Branch vs Subsidiary Calculator Canada 2026
Decide how your foreign company should enter Canada. Compare the Part XIV branch profits tax against Part XIII withholding on subsidiary dividends over five years, with the permanent establishment verdict, the treaty rate for your country, and the real setup and annual compliance cost each way.
five-year difference
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Year by Year
| Year | Profit | Corporate Tax | Branch Tax | Dividend Withholding |
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Setup and Annual Compliance Cost
| Item | Branch | Subsidiary |
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Points That Decide This More Often Than the Tax Rate
Planning Suggestion
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Disclaimer: This calculator applies the Ontario general corporate rate of 26.5%, Part XIV branch profits tax and Part XIII withholding at published treaty rates, over a five-year horizon with the entered profit arising from the break-even year onward. It does not model transfer pricing adjustments, thin capitalisation, the excessive interest and financing expenses limitation, foreign tax credits or home-country tax, capital tax, or the allowance for increase in investment in property in Canada beyond the reinvestment assumption you select. Treaty entitlement also depends on the limitation on benefits and principal purpose tests. This page is general information, not tax advice.
Branch or Subsidiary — What Actually Differs
A foreign company entering Canada has two realistic choices. It can operate through a branch, which means the foreign company itself registers in Ontario and carries on business here directly. Or it can incorporate a Canadian subsidiary, a separate Ontario corporation owned by the parent.
Both pay Canadian corporate tax on Canadian profits at the same rate, because neither can be a Canadian-controlled private corporation and neither gets the small business deduction. The Ontario general rate of 26.5% applies from the first dollar in both cases. The difference lies in the second layer of tax, in when it is charged, and in what happens during the loss years.
| Factor | Branch | Subsidiary |
|---|---|---|
| Canadian corporate tax | 26.5% in Ontario | 26.5% in Ontario |
| Second layer of tax | Part XIV branch profits tax | Part XIII withholding on dividends |
| When the second layer is charged | Every year on profit not reinvested | Only when a dividend is actually paid |
| Limited liability | None, the parent is directly exposed | Yes |
| Start-up losses | May be usable by the parent immediately | Trapped in Canada until Canadian profits arise |
| Selling the Canadian business later | Asset sale only | Shares can be sold |
| Books required | Segregated branch accounts within the parent | Standalone Canadian financial statements |
| Perception with banks and customers | Harder to bank and contract | Treated as a Canadian business |
How a Canadian Branch Is Taxed
The foreign corporation is taxable in Canada on the profits of the business carried on here. Where a treaty applies, Canada can only tax those profits if the company has a permanent establishment in Canada, and then only the profits attributable to it.
On top of the ordinary corporate tax, Part XIV imposes a branch profits tax. The statutory rate is 25% of after-tax branch profits that are not reinvested in property in Canada. Its purpose is to put a branch in the same position as a subsidiary that pays a dividend to its parent, and most treaties reduce it to the same rate as the direct dividend rate.
The Canada United States treaty goes further. It exempts the first CAD 500,000 of cumulative branch earnings attributable to a Canadian permanent establishment from branch tax, across the company and its related companies. For a US parent expecting modest early Canadian profits, that exemption can remove branch tax entirely for the first few years. No equivalent exemption exists for a subsidiary paying dividends.
How a Canadian Subsidiary Is Taxed
A Canadian subsidiary pays corporate tax on its own profits and nothing further until it distributes them. When it pays a dividend to the foreign parent, Part XIII withholding applies at 25%, reduced by treaty, usually to 5% where the parent holds at least 10% of the voting shares.
Because the second layer only bites on payment, a subsidiary that reinvests its profits in Canada defers the withholding indefinitely. A branch that reinvests also reduces its Part XIV base, but the reinvestment has to be in property in Canada and the calculation is tested every year rather than simply deferred.
The Treaty Rates That Decide the Number
| Parent Country | Branch Profits Tax | Dividend Withholding at 10% Ownership | Special Feature |
|---|---|---|---|
| United States | 5% | 5% | First CAD 500,000 of cumulative branch earnings exempt |
| United Kingdom | 5% | 5% | Rates match, no branch exemption |
| Germany | 5% | 5% | Rates match, no branch exemption |
| Australia | 5% | 5% | Rates match, no branch exemption |
| United Arab Emirates | 5% | 5% | Rates match, no branch exemption |
| China | 10% | 10% | Rates match, no branch exemption |
| India | 15% | 15% | Rates match, no branch exemption |
| No treaty in force | 25% | 25% | Full statutory rates apply both ways |
Permanent Establishment — When Canada Can Tax You at All
Under every Canadian treaty, business profits are taxable in Canada only where the foreign company has a permanent establishment here. That usually means a fixed place of business such as an office, branch, factory or workshop, or a dependent agent who habitually concludes contracts in the name of the company.
| Canadian Presence | Permanent Establishment | Filing Obligation |
|---|---|---|
| Office or other fixed premises | Yes | Full T2 with Canadian profits taxed |
| Employees or dependent agents concluding contracts | Usually yes | Full T2 with Canadian profits taxed |
| Selling remotely with no people or premises | Usually no | Treaty-based T2 still required to claim the exemption |
| No treaty between Canada and the parent country | Not relevant | Taxable on Canadian source business income regardless |
No permanent establishment does not mean no filing. A foreign corporation carrying on business in Canada must file a T2 even where a treaty exempts the profits. The return is filed with Schedule 91 claiming the treaty exemption, and the penalty for not filing it is the same as for any other late T2. Selling into Canada through a website with a Canadian warehouse or a Canadian salesperson is the fact pattern that most often creates an unexpected permanent establishment.
The Timing Difference Nobody Prices In
On the headline numbers the two structures usually land within a few thousand dollars of each other, because most treaties set the branch tax rate and the direct dividend rate at the same figure. The real divergence is timing.
A subsidiary that keeps its profits in Canada pays no second layer of tax at all, for as long as it keeps them there. A branch is tested each year on after-tax profits not reinvested in Canadian property, so a branch that wants to hold cash outside Canada pays branch tax whether or not a formal remittance is made. For a group that intends to fund Canadian growth from Canadian profits, that difference is neutral. For a group that wants flexibility over where the cash sits, the subsidiary wins.
Losses in the Start-Up Years
This is the classic argument for starting as a branch. Canadian losses in a branch form part of the foreign company’s own results and, depending on the parent’s home country rules, may reduce the parent’s tax immediately. Losses in a Canadian subsidiary are trapped in Canada and carry forward twenty years until Canadian profits arise to absorb them.
A common structure is therefore to start as a branch through the loss years, then convert to a subsidiary once the operation turns profitable. That conversion is a taxable transfer of the branch assets unless it is done under a section 85 rollover, so it needs to be planned before the assets have appreciated, not afterwards.
Setup and Compliance Cost Each Way
| Item | Branch | Subsidiary |
|---|---|---|
| Government registration fee | $330 extra-provincial licence | $300 Ontario incorporation |
| NUANS name search | $25 | $25 |
| Professional fee | $35 | $35 |
| Ontario address for service, one year | $1,000 | $1,000 |
| Total setup | $1,390 | $1,360 |
| Annual T2 and required schedules | $600 | $400 |
| Annual return | Not applicable | $50 |
| GST/HST returns | $200 | $200 |
| Address renewal | $1,000 | $1,000 |
| Total annual | $1,800 | $1,650 |
What the Calculator Does Not Model
- Transfer pricing: charges between the parent and the Canadian operation must be at arm’s length under section 247, with contemporaneous documentation and a T106 return
- Thin capitalisation: interest on parent debt is denied above a 1.5 to 1 debt to equity ratio, and the denied interest is recharacterised as a dividend
- Excessive interest and financing expenses limitation: caps net interest deductions at 30% of tax EBITDA
- Home-country tax and foreign tax credits: the parent’s own tax position frequently outweighs the Canadian difference
- Regulation 105 withholding: 15% on payments to non-residents for services performed in Canada, which affects both structures
- Section 116 and departure planning: on eventual sale or wind-up of the Canadian operation
- Limitation on benefits and the principal purpose test: treaty rates are not automatic
Get the entry structure right once. Changing from a branch to a subsidiary later is a taxable event unless it is planned as a rollover, and changing the other way is worse. We advise on the entry structure, register or incorporate it, handle the CRA registrations and file the first year end. Full details are on our non-resident corporation page.
Frequently Asked Questions
Common questions from foreign companies putting their first entity into Canada.
Related Calculators and Guides
More tools for foreign companies and non-resident owners.
Deciding How to Enter Canada?
Tell us the parent country, the expected Canadian numbers and whether people or premises will be here. We will model both structures against your own figures, recommend one in writing, and register or incorporate it on a fixed fee.