Profit Repatriation to a Foreign Parent Calculator
A dividend is the most expensive way to move money out of a Canadian subsidiary and the one most groups default to. Compare all five routes on total Canadian tax and cash landed, with the thin capitalisation headroom that limits the cheapest of them.
saved against a dividend
—
—
—
—
Every Route Compared
| Method | Deductible in Canada | Withholding | Total Canadian Tax | Cash to the Parent | Effective Rate |
|---|
Thin Capitalisation Headroom
| Item | Basis | Amount |
|---|
What Each Route Actually Requires
| Method | What Has to Be True |
|---|
Points That Decide This
What to Do Next
—
Disclaimer: Canadian corporate tax is applied at the Ontario general rate of 26.5%, since a foreign-controlled corporation is not a Canadian-controlled private corporation. Dividends are paid from after-tax income and are not deductible. Interest, royalties and management fees are deductible where they are reasonable and, in the case of amounts to non-arm’s length non-residents, supported by contemporaneous transfer pricing documentation. Part XIII withholding is 25% statutory, reduced by treaty. The Canada-United States treaty generally provides for no withholding on interest, including between related parties, and no withholding on royalties for copyright other than films, computer software, patents and know-how, with 10% on other royalties including trademarks. Management fees for services performed outside Canada by a parent with no Canadian permanent establishment are generally relieved under the business profits article. Thin capitalisation under subsection 18(4) denies interest on debt to specified non-residents exceeding one and a half times equity, and subsection 214(16) treats the denied amount as a deemed dividend. Every deductible route depends on the charge being genuine and priced at arm’s length. This page is general information, not tax advice.
A Dividend Is the Most Expensive Route, by a Long Way
A dividend is paid from income that has already borne Canadian corporate tax, and it attracts withholding on top. Every other route is deductible, so the corporate layer disappears entirely.
| Moving $1,000,000 to a US Parent | Total Canadian Tax | Cash Landed |
|---|---|---|
| Dividend | $301,750 | $698,250 |
| Interest, within the thin cap limit | Nil | $1,000,000 |
| Royalty for software, patents or know-how | Nil | $1,000,000 |
| Management fee, no Canadian permanent establishment | Nil | $1,000,000 |
| Royalty for a trademark or a film | $100,000 | $900,000 |
The gap between a dividend and interest to a US parent is thirty percentage points on the same money. That is not a planning nuance. It is the difference between $698,250 and $1,000,000 landing with the parent, and most groups default to the dividend because it is the route everyone knows.
Why Interest to a US Parent Is Zero
The Fifth Protocol to the Canada-United States treaty eliminated withholding on interest between related parties, phased in and fully effective from 2010. Combined with full deductibility in Canada at 26.5%, that makes interest the cheapest route available.
It is also the most constrained. Thin capitalisation caps deductible interest at a debt-to-equity ratio of one and a half to one, and interest above that is both denied as a deduction and treated as a deemed dividend attracting withholding. The rate must also be genuinely arm’s length.
| Equity in the Subsidiary | Maximum Debt | Interest at 7% |
|---|---|---|
| $1,000,000 | $1,500,000 | $105,000 a year |
| $2,000,000 | $3,000,000 | $210,000 a year |
| $5,000,000 | $7,500,000 | $525,000 a year |
Royalties Depend Entirely on What Is Licensed
The treaty splits royalties. Copyright other than films, computer software, patents and information concerning industrial, commercial or scientific experience carry no withholding. Trademarks and films carry ten percent.
A group licensing its brand to the Canadian subsidiary pays ten percent. The same group licensing its software pays nothing. Where both exist, the split between them matters and should be documented deliberately in the licence rather than described loosely as a royalty for the use of the group’s intellectual property.
Management Fees Are the Easiest to Get Wrong
A management fee is deductible in Canada and generally relieved from withholding under the business profits article where the parent has no Canadian permanent establishment. On paper it is as cheap as interest and it has no thin capitalisation ceiling.
It is also the first line a transfer pricing auditor examines, and the most commonly adjusted item on a Canadian subsidiary file. The services must genuinely be delivered, the charge must be benchmarked, and contemporaneous documentation must exist by the T2 filing due date, or subsection 247(4) deems no reasonable efforts and the ten percent penalty applies on the whole adjustment.
Without a Treaty, Everything Costs More
| Route | Treaty Parent | No Treaty |
|---|---|---|
| Dividend | 30.18% | 44.88% |
| Interest | Nil to 15% | 25% |
| Royalty | Nil to 10% | 25% |
Where the ultimate parent sits outside a treaty country, holding the Canadian subsidiary through a treaty jurisdiction is an obvious thought and an exposed one. Beneficial ownership and the limitation on benefits provisions exist precisely to defeat an intermediary inserted only to obtain a lower rate.
Use a Mix, Not One Route
- Fill the interest capacity first, up to the thin capitalisation ceiling at a defensible rate.
- Charge genuine royalties where real intellectual property is being used, split correctly between the zero and ten percent categories.
- Charge management fees for services actually delivered, benchmarked and documented.
- Use dividends for the remainder, since it is the only route with no substance requirement at all.
- Get the NR301 in place before any payment, or withhold at twenty-five percent.
- File the T106 where reportable transactions exceed $1,000,000, which a group doing all of this will cross.
The deductible routes are cheaper because they carry substance requirements. That is the trade. A dividend needs nothing to be true. Interest needs real debt at a real rate, royalties need real intellectual property, and a management fee needs services that were actually performed.
What This Calculator Does Not Cover
- The parent country’s tax on the amounts received, which changes the ranking
- Determining arm’s length prices, which is the substance of a transfer pricing study
- Withholding on salary under Regulation 102 for services performed in Canada
- Paid-up capital reductions, which can return capital without a dividend
- Provinces other than Ontario
- Hybrid instruments and the anti-hybrid rules that may apply to them
Set the structure up before the cash needs to move, not after. Intercompany debt and licences created retroactively are worth very little. Our international tax service covers the agreements, the documentation and the withholding compliance.
Frequently Asked Questions
Common questions on moving money to a foreign parent.
Related Calculators and Guides
More tools for cross-border groups.
Set the Structure Up Before the Cash Needs to Move
Send us the group structure and the amounts. We will set the intercompany debt within the thin capitalisation limit, draft the licence and services agreements, prepare the documentation and handle the withholding compliance.