Many Canadian business owners have already expanded or plan to expand their businesses to cover the U.S. market especially in the border provinces. Some of them even have corporations set up in the U.S. to facilitate business and carry out transactions between their Canadian and U.S. corporations leading to cross-border tax issues. Although the business owner may have taken significant tax measures to reduce their tax burden, there are various Canadian and U.S. tax filing requirements which the business needs to comply with.
Here are some of the forms, outlined by AG Tax analysts, that a corporate taxpayer needs to file in Canada and the U.S. to be tax-compliant. Nevertheless, it is advisable to consult a tax professional as he/she would provide recommendation(s) based on the taxpayer’s specific situation.
Canadian Filing Requirements
T2, Corporation Income Tax Return
While it is obvious that every Canadian corporation is required to file this form, if the U.S. subsidiary corporation has any Canadian source income or activities in Canada then it may also be required to file Form T2. The Form T2 is the tax form that every corporation, foreign or Canadian, needs to file to report their Canada-sourced income, which could be through the business carried out in Canada, or from a taxable capital gain, or from the disposal of a taxable Canadian property, even if there was no gain from the sale (some exceptions may apply).
This return should be filed after 6 months from the corporation’s financial year end.
T1134, Information Return Relating to Controlled Foreign Affiliates
T1134 is to be filed by Canadian residents who have direct/indirect, partial/full ownership of a foreign corporation or trust if the investment amount is equal to or more than CAD$100,000; unless the corporation/trust is dormant, and performing no activities, and has total assets worth less than a million.
This form is to be filed within 15 months from the completion of the Canadian resident’s tax year. (Click here for more information: Form T1134)
T106, Information Return of Non-Arm’s Length Transactions with Non-Residents
This form is used to report all non-arm’s length transactions carried out during the tax year between the reporting Canadian corporate, and the U.S. subsidiary, if the total value of these transactions is more than $1 million.
T106 should be filed along with the T2 income tax return. In case the T106 is filed after the T2, the taxpayer may be liable to a penalty of $100 or $25 per day (maximum 100 days), whichever is greater, for each delayed filing.
And, in case the taxpayer intentionally avoided filing the T106, the entity would be liable to a penalty of $500 for each month (maximum $12,000) until the T106 was filed, and $1,000 for each month ($24,000 maximum), separately for each year, if the entity was sent a notice by the CRA to file T106. The latter penalty may also apply in case of inaccurate or omitted information on the T106.
U.S. Filing Requirements
Form 1120, U.S. Corporation Income Tax Return
This form is the T2 equivalent for U.S. domestic subchapter “C” (regular) corporations in the U.S. The U.S. subsidiary needs to report any income, gains, losses, deductions, credits, etc. for the concerned tax year on this form to the Internal Revenue Service (IRS) as well as to report any disclosures required under U.S. tax law. The deadline for the Form 1120 return is 2.5 months after year end (e.g. March 15 of the following year for a calendar year corporation). A six-month extension may be requested; however, an extension to file a return does not extend the time to pay any tax due. Penalties and interest are still assessed on any tax paid late despite having a timely filed extension or return.
Form 1120-F, U.S. Income Tax Return of a Foreign Corporation
While Form 1120 needs to be completed by the U.S. subsidiary, Form 1120-F needs to be completed and filed any Canadian corporation with a U.S. trade or business to report income, gains, losses, etc. which is a result of the business activities carried out in the U.S. The Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital (Canada-U.S. Tax Treaty or the Treaty) may allow a Canadian corporation to have a U.S. trade or business but not have to pay U.S. federal income tax if certain provisions of the Treaty are met. If the Treaty is used to exempt or reduce U.S. income tax, a treaty based disclosure is required to notify the IRS each year you use the Treaty. Failure to do so could result in a $10,000 per non-disclosure per year as well as loss of business deductions should such U.S. business income not be exempt.
The due date for Form 1120-F is the same as Form 1120 (2.5 months after year end) unless the foreign corporation does not have an office or fixed place or business in the U.S. In that case, the due date is then automatically extended for an additional 3 months making the deadline for a foreign corporation with a U.S. trade or business but without an office or fixed place of business in the U.S. 5.5 months to file Form 1120-F (e.g. June 15 of the following year for a calendar corporation. An additional 6 month extension may be filed. Again the extension does not extend the time to pay tax only to file the return.
If the return is not filed within 18 months of its due date, then the foreign corporation may lose its right to take deductions against its gross income when computing U.S. taxable income.
Form 5472, Information Return of a 25% Foreign-owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
Form 5472 should be filed by those U.S. corporations which have 25% or more foreign shareholders to report certain reportable transactions between the corporation and the foreign shareholders, unless there is no reportable transaction, or due to any tax treaty exemption between U.S. and Canada (or any other foreign country).
The reportable transactions are sale/purchase of inventory or other tangible property, any amount paid/received for the use of copyrights, patent or other similar non-tangible property, rents/ royalties/ commissions/ interest paid and/or received, premium for insurance, etcetera.
In case of non-monetary transactions, such as: exchange of properties, the fair value should be estimated based on prevailing market value of property, or any other acceptable way of estimating property value for reporting. (Click here for more information: Form 5472).
This form is due with the tax return. It is very important that Form 5472 be filed timely. It can no longer be filed separately. The penalty for late filing is $10,000 per Form 5472 per year. If this form is required, the form needs to be timely filed with the return or the penalties are assessed automatically if late regardless of any tax due.
While there may be some cases of exemptions, determining the filing obligation can be a complex process, and we advise taxpayers to contact an AG Tax expert regarding these situations.
Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
Generally Form 5471 is filed anytime a U.S. person including a U.S. corporation owns 10% or more of a foreign corporation at any time during the taxation year. This Form is also filed with the tax return and must be filed timely. If filed late it will incur the same automatic penalties as Form 5472, $10,000 per form per year. (Click here for more information: Form 5471).
This form is rather complex and should be prepared by a tax professional. Failure to report the necessary information may also incur a $10,000 penalty.
FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
If the Canadian parent corporate holds banks accounts or investments in Canada or in any other foreign country under the name of the U.S. subsidiary corporate, the U.S. subsidiary needs to report each and every foreign bank account and/or investment on this form.
Unlike other forms which are required by the IRS, the FBAR is required by Financial Crimes Enforcement Network (FinCEN), and therefore the penalties/punishment is also severe. In case it is an honest mistake and the taxpayer is able to prove that they were unaware of this filing requirement, the penalty could be a sum of $10,000 for each non-compliant tax year, while the penalty for willful non-compliance to elude taxes could be $100,000 or 50% of the highest balance in the account (whichever is greater) for each non-compliant tax year and account. Additionally, the taxpayer could also be subject to a fine of $250,000 and imprisonment up to 5 years to five years in jail, or more.
There are several other tax forms that a foreign parent and U.S. subsidiary could be subject to and there could be additional state/provincial filing requirements depending on the state or province where the corporation is carrying out its business activities. It is therefore advisable to contact a cross border tax advisor to ensure your Company is tax-compliant. The CRA and IRS have become stricter, and are very particular about compliance regarding each document/form that needs to be filed, and non-compliance with regards to the above forms and other forms could turn out to be highly expensive in the form of penalty, fines, and/or tax litigation or controversy.
AG TAX LLP Can Help
If you have any tax-related queries or need assistance with tax planning or 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
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
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