Canadian Subsidiary vs Branch: Branch Tax, Setup and Filings for Non-Resident Corporations

A non-resident corporation that wants to sell, hire or hold assets in Canada has two options: incorporate a Canadian subsidiary, or register the foreign company itself as a branch. The tax gap is narrower than most people expect, because Canada charges a branch tax built to copy the withholding tax a subsidiary pays on dividends. For a US parent both settle at 5% under the treaty once the branch has used its $500,000 exemption. What separates them is liability, the use of early losses at home, banking, and compliance load. If you are still working out whether the company must file in Canada at all, start with our complete guide to non-resident corporations in Canada.

What is the difference between a Canadian subsidiary and a branch?

A subsidiary is a new corporation incorporated in Canada, federally or provincially, owned by the foreign parent. It is a Canadian resident, a separate legal person, and it pays Canadian tax on its worldwide income. A branch is not a new entity. The foreign corporation registers in the province where it operates and is taxed in Canada only on the business it carries on here. Everything the branch signs, owes or is sued for belongs to the foreign corporation directly.

Factor	Canadian subsidiary	Canadian branch
Liability	Separate corporation; parent's exposure limited to its investment and any guarantees.	The foreign corporation itself; Canadian debts, lawsuits and tax assessments attach to the parent.
Tax base	Worldwide income.	Profits of the business carried on in Canada, normally through a permanent establishment.
Corporate rate	Federal 15% plus province (Ontario 11.5%, BC 12%).	Same rates on Canadian-source profits.
Second layer	Part XIII dividend withholding, 25% statutory.	Part XIV branch tax, 25% statutory, on after-tax profits not reinvested in Canada.
Treaty rate, US parent	5% with at least 10% of the voting stock; 15% otherwise.	5%, with the first $500,000 of cumulative earnings exempt.
Start-up losses	Trapped in the subsidiary until it has Canadian profits.	Part of the parent's own results; usable at home where home rules allow.
Thin capitalization	Interest on debt from 25%-or-more non-resident shareholders deductible only up to 1.5:1 debt to equity.	No deductible interest to its own head office; third-party debt on normal rules.
Provincial registration	Incorporate, then register extra-provincially where it operates.	Extra-provincial licence in each province, with a local agent for service.
Directors	Federal: 25% resident Canadians. BC, Alberta, Ontario: none.	None; the parent's board governs.
Banking	Standard Canadian business account, with ID checks on foreign directors.	Foreign-entity onboarding at the banks is slow; usually a CAD account from a provider that serves foreign companies.
Compliance cost	Own books, T2, minute book, annual returns, transfer pricing on every parent dealing.	T2 with Schedules 97 and 20, branch accounts carved from the parent's ledger, provincial returns.

What is branch tax in Canada?

Branch tax is the additional tax in Part XIV of the Income Tax Act, section 219. A subsidiary's profits are taxed twice on the way home: corporate tax, then withholding on the dividend. To stop a branch paying only once, section 219 charges a non-resident corporation 25% of its after-tax Canadian business earnings, less an investment allowance for amounts kept invested in Canadian business property. It is calculated on Schedule 20 and paid with the T2, not withheld at source, because there is no dividend to withhold from.

Treaties cut the rate. Article X(6) of the Canada-US tax treaty caps branch tax at 5% and exempts the first $500,000 Canadian of cumulative earnings not previously subjected to it, counted over the life of the branch. That exemption is the one real tax edge a branch has: a subsidiary's first dividend attracts withholding, while a branch can send home $500,000 of after-tax profit with nothing on top.

The CRA's T2 guide also notes that a treaty can confine branch tax to corporations with a permanent establishment. A US corporation selling into Canada with no fixed place of business or dependent agent here is generally protected under Article VII, files a treaty-based return on Schedule 91, and owes no branch tax. Our guide to the treaty-based return, Schedules 91 and 97 covers that filing.

How is a Canadian subsidiary taxed?

A subsidiary incorporated in Canada files a T2 on its worldwide income at 15% federally plus the province: Ontario 11.5% (26.5% combined), British Columbia 12% (27%). A foreign-owned subsidiary is not a Canadian-controlled private corporation, so it gets no small business deduction. The full table is in our post on corporate tax rates by province.

Profits leave as dividends, and section 212(2) in Part XIII imposes 25% withholding on dividends to non-residents. Article X(2) of the treaty reduces that to 5% when the parent owns at least 10% of the voting stock, 15% otherwise. The subsidiary withholds, remits by the 15th of the following month, and reports on an NR4 by March 31. Interest is different: since the 2007 protocol, Article XI lets interest be taxed only in the recipient's country, so a treaty-qualified US parent receives it with no Canadian withholding. Rates for other countries are in our article on Canadian withholding tax for non-resident companies and shareholders.

Two rules shape how the parent funds the subsidiary. Thin capitalization in section 18(4) denies the interest deduction on debt owed to specified non-residents (25%-or-more shareholders) to the extent that debt exceeds 1.5 times equity. And every parent-subsidiary dealing must be priced at arm's length and, once the year's reportable transactions pass $1,000,000, reported on Form T106.

How much Canadian tax does a US parent pay under each structure?

Take a US corporation earning $1,000,000 of pre-tax profit from an Ontario operation and sending every after-tax dollar home. It owns 100% of the voting shares, so the 5% dividend rate applies, and the branch qualifies for the 5% rate and the $500,000 exemption. The example ignores the investment allowance (nothing is reinvested in Canada) and ignores US tax on the receipt, which is a separate analysis for the parent's US adviser.

Line	Subsidiary	Branch, year 1	Branch, later years
Profit before tax	$1,000,000	$1,000,000	$1,000,000
Federal tax at 15%	$150,000	$150,000	$150,000
Ontario tax at 11.5%	$115,000	$115,000	$115,000
After-tax profit	$735,000	$735,000	$735,000
Second layer	Withholding 5% of $735,000 = $36,750	Branch tax 5% of ($735,000 less $500,000) = $11,750	Branch tax 5% of $735,000 = $36,750
Cash to US parent	$698,250	$723,250	$698,250
Total Canadian tax	$301,750 (30.2%)	$276,750 (27.7%)	$301,750 (30.2%)

The branch saves $25,000, once, entirely from the $500,000 exemption. From the second profitable year the two structures cost the same 30.2% of pre-tax profit. Reinvesting branch profits in Canada defers branch tax through the investment allowance; retaining earnings in a subsidiary defers withholding the same way. Neither escapes the second layer for good.

Losses change the picture. A subsidiary's start-up losses sit in Canada until it has profits to absorb them. A branch's losses are the US corporation's own losses in the same year, which is why a business expecting two or three years of red ink often starts as a branch and incorporates once it is profitable.

Subsidiary or branch: which is better for a US company?

A branch usually fits when:

• The Canadian work is a defined project with an end date, such as a construction or installation contract.
• Start-up losses are expected and the home country lets the corporation use them against head-office income.
• Cumulative after-tax profits will stay under $500,000, so the treaty exemption removes the second layer entirely.
• The parent accepts Canadian liabilities on its own balance sheet, or the activity carries little risk.

A subsidiary usually fits when:

• The business will be profitable and permanent: local staff, leases, inventory, customers who expect a Canadian counterparty.
• Product, employment or contract risk should stop at a separate corporation.
• Canadian banks, landlords, suppliers and government programs, all built around Canadian corporations, matter to the plan.
• The parent may bring in Canadian shareholders or sell the Canadian business one day as a share sale.

Since the tax result is close to neutral for a US parent, the decision is made on liability and administration. Most foreign companies that come to us expecting a tax argument choose the subsidiary for the simpler banking and contracting; those that choose the branch do so because the presence is temporary.

How do you set up a Canadian subsidiary?

1. Choose the statute. Federal incorporation under the Canada Business Corporations Act requires 25% resident Canadian directors (one if the board has fewer than four). British Columbia, Alberta and Ontario have no residency requirement (Ontario removed its rule on July 5, 2021), so a parent that wants a wholly foreign board incorporates provincially.
2. File the articles. Pick a name or a numbered company, file articles, appoint directors and issue shares to the parent. Our walkthrough on incorporating a business in Canada with Ownr covers the mechanics for Ontario and federal corporations.
3. Register extra-provincially in any other province where it will carry on business.
4. Open CRA program accounts: a business number with a corporate tax account, GST/HST once taxable sales pass the small supplier threshold, and payroll before the first employee is paid.
5. Capitalize deliberately. Set share capital and parent loan with the 1.5:1 thin capitalization limit in mind, and paper the loan and service agreements at arm's-length terms before the first transaction.
6. Open the bank account. Banks will open one for a Canadian corporation with foreign directors, but expect ID verification for every director and signing officer and often a visit in person. Our guide to opening a Canadian business bank account remotely as a non-resident lists what works from abroad.

How do you set up a Canadian branch of a foreign corporation?

There is no federal branch registration; the foreign corporation registers in each province where it carries on business. In Ontario, a corporation incorporated outside Canada is a class 3 extra-provincial corporation under the Extra-Provincial Corporations Act and needs an extra-provincial licence before it starts. It must appoint an agent for service resident in Ontario (an individual, or a corporation with an Ontario registered office) and file an Initial Return under the Corporations Information Act within 60 days of starting business. A foreign corporation operating without the licence can be prosecuted and cannot maintain a lawsuit in an Ontario court. Other provinces run equivalent extraprovincial registrations with their own forms and local agent rules.

On the tax side, the corporation gets a business number as a non-resident corporation, registers for GST/HST if it makes taxable supplies in Canada, and opens a payroll account for Canadian staff. The branch's books must support a Canadian-dollar income statement and the GIFI schedules, which in practice means a separate set of accounts inside the parent's ledger with head-office costs allocated on a documented basis.

Banking is the step that stalls most branches. A Canadian bank sees a foreign entity, not a Canadian corporation, and its non-resident onboarding can take months.

What does each structure have to file in Canada?

Both file a T2 within six months of year end. The branch adds the non-resident schedules; the subsidiary adds withholding reporting on what it pays the parent.

Filing	Subsidiary	Branch	Due
T2 return with GIFI	Yes	Yes, even if a treaty exemption is claimed	6 months after year end
Schedule 97, non-resident corporation information	No	Yes, every year	With the T2
Schedule 20, Part XIV branch tax	No	Yes, when there are Canadian business profits	With the T2; tax by the balance-due day
Schedule 91, treaty-based exemption	No	Only when claiming no permanent establishment	With the T2
Form T106	Yes, once related-party transactions exceed $1,000,000	Yes, same threshold, for related non-residents other than its own head office	6 months after year end
Part XIII withholding and NR4	Yes, on dividends, royalties, rents and management fees to the parent	Not on profit remittances; still required for Part XIII payments to other non-residents	Remit by the 15th of the next month; NR4 by March 31
Transfer pricing documentation	Yes, for every parent dealing	Head-office allocations must be supportable under Article VII	By the T2 due date
Provincial corporate filings	Annual return plus extra-provincial filings	Ontario Initial Return within 60 days, then annual returns	Varies by province

Quebec and Alberta collect their own corporate tax on separate provincial returns, and Quebec runs its own corporate registry, so an operation in either province adds a second return under both structures.

Frequently asked questions

What is branch tax in Canada?

Branch tax is the Part XIV tax in section 219 of the Income Tax Act: 25% of a non-resident corporation's after-tax Canadian business profits not reinvested in Canada, standing in for the dividend withholding a subsidiary would pay. The Canada-US treaty caps it at 5% and exempts the first $500,000 of cumulative branch earnings. It is calculated on T2 Schedule 20.

Is a Canadian subsidiary taxed on its worldwide income?

Yes. A corporation incorporated in Canada is a Canadian resident and pays tax on worldwide income at 15% federally plus the provincial rate (11.5% in Ontario, 12% in BC). A branch is taxed only on the business it carries on in Canada.

Does a US company need a Canadian director for its subsidiary?

Only for a federal corporation, where the Canada Business Corporations Act requires 25% resident Canadian directors (at least one if the board has fewer than four). British Columbia, Alberta and Ontario have no residency requirement.

Do branch profits sent home face dividend withholding tax?

No. A branch cannot pay a dividend, so there is no Part XIII withholding and no NR4 slip on profits remitted to head office. Branch tax replaces that layer and is paid with the T2 return.

Which structure protects the foreign parent from Canadian liabilities?

The subsidiary. It is a separate legal person, so claims stop at its assets unless the parent has guaranteed them. A branch is the foreign corporation itself, so every Canadian contract, lawsuit and tax debt is the parent's own.

When is a branch better than a subsidiary in Canada?

For a defined project of one to three years, for a start-up phase whose losses the home country lets the corporation use at home, and where cumulative after-tax profits will stay under the $500,000 treaty exemption. Once the business is profitable and permanent, the subsidiary wins on liability and banking at the same tax cost.

Can a branch of a foreign corporation open a Canadian bank account?

It can, but Canadian banks treat a foreign entity as a non-resident client and onboarding is slow, often with an in-person visit. Many branches run on a Canadian-dollar account from a provider that serves foreign entities and open a domestic bank account once a subsidiary exists.

What forms does a non-resident corporation with a Canadian branch file?

A T2 return within six months of year end with Schedule 97, Schedule 20 (branch tax) and GIFI financial statements. Schedule 91 applies only when claiming treaty protection for having no permanent establishment. Form T106 is added when transactions with non-arm's length non-residents exceed $1,000,000.