Many people are beginning to appreciate the power of expanding their business through the internet. It can easily expand a product’s potential buyers from thousands to millions by providing easy access to the global market, including the largest capital market, the United States of America. Many Canadian businesses have already taken advantage of such opportunities by selling their goods and services across the Canada/U.S. border through the internet. While the barriers to entry to sell certain products online to U.S. customers may be low (essentially all you need is a computer, a product to sell, and a bank account), one has to be aware of the various tax issues and implications inherent in doing business in the U.S.
Lately we have been getting many of the same queries from our clients regarding starting online businesses, so we are taking this opportunity to share some of the frequently asked questions.
U.S. Tax FAQs for Canadian Online Businesses
Do I need to be incorporated in either Canada or the USA?
No, in fact the lowest tax rates are often achieved operating as a sole proprietorship. A corporation may be subject to double taxation, especially if it is a U.S. incorporated company or if there is a U.S. permanent establishment. However, a corporate structure may provide several benefits such as liability protection, tax deferral, and other tax planning opportunities not available to individual sole proprietors. Advanced planning concerning corporate structure is absolutely critical to avoiding unfavorable exposure to taxation both in Canadian and USA.
Do I need to be registered with the Internal Revenue Service (IRS) or other government agencies to do business in the U.S.?
As a non-U.S. seller, if you sell tangible goods and title to the goods, or risk of loss, passes to the buyer outside the U.S. and you have no other presence in the U.S., then technically there is no requirement to obtain an IRS taxpayer identification number such as an ITIN (for individuals) or EIN (for entities). That being said, an ecommerce website may require you to obtain a U.S. tax identification as a matter of policy. We’ve also come across several U.S. businesses that will not deal with Canadian corporations that do not have an EIN as a business policy, or they require U.S. withholding to be deducted from their payments. As a result it may be strictly required to avoid withholding tax issues. Furthermore, in order to import your inventory into the U.S. you may need an importer’s identification number. An ITIN or EIN should be acceptable as an importer identification number. Without such a number there may be delays and additional paper work required to be completed.
Last but not least, certain products are not allowed to be sold in the U.S. Please check the policies of your online e-commerce site as well as local government authorities to determine if there are any restrictions with the products you sell including products that require safety certification or approval prior to selling in the U.S.
Do sellers need to collect sales tax on sales to U.S. customers?
While our focus in this article is on cross border income tax, U.S. sales tax is also an important consideration and there very well could be exposure to taxation at the state and local levels. Sales taxes are administered at the state and local levels, not federally. Businesses are required to charge sales tax on sales to customers in those states where they have sales tax “nexus” or have registered for sales tax voluntarily. Nexus is generally defined as the minimum level of activity in a state that could cause the state to require the taxpayer to be subject to that state’s tax. There are online sales tax software packages that are reasonably priced which can assist you in keeping track and charging the right amounts.
Do I need to pay U.S. tax if I operate solely from Canada?
This depends on how you transact business and/or whether or not you have a U.S. permanent establishment. For more details on a permanent establishment please read the following article:
Also, if you have inventory stored in a warehouse or agents in a state selling on your behalf, your business may create state income tax “nexus” and be subject to that state’s income tax. Research if the organization that you are selling through automatically categorizes your operations as having nexus.
I don’t have a U.S. permanent establishment. Is it true that as Canadians we do not have to pay U.S. federal income tax or file U.S. returns because we are protected by the U.S. – Canada Income Tax Treaty (“Treaty”)?
Depending on the facts this may be true, but in most cases if you are exempt from U.S. federal income tax under the Treaty you must disclose which paragraphs of the Treaty apply to your situation in a U.S. “treaty based return”. In addition, the treaty may only apply to federal income tax and not all states follow the federal tax treaties. Please contact AG Tax or your cross border tax advisor to discuss whether this applies to your specific situation. It is critical to know what exposure you have to state and local taxes. Do not assume that you have no exposure.
What U.S. tax returns do I need to file, if any?
Again, this depends on how you transact business in the U.S., but generally if you have inventory or agents in the U.S. you will need to file a U.S. federal income tax return such as a “treaty based return” and very likely a state income tax return in those states as well.
I’m operating my business in Canada but ship to U.S. customers. Do I need to report income in the U.S. or in Canada?
If your business is considered resident of Canada, the business is subject to Canadian tax on its worldwide business income regardless of whether the income is from a foreign source such as the U.S. Depending on your situation both U.S. and Canadian returns may be required; you may be required to file a U.S. return first to report and pay any tax on your U.S. source income, and then file a Canadian return to claim any U.S. tax paid as foreign tax credits on your Canadian return.
As one can see, many of the answers above depend on your facts and situation. A simple change in the way you do business in the U.S. can help you avoid paying unnecessary income taxes. In order to minimize your business’s exposure to U.S. taxes it is best to consult an experienced cross border tax advisor such as AG Tax. Our Cross Border tax experts will help you put together a plan to ensure that your business is compliant with U.S. tax laws, which can help avoid tax controversy and other tax problems down the road.
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 US 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
- US 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.