Canadian Partnerships: Ideal Tax-Free Structure for E-Commerce and Banking

If you are in international electronic commerce and banking and not a Canadian resident, tax optimization via a general partnership in Canada in combination with an offshore Marshall Islands company may be your thing. In the below article, we will discuss the ways and methods to combine them to form a single business.

Introduction to e-commerce taxation in Canada

Companies are more in line with modern trends and develop faster than the state. Business owners and tax agencies could spend years playing cat and mouse back in the day. With technology advancement, it takes a lot less time for the Canada Revenue Agency (CRA) to close loopholes in their taxation system.

The Canadian government’s stance on Internet income taxation saw changes in the early 2000s. Initially, most online companies managed to keep their income under wraps. The Canada Revenue Agency (CRA) therefore released a general statement claiming the Canadian residents shall report their income originating anywhere in the world. Non-residents have it much easier.

Further down the line, the CRA worked out special requirements demanding that online business owners report all the web-sites they derive income from. Additional sales tax requirements were introduced for electronic commerce companies, both in Canada and abroad.

Canada boasts one of the highest voluntary tax payment ratios globally. Most e-commerce companies strive to abide by the evolving tax rules and regulations.

Realizing their tax liabilities when operating both in Canada and abroad remains the main issue for the said electronic commerce companies. When selling goods and/or services to their overseas customers, e-commerce site and online store owners are subjected to foreign tax jurisdictions. The corresponding tax agreements resolve certain unclear points, yet some issues remain in a gray area.

Depending on the company type you choose, tax effects will vary for your e-commerce business. The Q Wealth team recommends you incorporate a general partnership (GP for short) in Ontario, Canada.

Canadian partnerships in Ontario and their benefits for non-residents

A general partnership (GP) in Ontario, Canada, comes with a number of benefits for non-residents. With this in mind, a general partnership is an investment instrument popular with overseas investors about to register an e-commerce company or start a banking business in Canada.

To set up a GP in Ontario, Canada, you will have to submit an appropriate declaration provided for under the Partnership Act. It is an option popular with non-residents to register a GP in Ontario, Canada, for a number of reasons:

1. It provides for an opportunity to set up and operate your company using the prestigious Canadian business model.
2. The business model in question comes with multiple tax benefits.
3. The taxation scheme applied in this case reduces your tax liabilities and filing obligations in Canada to the max. 

The general partnership shall consist of 2 partners, with 1 of them a Canadian resident. The same person may be both a general partner and a limited partner.  It is possible for partners to be both natural and legal persons. Corporations registered outside Canada may be GP members, provided they were incorporated outside the Ontario Province before becoming partners.

In a Canadian general partnership, a general partner shall be liable for all the Ontario GP’s debts and liabilities. The minimum amount to be contributed by Canadian partners is not provided for. The law requires that the partners’ contributions consist of either money or assets.

Due to the partners’ identities and amounts contributed to the general partnership being confidential, a general partnership in Ontario, Canada, may be used as a venture capital or direct investment vehicle. A GP in Ontario, Canada, makes a great and popular option for a number of entities:

• Internet companies (with website developers and online auctioneers among them)
• software developers, computer support specialists, and IT service suppliers.

To incorporate a GP in Ontario, Canada, you shall specify the mailing address of your principal place of business in Ontario. Here are the documents for the general partnership to keep at the above Ontario address:

• partner register
• partnership agreement
• copies of all minutes and supporting documents.

Where a Canadian GP has no principal place of business in Ontario, the documents may be kept at their agent’s or representative’s office.

Taxation of a Canadian general partnership in Ontario

A Canadian GP in Ontario is not a separate legal entity obliged to pay taxes in the country. It sends all its profits to the partners, who later on pay taxes the laws of their country of residence provide for. In Canada, GPs are not required to file tax declarations or pay income taxes.

Canadian residents pay personal income tax on their profit from the general partnership in Canada, while non-residents have no tax liabilities in the country (except where their Ontario GP profits originate from certain sources in Canada). The GP does not pay any withholding taxes on amounts distributed to non-resident partners of the general partnership in Ontario, Canada, but does pay withholding taxes in general.

Where a Canadian non-resident GP makes any payments and the payment in question consists of generally taxed amounts (e.g., rental payments, royalties, or dividends originating from Canada), a third party payer shall withhold the tax amount to be paid to the general partnership, as provided for under CRA Form NR302. This is a must even if some Canadian GP partners are Ontario residents, as having even one (1) non-resident partner results in it being necessary to pay withholding taxes under the Canadian Income Tax Act, Part XIII.

How to use a Canadian partnership if you are a non-resident international company processing credit card payments

If you are about to process payments from customers, you will need a merchant account. Yet, in our experience, finding a bank ready to open a merchant account for a company from a zero-tax jurisdiction is rather challenging. Don’t ignore the fact the choice of banks is severely restricted in this case.

If this is your issue to overcome, you may consider the option below. We use a similar arrangement for a company of ours.

An entity based in Canada, with the single objective of credit card payment processing, is an important addition.

Your customers may come from different jurisdictions, depending on your company’s activities and business scope. Suppose, they are mostly from the States. It means, you are to receive a great many of  USD credit card payments from the US.

You need a merchant account to process them. You will inevitably lose a ton of money in foreign exchange commissions and conversion fees, if you open the merchant account with a bank in Chile or Ireland. With Canada, you will enjoy an opportunity to clear and settle USD payments without it being necessary to pay the said fees and charges. 

The Q Wealth experts suggest you use your GP in Ontario, Canada for non-residents to receive payments on your merchant account. 

Adding a GP in Canada to the above arrangement does not change your general tax situation. The legal person is a Canadian GP. Its non-resident partners are not liable for any taxes collected in Canada. Your own offshore IBC in the Marshall Islands may be your GP partner.

FYI: to avoid paying taxes in Canada, none of your income should originate from any Canadian sources.

Payment systems as a backup tool

The Stripe and Wise international payment systems are great tools to carry on your e-commerce business via a GP in Ontario, Canada, coupled with an IBC in the Marshall Islands. Stripe is perfect for credit card processing, while Wise makes bank account opening unnecessary. With Wise, you may manage your multicurrency assets completely online using different virtual bank accounts therefor. It may be easier and better for you than opening a bank account.

Summary

It may be challenging for you to use offshore companies in your business, and it does not necessarily pay off. This is why it is advisable to hire an experienced international taxation expert to analyze the options we offer before you make any final or irreversible decisions.

With a correct approach, going offshore may be of major importance for your income. It makes income maintenance or reinvestment a lot easier. If you feel like selling digital products, going offshore may be an excellent option.

Below, you will find more information about how to use our team’s assistance to incorporate a general partnership in Ontario, Canada.

Another opportunity for non-residents to register a limited partnership in Ontario, Canada (LP) is described in the above article. 

You are welcome to contact us at in**@***********rt.com to book your preliminary consultation with the Q Wealth experts on the services we offer.