The significant growth in trade and business between the U.S. and Canada has resulted in an undesirable, yet perhaps foreseeable, growth in taxation disputes. However, in order to minimize the complications arising from taxation issues, the U.S. and Canada have a convention, known as the U.S.-Canada Income Tax Treaty. The Treaty attempts to avoid of unnecessary double taxation and prevent fiscal evasion with respect to taxes on income and capital. And, one of the most significant topics covered by the Treaty is “permanent establishment’.
Article V Treaty defines permanent establishment as a fixed place of business (for example, a branch, an office etc), through which the business of a resident of Canada is wholly or partly carried on. AG Tax have had numerous queries from Canadian business owners on the applicable tax treatments they will face when a U.S. permanent establishment is created. In response to these queries, our team of chartered accountants has prepared a brief summary of the tax treatment in the U.S. that the Canadian business will face.
Why is Permanent Establishment important?
Article VII of the Treaty provides that the business profits of an individual or corporation resident in one country may only be taxable in the other country to the extent that those business profits are attributable to a permanent establishment in that other country. Since the rules governing permanent establishment are set out in the Treaty, the requirements of permanent establishments are generally the same in both countries. For more information on the following topics, please review the AG Tax article entitled Taxation of Permanent Establishments: Canadians with US Business Interests:
• Permanent Establishment Defined
• Determining Whether You Have a Permanent Establishment
• Dependent Agent Permanent Establishment
• Independent Agents
• Permanent Establishments from Services
What are the Tax Treatments in the U.S. once Permanent Establishment is Created?
• Federal Tax Treatments:
If Canadian companies have permanent establishment in the U.S., they are taxed on the profit attributable to the permanent establishment. It is important to note that even if the Canadian companies do not have a fixed place of business, they may still be considered permanent establishments due to services provided in the U.S.
Once permanent establishment is created, the Canadian companies are able to deduct business expenses attributable to the permanent establishment (for example, general and administrative expenses). Canadian companies are also required to file all necessary tax returns, informational returns, and foreign disclosure forms to the Internal Revenue Agency (IRS).
• State Taxes:
Not all states recognize the U.S.-Canada Income Tax Treaty. Therefore, Canadian companies with a presence in more than one state could still be subject to state and local taxes, even if they are not subject to federal taxes.
Physical presence, accounting nexus and economic nexus play significant roles in determining whether the Canadian companies need to file state taxes.
Once nexus is created in the state, Canadian companies are required to file the necessary state and local tax returns with business profits apportioned to each state.
Precautionary Actions
• It is always recommended that Canadian companies who conduct business in the U.S. consult a cross-border accounting professional regarding the federal and state tax implications and consequences they may face.
• Advice should also be sought when determining which state(s) are most feasible for you to conduct your business, prior to beginning U.S. expansion.
• A cross-border tax advisor can also devise a plan for strategies to avoid double taxation, minimize taxes, ensure advantageous use of foreign tax credits, and maintain compliance to tax regulations in both U.S. and Canada.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
