Treaty-based filing positions
Canadian businesses with income that is effectively connected with a U.S. trade or business must file U.S. tax returns, even if such business is not attributable to a U.S. PE and is therefore not subject to U.S. federal income tax.
In the case of a Canadian corporation, Form 1120-F, U.S. Income Tax Return of a Foreign Corporation must be filed to disclose U.S. source income, together with Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) to claim relief under the treaty from U.S. federal taxation on income from U.S. activities because the corporation does not have a U.S. PE.
If you are a Canadian individual, you must file Form 1040NR U.S. Non-resident Alien Income Tax Return and attach Form 8833 disclosing that you are claiming relief under the treaty from taxation on income from your U.S. activities because you do not have a PE in the U.S. Note that it is necessary to indicate on Form 8833 the appropriate provision of the treaty whereby your income from your U.S. activities is not taxable in the U.S.
If you are uncertain as to whether you have income from carrying on a business in the U.S., you should consider filing a U.S. return to protect yourself from penalties for failure to file and disclose a treaty-based filing position.
U.S. permanent establishment
If it is determined that you have a U.S. PE, the income that is attributable to the U.S. PE is subject to U.S. tax and therefore no treaty exemption is available. Corporations with a U.S. PE must file Form 1120-F, and individuals with a PE in the U.S. must file Form 1040NR.
Taxpayers with U.S. PEs can generally claim foreign tax credits on their Canadian tax returns for U.S. income tax that is paid on their U.S. source income. As Canadian residents (both corporate and individual) are taxable on their worldwide income for Canadian tax purposes, U.S. effectively connected income will be taxed in both Canada and the U.S. However, by claiming a foreign tax credit for the U.S. tax paid against your Canadian income tax, you can generally avoid double taxation on the U.S. effectively connected income.
For Canadian corporations with a PE in the U.S., the original deadline for filing a U.S. income tax return for a particular year is the 15th day of the 4th month following the end of the fiscal year of the business for corporate fiscal periods that start after December 31, 2015. For example, for calendar year businesses, the deadline would be April 15th of the following year.
There is an exception for corporations with a June 30th year-end for tax years starting after December 31, 2015 and before January 1, 2026. For these corporations, the tax returns are still due on the 15th of the 3rd month following the year-end of the corporation, or September 15th.
These corporate filing deadlines also apply to Canadian corporations that do not have a PE in the U.S., but have a place of business in the U.S. The deadline for Canadian corporations that do not maintain an office or place of business in the U.S. is the 15th day of the 6th month following the end of the fiscal year of the business.
It is possible to extend these filing dates if an application for extension is made on or before the first due date. The application for extension of a corporate tax return is made by filing Form 7004 Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. However, an extension in time to file a return does not defer the payment of any taxes that may be due. By filing this form, generally a six-month extension is available.
However, for calendar-year corporate filers, the extension is only five months for year-ends that start after 2015 and before January 1, 2026. For June 30th fiscal corporations, the extension can be granted for seven months for corporate year-ends that start after December 1, 2015 and before January 1, 2026.
For individuals who are not U.S. residents and U.S. residents living outside of the U.S., the original deadline for filing the return for a particular year is the 15th day of the 6th month following the end of the calendar year, i.e. June 15th. Note, however, if an individual has income subject to U.S. withholding at source (for example, employment income), the filing deadline is April 15th instead. Individuals can also ask for an extension of time to file their return by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, on or before the original due date.
If you file late, but no tax is payable because of the treaty exemption, no interest and penalties should apply if a second filing deadline is met. For corporations, this second filing deadline is 18 months after the original due date. For individuals, this deadline is 16 months after the original due date for the return. For example, as an individual, where your 2019 return was originally due June 15, 2020, the final deadline for filing is 16 months after this date or October 15, 2021. In either case, if these second deadlines are missed, penalties may apply even if no tax is payable.
Individuals who miss the second deadline for filing returns will be denied personal exemptions and deductions on their return. In effect, you will be taxed on U.S. source gross business income. If you claim a treaty exemption to eliminate the tax at that time, you may be charged a $1,000 non-disclosure penalty for each item of income. Similar rules apply to corporations. If your corporation files later than the second deadline, it will be taxed on its U.S. source gross business income. If a treaty exemption is then claimed to eliminate the tax, a penalty for non-disclosure of $10,000 may be charged for each item of income. Note that temporary regulations may allow later filings in very restricted circumstances. Contact your BDO advisor for further information on the application of these rules.