Most Canadian companies when expanding its operations internationally, look to the United States due to the close proximity, access to a huge market, and ease of trade. However, when a Canadian company decides to sell its services and products in the US, it should be aware of the various US tax laws that could apply on the Canadian business.
Not only does this include the federal tax rules but also the several state regulations, where the Canadian business will be operating or providing its services. These could range from sales tax, gross receipts tax, franchise tax, property tax, and income tax.
In this article, we have covered some of the key tax-related points that a Canadian business owner should keep in mind while selling its services in the United States.
U.S. Taxation of Income Earned by a Canadian Service Provider
A Canadian business will be subject to various taxes on its US-sourced income depending upon the extent of it’s presence and activities in the United States. Any entity that is engaged in a trade or business in the U.S. will be subject to income tax on that income.
There is relief from the Federal tax under the Canada-U.S. tax treaty, if the corporation has no permanent establishment in the United States. A Canadian company that is engaged in a trade or business in the U.S. will only be subject to tax on the income effectively connected to the permanent establishment.
To claim treaty benefits, a tax return must be filed. In addition, a disclosure should be made to protect available tax deductions and avoid penalties applicable should the IRS determine at a later date that the tax payer did in fact have a permanent establishment.
If the Canadian company has agents/salesperson from Canada travelling to the US to sell its services, or the company hires agents based in the US to sells its services, the company may be considered to be engaged in a trade or business in the U.S. through a permanent establishment. In addition, a physical location or extended time at a work location could create a permanent establishment. In this case, the corporation would be taxable on any income that is attributable to the permanent establishment and is required to file a return.
U.S. State Taxes
The Canada-US Treaty does not extend to cover US state income taxes at least for most of the states. Each state has its own set of tax laws. Some states accept the federal treaty exemption while some states make it a point to tax treaty-exempt income(s). Some states do not impose any state income taxes.
Furthermore, a company operating in multiple states may be subject to filing multiple tax returns and will need to strategize their tax plans accordingly to minimize their tax burden.
In addition to income taxes, most states have a state and/or local sales tax. There are over 2,500 taxing jurisdictions in the U.S. that impose a sales tax, making it a crucial aspect to discuss with the cross-border tax professional.
When it comes to state taxes, the following points need to be considered and discussed with the cross-border tax professional:
- US states with which the Canadian company will have a nexus?
- Is the company physically present in these states?
- What goods or services are being provided?
State taxation (both income and sales tax) could vary depending on the type(s) of services the Canadian company will be providing. While some states tax income based on where the service is performed, others tax income based on where the customer is located.
Trump’s Border Adjustment Tax
Although, yet to be executed, Canadian business owners need to consider the possible revision of NAFTA (North America Free Trade Agreement), and the border adjustment tax, which would tax all goods and services coming into the United States from foreign countries including Canada.
A border tax could increase the cost of the Canadian product or service making the U.S. market less attractive when considering business expansion.
Discussing with a Cross-Border Tax Professional
Before starting cross-border business activities, it is best to consult a U.S. Canada tax professional and understand the potential tax liabilities for Canadian businesses operating in the US. If the business has not yet finalized which U.S. states to carry out business operations, it could look into operating initially in those U.S. states that are more tax-friendly.
In addition, it may also be beneficial to operate in the U.S. through a U.S. subsidiary corporation rather than having branch operations. The business should properly understand its U.S. income and sales tax compliance requirements in the case of operating through US-based agent, having a permanent establishment or providing its services from Canada.
It is important to remember that non-compliance could lead to severe penalties including tax liens issued against business assets, and at times criminal punishment.
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
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
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
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