It’s a fair question, and one that thousands of international businesses get wrong every year. Well, it depends on what you’re doing in Canada. If you’re not paying Canadian tax, you may still be required to file a return.
That distinction between filing and paying is one of the most misunderstood corners of Canadian tax law for foreign corporations. And ignoring it? That comes with consequences. Let’s clear it all up.
What Kind of Income Are We Talking About?
The type of tax payable and the requirement to file depend on the type of income a non-resident corporation receives. Canadian tax law broadly splits non-resident income into two buckets:
- Part I Tax applies to income from an active business carried on in Canada. This is the corporate income tax most people think of, calculated on net profits, filed via the T2 return.
- Part XIII Tax applies to passive Canadian-source income, such as dividends, interest, rents, royalties, and certain management fees paid to a non-resident. This tax is withheld at the source by the Canadian payer, so the foreign corporation often never has to file a return for this type of income alone.
Knowing which category your Canadian income falls into is the first step to understanding your obligations.
Does Your Foreign Company Need to File a T2?
A non-resident corporation must file a T2 return with the CRA if the corporation carried on business in Canada or disposed of a taxable Canadian property at any time in the tax year.
“Carried on business in Canada” sounds straightforward, but the CRA’s definition casts a wide net. Sending employees to complete a project, providing services that are physically performed on Canadian soil, selling goods to Canadian buyers, or maintaining any kind of agent relationship in Canada can all qualify. If any of those apply to your company, the filing obligation kicks in.
Additional T2 filing triggers include having filed Form NR6 to pay Part I tax on net rental income or timber royalties, or Form T1288 for acting services in a Canadian film or video production.
Payroll Tax and Regulation 105
Before getting to the filing rules, two withholding obligations frequently catch foreign corporations off guard, and both can create filing requirements of their own.
Payroll Tax (Regulation 102): If a foreign corporation sends employees to Canada, there is a technical requirement to withhold Canadian payroll tax from the first dollar paid to those employees for time spent in Canada, regardless of how short the assignment. Exemptions exist, for example, under tax treaties or through a Regulation 102 waiver, but the base rule applies from day one. Foreign employers unaware of this face retroactive remittances, interest, and penalties.
Services (Regulation 105): When a non-resident person or corporation provides services in Canada, the Canadian payer must withhold 15% from every payment and remit it directly to the CRA. For every $100 billed, the non-resident receives $85, while $15 goes to the CRA on their behalf. This can be a significant cash flow hit, especially for foreign corporations that haven’t built it into their contracts.
A common safeguard is a gross-up clause, under which the Canadian customer is responsible for withholding. Note: as of October 2024, the CRA updated its position to include subcontractor fee reimbursements paid to non-residents; these are now also subject to Regulation 105 withholding. Foreign corporations providing services in Quebec should also be aware that an additional 9% provincial withholding applies.
The 15% withheld under Regulation 105 is not a final tax but a payment on account. If your actual Canadian liability is lower, or zero due to a treaty exemption, you can recover the difference by filing a T2 return. More on that in the voluntary filing section below.
A waiver application (Form R105) can be submitted to the CRA to reduce or eliminate the withholding obligation in advance, but it must be filed at least 30 days before services begin. The CRA is currently consulting on simplifying this waiver process.
The Big Misconception
This is the most costly assumption foreign companies make. A tax treaty between Canada and your home country may mean you owe zero Canadian tax, but it does not eliminate your filing obligation.
The CRA is explicit: this requirement applies even if the corporation claims any profits or gains realized are exempt from Canadian tax under a tax treaty. To claim a treaty exemption, the corporation must complete Schedule 91 (Information Concerning Claims for Treaty-Based Exemptions) and Schedule 97 (Additional Information on Non-Resident Corporations in Canada), and attach both to the T2 return.
In other words, the treaty saves you money but only if you claim it properly, on paper, on time, filed with the CRA. If you don’t file, the treaty exemption simply goes unclaimed. It doesn’t disappear. It’s available whenever you file, but in the meantime, penalties for the filing failure continue to accumulate.
What About Schedule 91?
Schedule 91 has been developed for all non-resident corporations that must file a Canadian tax return to identify the type of income they earned. Think of it as the CRA’s way of getting a full picture of your Canadian activities, your corporate structure, the nature of your revenues, and whether you have employees or subcontractors working in Canada.
Both Schedule 91 must be attached to your T2 return. Missing either one is not a technicality the CRA overlooks.
What Happens If You Don’t File?
Penalties. The basic penalty for late filing is 5% of the balance owing, plus 1% for each full month the return is late, up to 12 months.
For non-residents claiming a treaty exemption and owing no tax, the penalty is the greater of $100 and $25 per day for up to 100 days, a maximum of $2,500 for the filing failure alone, even if no tax is owed.
Additional penalties may apply if T4, T4A, or T4A-NR slips were not filed on time. The CRA is also inclined to deny waiver requests under Regulations 102 and 105 where the employer or payer has a history of not filing required forms. A small filing lapse can snowball quickly if your company has employees or subcontractors working in Canada.
When You Probably Don’t Need to File
A foreign corporation generally must file only if it carries on business in Canada, has a permanent establishment, or realizes a taxable gain on Canadian property. If your only Canadian connection is passive income, interest or dividends, and the Canadian payer has already withheld Part XIII tax at the correct rate, you typically won’t need to file a T2. The withholding is treated as your final Canadian tax obligation on that income.
If you have no employees in Canada, no agents concluding contracts on your behalf, and no fixed place of business here, you likely haven’t crossed the filing threshold. But “likely” is doing a lot of work in that sentence. The line isn’t always obvious, and getting it wrong is expensive.
A Note on GST/HST Registration
GST/HST is a separate obligation that’s easy to overlook. Foreign corporations making taxable supplies in Canada, goods, services, or real property, may be required to register for and collect GST/HST, even without a physical office in Canada. The general registration threshold is $30,000 in annual taxable supplies to Canadian customers.
In certain cases, voluntary registration is also worth considering. If your business has Canadian expenses, materials, operating costs, and contractor fees, you may be able to claim the GST paid on those costs back as input tax credits.
When this applies, GST is not an additional cost to the business; it’s recoverable. And even if you choose not to register, there may be reporting obligations depending on your Canadian activity.
GST/HST obligations are highly fact-specific and vary based on the type of supply, the province involved, and your corporate structure. Speak with a professional to assess your specific situation.
When Is the T2 Due?
The T2 must be filed within six months of the end of each tax year. If your fiscal year ends December 31, your Canadian filing is due June 30 of the following year. All financial information must be reported in Canadian dollars.
If your company earns income in Quebec or Alberta, those provinces administer their own corporate income tax systems. Separate provincial filings may be required in addition to the federal T2 if a provincial establishment exists.
Voluntary Filing
A non-resident corporation that isn’t required to file may still want to do so, particularly to claim a refund of the 15% Regulation 105 withholding applied to services performed in Canada, or to make elections that reduce overall tax exposure.
If your company has had Canadian tax withheld at source but your actual Canadian liability is lower, or zero, filing a T2 is the only mechanism to recover that overpayment. Leaving it on the table is a gift the CRA is happy to keep.
Note that Regulation 105 withholdings are not refundable if the return is filed more than three years after the relevant filing deadline.
The Bottom Line
Here’s what every foreign company doing business in or with Canada needs to know:
- Canadian activity = a potential filing obligation, even if you end up owing nothing.
- Treaties reduce tax, not paperwork. You still have to file and attach Schedules 91 and 97 to claim the exemption.
- Payroll tax and Regulation 105 withholding can bite before you even think about corporate tax. Know the rules before your employees or contractors arrive in Canada.
- GST/HST may create registration obligations, and voluntary registration can recover costs. Don’t assume it doesn’t apply.
- The T2 deadline is firm: six months after the fiscal year-end. Miss it, and the penalties stack up fast.
- When in doubt, get advice before you start, not after the CRA comes calling.
At The Tax Whiz, we help foreign corporations understand their Canadian obligations, claim treaty exemptions correctly, and recover withheld taxes efficiently and without the guesswork.
Frequently Asked Questions
- Does a foreign company need to file a Canadian tax return even if it owes no tax?
Yes, in many cases. If your foreign corporation carried on business in Canada or disposed of taxable Canadian property, you’re required to file a T2 with the CRA regardless of whether tax is owed. Even if a treaty exempts your income from Canadian tax, you must still file and attach Schedules 91 and 97 to formally claim that exemption.
- What are Schedules 91 and 97, and why do they matter?
Schedule 91 is the treaty-based exemption claim form, required if you’re claiming that Canadian business income is protected under a bilateral tax treaty. Schedule 97 provides additional information on non-resident corporations operating in Canada and must also be attached to the T2 return. Missing either one is not a technicality the CRA overlooks, and the treaty exemption claim won’t be valid without both.
- What is Regulation 105, and how does it affect foreign corporations providing services in Canada?
Under Regulation 105, the Canadian customer is required to withhold 15% from every payment made to a non-resident for services performed in Canada and remit it to the CRA. The non-resident receives 85 cents on every dollar billed. This withholding is not a final tax but a payment on account. If your actual Canadian liability is lower or zero, you can recover the overpayment by filing a T2 return. Note that as of October 2024, subcontractor fee reimbursements paid to non-residents are also subject to this withholding.
- What is the T2 filing deadline for a foreign corporation?
The T2 must be filed within six months of the end of the corporation’s fiscal year. If your fiscal year ends December 31, the deadline is June 30 of the following year. All financial information must be reported in Canadian dollars. Separate provincial filings may also be required if the corporation has a presence in Quebec or Alberta.
- What are the penalties for failing to file a T2?
If tax is outstanding, the penalty is 5% of the balance owing plus 1% per month the return is late, up to 12 months. If no tax is owed but a filing was still required, such as when a treaty exemption applies, the penalty is the greater of $100 or $25 per day for up to 100 days, for a maximum of $2,500. Additional penalties may apply for missing T4, T4A, or T4A-NR slips.
- When would a foreign company NOT need to file a Canadian tax return?
If your only Canadian income is passive, dividends, interest, or royalties, and the Canadian payer has already withheld Part XIII tax at the correct rate, you generally don’t need to file a T2. Companies with no employees, no agents, and no fixed presence in Canada typically fall below the filing threshold, but this should always be confirmed with a professional, given how broadly the CRA interprets “carrying on business”.
- Does my foreign corporation need to register for GST/HST in Canada?
It depends on the nature and volume of your activities in Canada. If your taxable supplies to Canadian customers exceed $30,000 annually, registration is generally required. Voluntary registration can also be beneficial if you have Canadian expenses, since it allows you to recover GST paid on those costs as input tax credits. GST/HST obligations are highly fact-specific, so professional advice is recommended.
- If Canada withholds 15% on services my company performed, do I need to file to get it back?
Yes. The 15% Regulation 105 withholding is a payment on account, not a final tax. Filing a T2 return is the only way to recover any overpayment, for example, if your actual liability is lower due to a treaty exemption. Be aware that Regulation 105 withholdings are not refundable if the return is filed more than three years after the relevant filing deadline.