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It has been a long-standing stereotype that Canadians live in a deep freeze for 364 days of the year, say “aboot” instead of “about”, and are crushed under some of the highest taxes in the world. Of course, like most stereotypes, these are not necessarily based on facts. In particular, it is a revelation to most international franchisors to discover that corporate tax rates in Canada are at, or most likely below, the levels they encounter in their home countries. While our personal tax rates may be higher, Canadian government has been focussed on building and keeping equity at home by offering corporate tax rates that are among the lowest of the G8 nations.
The issue was brought to the forefront with the recent announcement that Tim Hortons Inc., the iconic Canadian franchise brand, had agreed to be purchased by Burger King Worldwide Inc., controlled by Brazilian equity firm 3G Capital. The merger would create the third-largest food service brand in the world, with annual sales of $23 billion through over 18,000 restaurants in 100 countries. As part of the process, the merged company’s head office will be moved to Canada, while Burger King retains a base of operations in America. Despite Burger King’s claims that the move is not for tax purposes, it seems quite clear that it will provide substantial benefits to the American giant from a tax perspective. Savvy international franchisors can use this mega-deal as an example of how they can leverage aggressive Canadian corporate tax rates to their advantage, and not just on inversion transactions. In the Burger King deal, for example, debt from Canadian operations can be taken on by the US partner company, which can then make interest payments on the debt to minimize or eliminate its US income. This has the net effect of shifting income made internationally to Canada, where the company will be taxed at a more favourable rate.
Another method would be charging the international partner management fees, for example, and paying those fees out of the higher-taxed entity to reduce its overall income. The income tax on the fees charged would then be paid at the lower Canadian rate. Most cross-border lawyers and accountants can advise as to other ways to maximize the performance of a franchise system that has units in multiple jurisdictions, including Canada.
So while you may think of Canadians as little more than very polite folk with universal health care and a rabid obsession for hockey, don’t discount the fact that for franchisors, Canada is also one of the most desirable destinations in the world to help boost the bottom line for any franchisor. Remember that the next time you order a double-double at Burger King.