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International business tax for a Canadian company splits into two questions: what you pay abroad, and what you withhold when you pay someone outside Canada. On the second one, the CRA’s default withholding rate on a payment to a non-resident is 25%, and a tax treaty can lower it when the paperwork is in order.
What changes once income crosses the border?
Three things can. A foreign country may tax the profit. Canada still taxes your corporation on its income, so the two need to be reconciled. And any money you send out to non-residents may carry Canadian withholding.
The CRA describes tax treaties as agreements meant to avoid double taxation and prevent evasion. They define residency, cut withholding on interest, dividends and royalties, and generally limit business income taxation to income from a permanent establishment. Which treaty applies, and what it says, depends on the country. No single treaty has been read for this page, so treat the treaty points as general.
How does Canada stop you paying tax twice?
Through a credit. A corporation that pays foreign tax on income from a business carried on in another country can claim a federal foreign business income tax credit against its Part I tax. You work it out on Schedule 21 (Part 2), one country at a time, and the total goes on line 636 of the T2.
The credit is capped, so it doesn’t always cover the foreign bill. The cap isn’t worked through here. If a foreign tax is higher than the Canadian tax on the same income, expect to eat the difference.
What does withholding cost on a payment abroad?
Take an Ontario corporation with $100,000 of active business income. The corporate tax calculator shows $11,696 of tax and $88,304 left. (That uses a blended 2026 small business rate, which isn’t published as one figure, so it’s an estimate.)
Now say the owner lives abroad and the company pays the whole $88,304 out as a dividend. At the default 25%, the company withholds $22,076. If a treaty set the rate at 15%, and that’s only an illustration, it would withhold $13,245.60. The $8,830 difference is why treaty paperwork matters.
Non-residents have to pay a 25% tax on amounts that are taxable under Part XIII.
NR4 – Non-Resident Tax Withholding, Remitting, and Reporting, Canada Revenue Agency, canada.ca
| Topic | Form or place | What was confirmed |
|---|---|---|
| Withholding on payments to non-residents | Part XIII, NR4 slips | Default rate 25% |
| Treaty relief on the payer’s side | NR301, NR302, NR303 | Certify residency and beneficial ownership |
| Foreign tax on business income | T2 Schedule 21, line 636 | Credit worked out per country |
| Dealings with related non-residents | T106, transfer pricing | Terms must match arm’s length |
| Treaty texts and status | Finance Canada | Official source for each treaty |
What should you do before paying someone abroad?
Don’t just wire the money. Work through three questions first.
- What kind of payment is it? A dividend, interest or a royalty can be taxable under Part XIII. Buying goods from a foreign supplier is a different thing, so don’t assume every payment abroad triggers withholding.
- Who is the real recipient, and where do they live? The treaty rate depends on the country where the beneficial owner is resident.
- What proof do you hold? A treaty rate needs documents on file. If you can’t back up the lower rate, withhold the default one.
A bakery owner in Winnipeg paying a licence fee to a recipe designer in another country has exactly this problem. The right rate is a fact about the payment and the recipient, not a guess.
What paperwork do related-party deals add?
If you trade with a company you control or share an owner with, the CRA expects the terms to look like a deal between strangers. That’s the transfer pricing rule. The related return is the T106, an annual information return for non-arm’s-length transactions with non-residents. Its thresholds have changed over the years, and the current ones weren’t checked on an official page, so open the T106 page before you file.
Keep the invoices, contracts and pricing notes that show how you set the price. The CRA can ask for them.
Where do people get international business tax wrong?
They assume a treaty applies by itself. It doesn’t. The CRA says a payer who applies a reduced rate without proper documentation risks an assessment, penalties and interest.
They also treat one country’s rules as the rule everywhere. Each foreign country sets its own tax and its own filing dates. And they forget the small stuff at home: sales tax on what you sell is a separate question, and the GST/HST calculator only covers ordinary Canadian sales. Personal tax on what you pull out as an owner living in Canada is another. For that, use the dividend tax calculator.
For a business that’s growing abroad, the useful step is a short call with a cross-border accountant before the first contract, since the treaty choice sits in the contract wording. This page can’t tell you which treaty or which forms apply to you, and a few bucks spent on advice up front is cheaper than a reassessment.
Where the numbers come from
The 25% default and the treaty form descriptions come from the CRA pages on NR301, NR302 and NR303 and on Part XIII tax. The treaty summary comes from the CRA’s tax treaties page, and the credit from CRA material on Schedule 21. Corporate tax figures use 2026 federal and Ontario rates from the CRA.
Frequently asked questions
What is the default withholding rate on payments to non-residents?
The CRA's default statutory rate is 25%. A treaty may lower it if the payer has the right certification.
Does a tax treaty apply automatically?
No. The CRA says payers who apply a reduced rate without proper documentation risk assessments, penalties and interest.
How do I avoid paying tax twice on foreign business income?
A corporation can claim a federal foreign business income tax credit on Schedule 21, worked out for each country.
What is the T106?
It's the annual information return for non-arm's-length transactions with non-residents.
Which treaty applies to my country?
We didn't read individual treaties. Finance Canada is the official source for texts and status.
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