In 2024, 3,000 MSBs were actively registered in Canada, many of which were foreign. The number of registrations and strictness of international policies since then has increased, causing FINTRAC to enhance its surveillance.
You may wonder whether the increased scrutiny triggers any foreign MSB tax obligations upon registration. The short answer is: Not necessarily. But as with many cross-border legal questions, the reality is more nuanced.
That’s why today we’ll unpack how foreign MSB registration interacts with Canadian tax laws
What Is A Foreign MSB Canada?
A business that offer money services to people in Canada even if it’s located abroad qualify as a money service business. These MSBs have to register with FINTRAC to offer its services such as cashing cheques for Canadian residents legally.
MSBs that conduct their operations from abroad without a business office in Canada are called foreign MSBs. They offer their services through online networks and must comply with FINTRAC obligations, including:
- Implementing an AML/ATF compliance program
- Performing Know-Your-Client (KYC) checks
- Submitting suspicious transaction reports (STRs) to FINTRAC
While FINTRAC registration brings regulatory obligations, it doesn’t automatically trigger tax obligations.
When Does A Foreign Corporation Become A Canadian Tax Resident?
Under the Income Tax Act (ITA), a corporation is considered a tax resident of Canada if:
- It is incorporated in Canada
- Its central management and control are exercised in Canada
The second criterion is especially important for foreign MSBs. Let’s imagine your MSB is legally located in Italy, but your board of directors operate from Canada.
Because your core decision-makers are within Canada, your business can be considered a tax resident. This means you will have to fulfil all foreign MSB tax obligations that local businesses also perform. Your MSB’s worldwide income will also be liable for tax deductions.
Permanent Establishment (PE): Foreign MSB Tax Obligations For Non-Residents
Many foreign MSBs believe that if they don’t meet the criteria for a Canadian tax resident, they’ll be free of obligations. That’s a misconception because of permanent establishment tax implications.
The definition of a PE typically arises from Canada's tax treaties, such as the Canada-Italy Tax Treaty, which is particularly relevant for Italian fintechs. As per the Canada Revenue Agency, a PE includes:
- A fixed place of business in Canada, such as an office, store branch, or company warehouse
- A dependent agent in Canada who habitually exercises authority to conclude contracts on behalf of the foreign company
If your foreign MSB qualifies as a permanent establishment in Canada, income tax obligations will be triggered.
Why Does Tax Status Matter For fMSBs?
It’s essential to know whether you qualify as a Canadian tax resident or a permanent establishment. Your status will directly affect:
- Requirements to file Canadian tax returns
- Liability for Canadian corporate income tax
- Requirement to withhold tax on payments to certain parties
- Taxable profits from Canadian activitiesÂ
Filing obligations can also trigger penalties for non-compliance, even if no taxes are due. Getting this analysis wrong can expose your business to audits, back taxes, and interest.
How to Reduce Risk: A Tax and Compliance Checklist for Foreign MSBs
When planning to get a foreign MSB license from FINTRAC, you must complete a checklist. Asking yourself questions will help you understand whether the registration will trigger any tax obligations:
Step 1: Map Your Corporate Structure
Mapping your business structure will help you determine whether you have physical presence in Canada:
- Where is your company incorporated?
- Where does your board of directors operate?
- Who makes strategic decisions and where?
If the answer to all these questions is Canada, you will have to meet foreign MSB tax obligations.
Step 2: Analyze Your Canadian Footprint
Your employees’ and contractors’ locations also matter during FINTRAC MSB license registration:
- Do you have a physical office or an employee in Canada?
- Are any contractors signing or negotiating contracts with Canadian clients?
- Do you rent servers or maintain infrastructure inside Canada?
Having employees, physical offices, contractors, or servers in Canada indicates you’re incorporated within the nation. This means you’ll qualify as a Canadian tax resident.
Step 3: Review Your Client Acquisition Model
Client acquisition models are great for determining your business’s prime service area:
- Are Canadian clients solicited online only?
- Do you rely on affiliate marketers or agents within Canada?
- Are sales contracts being finalized from abroad?
Offering physical money services in Canada or collaborating with agents there can trigger tax obligations and stricter compliance rules.
Step 4: Obtain Tax and Legal Opinions
Assessing your company’s tax status alone can be difficult. You should seek support from:
- A Canadian tax accountant to assess residency and PE risk
- A fintech regulatory lawyer to align your FINTRAC MSB registration with your operating structure
Fintech law firms can review your MSB applications and make changes to ensure you don’t trigger any tax obligations on registration.
When Should You File A Canadian Tax Return As A Foreign MSB?
Even if your company isn’t a Canadian tax resident, you may still have a filing obligation if:
- You earn Canadian-source income
- You have a PE in Canada under a tax treaty
- You are required to withhold tax on payments to Canadian residents
Filing a nil return (indicating no taxable income) may still be required to stay compliant and avoid late penalties.
Foreign MSB Registration Doesn’t Always Trigger Tax Obligations: Let A Fintech Lawyer Help You Avoid Implications
Registering as a foreign MSB doesn’t necessarily trigger tax obligations. How you present your company in the application plays an important role in tax implications.
Renno Co. & Fintech can prepare an application draft, assess risks, and help you make changes to ensure you don’t qualify as a Canadian tax resident or permanent establishment. This will ensure you don’t trigger any income tax obligations.
Reach out to us today to find out whether your fMSB registration plans may come with hidden tax risks.
