With the Canadian dollar performing under par, many Canadian businesses are considering opportunities for growth south of the border. From the development of a larger U.S. client base to opening a U.S. branch, there are many paths that can lead to success. Yet there are also many considerations that affect such business decisions, not the least of which are U.S. tax implications.
The Corporate tax rate in the United States is about 40%, with some variance from state to state. This is considerably higher than the rates in other industrialized nations, and a sharp increase from the rate—about 26%—that most Canadian companies pay.
Strategies for Cross-Border Business Activities
When establishing U.S. operations, businesses should choose a structure that will minimize their combined Canadian and U.S. tax burden. This means addressing not only immediate concerns surrounding U.S.-based business activities, but acting with an eye toward future profits, repatriation of income, and possibly the future sale of the business. As part of this discussion, any planning implemented should be integrated with your Canadian structure.
Under the current U.S. tax code, non-U.S. resident businesses are only taxed on their U.S.-source income that is effectively connected with a U.S. trade or business. However, determining which business revenues count as U.S.-sourced is more complex than many anticipate. Core variables used to determine U.S.-sourced income include:
- Whether the business activities in the U.S. are “regular, continuous, and substantial”
- Whether the business maintains a permanent establishment in the U. S., and
- The location in which the business activities are conducted.
If a Canadian company does business in the United States but is not deemed to have a permanent establishment, their business profits may be exempt from U.S. taxes under the Canada/U.S. Tax Treaty. For example, a Canadian business selling goods to American customers online or through a third party such as Amazon would likely be exempt. However, such firms would nonetheless be recommended to file a protective U.S. tax return to claim treaty benefits and avoid any potential misunderstandings from the IRS. Businesses also need to remain cognizant of state taxes and regulations, which can vary widely and may not follow federal tax treaties.
Structuring a Business to Reduce U.S. Tax Obligations
For Canadian companies that desire or require a location in the U.S., there are a number of options for corporate structures that can be used. At a high level, some common options include: