If your corporation has carried on business in the U.S. you may be required to file a U.S. tax return for that business activity.
The corporation may also have additional U.S. reporting requirements, for example, with respect to intercompany transactions and foreign accounts. Failure to meet these requirements can result in costly penalties.
You may be considered to be carrying on business in the U.S. if:
- You sell or ship goods to U.S. customers and provide an exemption from U.S. tax withholding to your customers.
- You provide services to U.S. customers and provide a tax exemption.
- Your employees regularly travel to the U.S. to market or sell your goods or services.
- You or your employees provide the company’s services in the U.S.
- Your corporation opens an office or place of business in the U.S.
The Canada – U.S. Tax Treaty
The Canada – U.S. Tax Treaty (also known as an income tax convention) provides rules agreed to by the two countries to govern items that could be taxed by both. Under the Canada – U.S. Tax Treaty, your income is only taxable in the U.S. if you carried on business through a ”U.S. permanent establishment” as defined in the treaty. A permanent establishment includes:
- A fixed place of business in the U.S. – an office, workshop, repair site, manufacturing plant
- An individual who has the authority to enter into contracts for the company and regularly exercises that authority, signing the contracts while in the U.S.
- Significant time spent in the U.S.—an individual manager or employee spends 183 days or more in the U.S. and his or her services provide more than 50 per cent of the revenue of the corporation during that time
- Multiple employees providing services to U.S. customers in the U.S. for a total of 183 days or more in the year on one project or a group of connected projects; a group of employees does not need to meet the revenue test
U.S. Tax Return Filing Requirements for Corporations
Corporations with a permanent establishment are subject to U.S. tax on the net income of the permanent establishment and must file Form 1120-F, U.S. Income Tax Return of a Foreign Corporation.
Corporations with no permanent establishment may not be required to report net income to the U.S. but may need to file the Form 1120-F return to provide proof of the exemption from reporting under the Treaty on Form 8833, Treaty-Based Return Position Disclosure.
As Canadian corporations are taxable on their worldwide income they must include the net income earned in the U.S. in their Canadian tax returns. In most cases however, foreign tax credits can be claimed for the amount of tax paid to the U.S.
Tax Filing Due Dates
- Corporations with a permanent establishment: on the 15th day of the 4th month following the company’s year end.
- Corporations without a permanent establishment: on the 15th day of the 6th month following the company’s year end.
In certain cases, these filing dates may be extended by filing an extension request.
Make Sure You Get It Right
With many years of experience in both Canadian and U.S. tax return preparation, we can ensure you avoid penalties and minimize your tax liability. Our U.S. tax preparation services for corporations and their owners are included in all our service packages.