident corporation that ceases business in Canada may also face deemed disposition rules that change its Part I taxable income earned in Canada and so its Part XIV liability canada.ca. Plan the shutdown or the incorporation of the branch before the last year end, and check the section 116 certificate rules for any taxable Canadian property sold.

Which nonresident corporations owe no branch tax?

No Part XIV tax is payable for a year by a corporation that was, throughout the year, one whose principal business was transporting persons or goods, communications or mining iron ore in Canada, or one exempt under section 149 laws-lois.justice.gc.ca. Nonresident insurers are outside 219(1) and fall under a separate election in 219(4), and authorized foreign banks compute their allowance under Regulation 808(8) on Part 6 of Schedule 20 canada.ca.

A treaty may also limit the tax to a corporation that carries on business in Canada through a permanent establishment canada.ca. A treaty resident with no permanent establishment here usually has no Canadian taxable business profits to tax, but it still has to look at its T2 filing obligation.

When is branch tax due, and where does the T2 go?

Part XIV is due on the balance due day, which is two months after the end of the tax year; the three month rule for CCPCs covers only Parts I, VI, VI.1 and XIII.1 canada.ca. The T2 filing deadline page has the dates for each year end.

There are no instalments of Part XIV. Section 157 requires monthly or quarterly instalments of tax under Part I and Parts VI, VI.1 and XIII.1 only laws-lois.justice.gc.ca, and the list of Part I provisions that ITA 219(3) applies to Part XIV doesn't include section 157. That list does include sections 161 to 167, so interest and penalties on a late or short payment still apply laws-lois.justice.gc.ca. Part I tax on the branch profits is still subject to corporate instalments.

Corporations subject to Part XIV file with the Sudbury Tax Centre canada.ca. Report every amount on Schedule 20 in Canadian dollars canada.ca.