Canadian companies looking to expand their business are increasingly looking south of the Border for new markets.
The population of the US recently passed 314 million while the population of Canada remains around 34 million. The Gross Domestic Product of the two countries is similarly scaled. The US GDP is around $15 trillion while the Canadian GDP is around $1.3 trillion.
Because the US market is roughly 10 times the size of the Canadian market, capturing even a modest piece of the US market at around 2% represents an equivalent growth for a Canadian company of approximately 20% of the Canadian domestic market.
Is there a significant tax difference?
Because we often drive or fly across the border with very little difficulty, Canadians often assume that there is very little difference between doing business in Canada and the US. Both countries use the same language, denominate our transactions in dollars and see many of the same corporate logos on both sides of the border, drive cars made in each other’s country, so is there really a difference?
The answer, quite simply is, “yes, there are substantial regulatory and tax differences”.
When is a Canadian doing business in the US subject to US tax?
Under the terms of the United States Internal Revenue Code (“IRC”) all persons earning income from US sources are subject to tax in the US. This provision would include Canadian businesses selling and shipping goods to US customers, selling services, providing cloud computing, etc.
Any time that you earn income from a US client or customer, you are “engaged in the conduct of a trade or business in the United States” and are subject to the taxes imposed by the IRC.
There are opportunities to relieve some of the US taxes; however, the requirement to report that you are earning income from US sources will persist, despite the tax exposure being extinguished. Further, some of the reporting requirements carry substantial monetary penalties for failure to file, regardless of whether tax is owed or not.
One of the opportunities to relieve US taxation comes from the Canada-US Income Tax Convention (the “Treaty”). Under the Treaty, the business profits of a Canadian company can only be taxed in the US to the extent that they are directly attributable to a Permanent Establishment (“PE”) in the US. A PE is defined in the treaty and includes a place of management, a branch, an office, or a representative who concludes contracts in the US. Additionally, having a representative or agent who is performing services on behalf of the Canadian business in the US for more than 183 days in the aggregate will also constitute a PE in the US.
For more information on the Taxation of Permanent Establishments, please see the taxation of permanent establishment article on our website dealing with this issue.
It is important to note that each State and several localities have their own segregated tax laws that may or may not be integrated with the Federal income tax laws. Additionally, the various States do not recognize the protections of the Treaty, so there may be exposure to state and local income taxes even when there may be no federal taxes.
AG TAX LLP Can Help
If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- 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.