Cross-Border Tax:
A New Level of
Complexity
Local expertise is little help when
real estate and construction
companies venture abroad
Moving into foreign markets can be a source of enormous opportunity for Canadian real estate and construction firms. It can also be a
source or tremendous frustration, as companies grapple with the complexities of cross-border taxation. Without adequate preparation,
companies can find themselves paying higher tax rates — and generating lower returns. Early tax planning can help businesses avoid these
risks and make the most of their cross-border ventures.
New Opportunities, Cross-Border Headaches
Planning, Preparation Essential
Most Canadian real estate developers, owners and investors tend to be locally
focused, and the same can be said of most of the country’s construction
companies and engineering and architectural firms. These companies have a deep
knowledge of local economic conditions and market dynamics; over the years
they’ve also built up a solid understanding of how Canada’s taxation system affects
their business. They know what they’re dealing with.
Companies should never underestimate the cost and complexity of doing business
abroad. But that shouldn’t discourage companies from pursuing promising
opportunities. Careful planning and preparation can help Canadian real estate and
construction companies avoid tax disputes and sub-optimal returns on their crossborder efforts — and increase the likelihood of success.
At some point, Canadian companies may move into a foreign market in pursuit of
an exciting growth opportunity. Unfortunately, things don’t always go according
to plan. Companies can quickly become overwhelmed in a world of unfamiliar
business practices, legal issues and tax rules. Currency fluctuations and shifting
business conditions can rapidly change a project’s economics. The result? A host of
new business and tax headaches back home in Canada.
•
Start planning early. Proper planning can make all the difference, but it can
take time to put the necessary structures in place to ensure cross-border
operations and finances work smoothly. Make sure the foreign venture is
structured right from to outset.
•
Don’t rely on gut instinct and existing experience. The skills and experience
that drove a company’s domestic success are no assurance of smooth sailing
in foreign waters. Company owners and their management teams need to
acknowledge they have a lot to learn.
•
Get up to speed on the foreign market. Companies need to develop a good
understanding of what they’ll face before they close a cross-border deal.
What legal, tax and regulatory rules will apply in the new jurisdiction? What
hindrances or barriers will the company likely encounter? What are the risks
of doing business in the new market? What tax treaties or other agreements
are in place? Knowing the answers can help leaders make far better business
decisions.
•
Get advisors with the right experience. Tax planning for cross-border
businesses is highly sophisticated and complex. Tackling it on your own is
risky and even your existing business advisors may not have the knowledge
and experienced needed to support your foreign initiatives. You may need
to expand your advisory team, adding those with proven knowledge and
experience helping companies do business in your chosen market.
Managing the Tax Integration Challenge
Tax integration is one of the most complex aspects of doing business
internationally, an area that requires a high level of sophistication. Companies
active across borders want to ensure they’re minimizing their total tax bill and
paying an optimized effective tax rate across domestic and foreign operations.
Ideally, this will be a lower overall rate; in a worst-case scenario it would be equal
to the company’s domestic effective tax rate. Unfortunately, inadequate planning
can result in a company paying a higher effective tax rate overall after venturing
abroad.
Conducting business in more than one country also creates challenges for
companies as they try to repatriate funds from their foreign operations to Canada.
Revenue authorities in Canada and around the world have ramped up efforts to
maximize tax revenues and minimize leakage, and they are especially alert to the
movement of funds across borders. Unprepared, companies can inadvertently get
involved in a tax dispute on one or both jurisdictions.
Keep Your Business Objectives Foremost
Doing business in foreign markets can open up new routes to growth for many Canadian real estate and construction companies, but navigating the complexities of
cross-border taxation can be perilous. Planning ahead, with the support of advisors who understand the business and tax rules of the jurisdiction you’re heading into,
can help companies achieve their goals.
For more information, contact:
Glenn Willis, CPA, CA, CPA, CMA
T: 416.596.1711
E: [email protected]
Eddy Burello, CPA, CA
T: 416.596.1711
E: [email protected]
This is the fourth in a series of MNP perspectives on key tax issues facing Canada’s real estate and construction companies. Other pieces have explored important tax
considerations at play in business succession planning, tax cost minimization, doing business across borders, valuations and business consolidation.