u.s. - canada cross border tax

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U.S. Canada Cross Border Tax

KYLE LODDER CPALodder CPA PLLCemail kyle@loddercpa.com | phone (360) 599-4340mailing address PO BOX 373, Lynden, WA 98264loddercpa.com

#Discussion Topics

Individual TaxBusiness TaxFederal Tax / Permanent EstablishmentState TaxSales TaxEntity Structuring


#Individual Tax

U.S. citizens and residents Worldwide taxation

Nonresidents taxed only on U.S. income


#U.S. Tax Residency

Green card holders (permanent resident status)Substantial presence testMore than 30 days present in the United States in the current year, and:183 days or more during the 3-year period that includes the current year and the 2 previous years, counting:All the days in the current year1/3 of the days in the prior year1/6 of the days from two years ago


#U.S. Residency Exceptions

Closer Connection Exception for individuals spending less than 183 days in the current year in the United States, who have a closer connection to another country. Individual must file IRS Form 8840Canada U.S. Treaty tie breaker rules for individuals treated as residents of both countries.When relying on the treaty, disclosure is required. Individual must file IRS Form 8833 with nonresident return.When relying on the treaty, individual is required to file additional disclosure forms that would be required of a U.S. resident (reporting foreign assets).


#Business TaxWhat does it take to trigger U.S. federal income tax?

A foreign corporation engaged in a trade or business in the United States shall be taxable on income which is effectively connected with the conduct of a trade or business within the United StatesLODDER CPA


Canada U.S. Income Tax Treaty Business profits

Fortunately, the Canada U.S. tax treaty provides certain relief. Under the treaty, business profits of a Canadian corporation are only taxable in the United States if they are attributable to a Permanent Establishment in the United States.LODDER CPA


Permanent establishmentA place of managementA branchAn officeA factoryA workshopA mine, an oil or gas well, or quarryAn agent who has and habitually exercises an authority to conclude contractsFor service providers, generally if individuals spend 183 days or more in the U.S. A warehouse does NOT constitute a permanent establishmentLODDER CPA


CanadaU.S. Income Tax Treaty Business profitsIf a Canadian business has business profits in the United States, but no permanent establishment, it must file a federal income tax return to claim the benefits provided by the U.S.Canada tax treaty. If no treaty claim is filed, federal income tax can potentially be imposed on the gross income earned in the United States without the benefit of any business deductions.



Taxation of Canadian Branch vs. US. SubsidiaryCanadian branch taxed on earnings effectively connected to a U.S. trade or business at graduated rates. Taxed on investment income at 30% unless reduced by treaty.U.S. corporation is subject to worldwide taxation. Generally, when a U.S. corporation is set up as a subsidiary of a Canadian corporation, the U.S. corporations activities are confined to the United States With some exceptions, the federal income tax paid by a Canadian corporation doing business in the United States is very comparable to a U.S. corporation with U.S.-only activities




Taxation of Canadian Branch vs. US. SubsidiaryCanadian branch has a $500,000 exemption from branch profits tax in U.S. under treaty.Non-tax issues may warrant the use of a U.S. subsidiary including:U.S. business partnerU.S. bankingLiability protectionTransfer pricingImmigration planning for employees




Corporate Federal Income Tax RatesFor Taxable Income Up to $10MM

34%39%34%25%15%LODDER CPA


State Tax ConsiderationsU.S. federal corporate income tax may not be the first or most important tax issue for Canadian businesses operating in the United StatesState income tax and state sales tax issues may deserve at least as much, if not more attention than federal income tax issuesLODDER CPA


Corporate state income taxStateRateArizona6.5% $50 min.California8.84% $800 min.Colorado4.63%Idaho7.4% $20 min. Hawaii4.4 6.4%Montana6.75%Nevada0%Oregon6.6 7.6%Texas0% Franchise tax on Texas earnings & capitalWashingtonB&O Gross revenue tax 0.5 3.3%


#State Tax ConsiderationsStates generally dont follow federal tax laws or treaties13,000+ state and local jurisdictions that impose taxes on businessesNEXUS minimum presence in a state subjecting company to tax in that given stateNEXUS standards differ by state and by local jurisdictionDiffering NEXUS standards for income tax and sales taxLODDER CPA


State nexusMay be created by:WarehouseOther physical place of businessEmployeesIndependent RepsActivities of business partnersEconomic nexus



Sales Tax ConsiderationsNo federal or national sales taxSales tax imposed by 45 states + DCSales tax imposed by local governmentsGENERALLY, sales tax must be collected if a business has sales tax NEXUS, and retail sales of:Tangible propertyDownloadable softwareCertain servicesWholesalers generally not subject to sales tax. May need to register with states in order to obtain a resellers certificate or permit.LODDER CPA


Sales Tax ConsiderationsWhen a business has sales tax NEXUS, it must collect and remit sales tax to the appropriate state/local tax jurisdiction.Buyer bears the responsibility of paying the sales tax, but it is the seller who is responsible for collection and remittance.State/local government will require seller to pay tax on behalf of buyer if they did not collect itU.S. buyers are generally accustomed to paying sales tax on retail purchasesLODDER CPA


State Tax ConsiderationsCollection/remittance of sales tax can be a large administrative burdenConsider state income tax, franchise tax, gross revenue tax, payroll tax, property tax, etc.Many states impose a minimum tax for the privilege of doing business in that state even if there is a loss from business operationsLODDER CPA


State Tax ConsiderationsState nexus is a much lower standard than permanent establishment. It is VERY common for Canadian businesses to not have a permanent establishment but to have state nexus.In these cases, a protective return is filed for federal tax purposes.Most states base their tax calculations from the federal tax return. A hypothetical federal return must be prepared, not to be filed, but to be used for state tax return preparation purposes.LODDER CPA

#Economic nexusEconomic NEXUS - Earning profits from a state while having no physical presence in that state.Standards differ by jurisdictionCalifornia standard: 25% of worldwide income or $500,000Public Law 86-272: State income tax exception if business activity is within solicitation standards. Only applies to the sale of tangible personal property. Not applicable to foreign entities.



Entity structuringState nexus rules must be considered in entity structuringWhen there is a Canadian parent company and a U.S. subsidiary, the Canadian parent may inadvertently attract state nexus in addition to the U.S. sub. Example:Parent has U.S. reps soliciting sales U.S. sub has reps providing servicesBoth entities may have state nexusLODDER CPA

#Entity structuringC corporationS corporation typically not available to Canadians, although widely used in the United States.Limited Liability Companies (LLCs) typically not used in a U.S. Canada cross border setting as double taxation can result. A U.S. LLC is not the same as a Canadian corporation. LLCs are commonly used in the United States, but usually not the right choice for Canadians.Various partnership forms (LP, LLP, LLLP) used for Canadian investment in U.S. real estate.LODDER CPA


Example - Internet sales only

CanadaU.S.No physical presence in the U.S.Process orders by internet, phone, or e-mail from CanadaNo salespeople or other representatives enter the U.S.Product shipped via courier (UPS, FedEx, etc.)All services performed in CanadaNo U.S. federal income tax, may be required to file treaty-based return, may have economic nexus



Example - Service Providers

CanadaU.S.No permanent establishment in the U.S.Providing services in U.S.Generally no federal taxation, if

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