Introduction
Many Romanian-Canadian entrepreneurs maintain business relationships with Romania — sourcing goods or services from Romanian suppliers, licensing technology developed in Romania, or selling services back to Romanian clients. These cross-border transactions are legitimate business arrangements, but they must be structured and reported correctly under both Canadian and Romanian tax rules, and under the Canada-Romania tax treaty.
Related-Party Transactions and Transfer Pricing
Where the Romanian entity is related to the Canadian corporation — owned or controlled by the same person or family — the transactions between them must be priced at arm's length. This is transfer pricing, as discussed in Article 72 in the US expansion context.
For a Canadian entrepreneur who also owns a Romanian company and transacts between the two, the Canadian corporation must be able to demonstrate that the prices charged between the related companies reflect what unrelated parties would charge for the same goods or services. An inflated fee paid to the Romanian company (reducing Canadian income and shifting income to Romania) or an artificially low fee paid by the Romanian company to the Canadian corporation are both transfer pricing risks.
The CRA has transfer pricing audit capacity and can adjust related-party prices where they are not at arm's length. Romania's ANAF (the Romanian tax authority) has similar powers.
Withholding Tax on Payments to Romania
When a Canadian corporation pays certain amounts to a Romanian entity, Canadian withholding tax may apply:
Management fees and service fees: Payments for management services, consulting, or similar services from a Romanian entity are generally subject to 25% withholding tax under the Income Tax Act, reduced to a lower rate under the Canada-Romania treaty. Under the treaty, the rate may be reduced to 15% or, for certain payments, may be exempt — depending on the characterisation of the payment and the treaty article that applies.
Royalties: Payments from a Canadian corporation to a Romanian entity for the use of intellectual property (software licences, trademarks, patents) are subject to withholding tax. Under the Canada-Romania treaty, royalties are generally subject to a 10% withholding tax rate.
Dividends: Dividends paid from a Canadian corporation to a Romanian individual or company are subject to withholding tax — typically 15% under the treaty for individuals, 5% for corporate shareholders owning at least 25% of the Canadian company.
Interest: Interest payments from a Canadian to a Romanian entity are subject to withholding at 10% under the treaty.
The Canadian corporation is responsible for withholding the correct amount and remitting it to the CRA, regardless of whether the Romanian recipient is aware of the obligation. Failure to withhold is a liability of the payer.
Romanian Service Providers: HST and ITC
Where the Canadian corporation pays for services provided by a Romanian company — software development, design, consulting — the HST implications depend on whether the services are performed in Canada or outside Canada.
Services performed entirely outside Canada by a non-resident are generally zero-rated for HST purposes (or outside the scope of HST entirely). The Canadian corporation does not pay HST on those invoices, and there is no ITC to claim.
However, where the service involves some Canadian component — where the service is provided partly in Canada, or where the service is directly related to real property in Canada — the HST analysis is more complex and may result in the Canadian corporation being required to self-assess HST on the imported service.
Documentation and Corporate Records
Cross-border related-party transactions require documentation that is more thorough than domestic transactions. The CRA expects:
A written agreement between the related entities specifying the nature of the services, the price, and the basis for that price
Evidence that the price reflects arm's length terms (comparable services from unrelated parties, or a transfer pricing study for significant amounts)
Payment records confirming that payments were actually made under the agreement
For entrepreneurs who have been transacting informally between their Canadian and Romanian entities without written agreements, formalising these arrangements is a risk management step worth taking before the CRA asks questions.
When to Speak With a CPA
Romanian-Canadian business owners with active cross-border transactions benefit most from CPA advice that encompasses both the Canadian and Romanian dimensions. While Rotaru CPA focuses on the Canadian side, coordinating with a Romanian tax advisor ensures the arrangements are compliant on both sides of the transaction.