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Tax free in high-tax Canada
Canada is known for its high quality of life, stable economy and robust legal system. What is less well known, however, is that Canada is a tax haven under certain conditions, which makes it possible to operate free of taxes, accounting & tax returns. This is possible in particular by choosing special legal forms such as the Limited Partnership (LP) and the Limited Liability Partnership (LLP).
- The decisive advantage
The decisive tax advantage of a Limited Partnership (LP) and Limited Liability Partnership (LLP) in Canada is that they are themselves No independent taxable entities are. The profits and losses of the company are allocated directly to the partners, who have to pay tax on them in their respective home countries. This creates the possibility of complete tax & accounting freedom in Canada.
Conditions for tax exemption
1
No permanent establishment in Canada
If neither the company in Canada nor one of the partners has a permanent establishment in Canada or is resident in Canada, no tax is payable in Canada on the income from the company. This means that the profits realised are not subject to Canadian corporation or capital gains tax.
2
Foreign partners
Tax & accounting exemption is only available if the company is incorporated and managed exclusively by parties resident outside of Canada. To maximise the tax benefits, it is advantageous to reside in a country that does not levy taxes on profits from foreign companies or has no income tax.
These include, among other things United Arab Emirates, Monaco, Malta, Cyprus, Hong Kong, Singapore, Panama, Bahamas, Cayman Islands, Bermuda, British Virgin Islands, Malaysia and the Dominican Republic.
3
No business activities in Canada
Another decisive point for tax exemption is that the company itself does not carry out any active business activities in Canada. Neither suppliers nor customers may be resident in Canada and no physical offices or employees should be maintained in Canada. The mandatory rental of a business address in Canada does not trigger a tax liability.
The keys to tax exemption: LP or LLP
Despite its normally high tax burden, Canada offers legal opportunities to operate completely tax-free and without any bookkeeping by choosing the right corporate form and structure, provided the conditions described above are met.
- Limited Partnership (LP)
The limited partnership must consist of at least one „general partner“ and one or more „limited partners“.
•General Partner has unlimited liability
•Limited partners are only liable to the extent of their capital contribution
•Foundation by one person possible
- Limited Liability Partnership (LLP)
The LLP is a similar structure with full liability protection for all partners.
•All partners protected from personal liability
•No liability risk for shareholders
•At least two people required
Founding an LP or LLP?
Persons who are considering setting up a company in Canada on their own are forced to resort to the formation of an LP, as at least two persons are required to form an LLP.
The only disadvantage of an LP compared to an LLP is that there is a certain liability risk for the general partner of an LP. However, for sole proprietors who do not have a large liability risk to worry about, the formation of an LP in Canada is definitely an excellent way to operate free of taxes and accounting.
Sole proprietors whose business involves greater liability risks should rather consider forming a US LLC, which fulfils exactly the same purpose for tax purposes, while there is no liability risk. If it is an association of two or more partners, the formation of a Canadian LLP is definitely the right choice, as all partners are only liable for the capital contribution of at least one Canadian dollar.
Company formation in Canada
If you are thinking about setting up a company in Canada, arrange a completely free initial consultation now. We can advise and assist you with all the formalities involved in setting up a Canadian LP or LLP, as well as opening a bank account for your company in Canada.
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