The U.S. is a major trading partner, with many U.S. companies entering Alberta and many Canadian companies providing goods and services south of the border. These companies face unique and often complex tax issues. It is critical to stay in compliance with both the IRS and the CRA as non-compliance with either country’s tax laws can have serious financial repercussions. A proper corporate structure will help you avoid potential double taxation and minimize worldwide tax.
It is important to get advice from someone who is intimately familiar with U.S. federal and state tax laws and understands how they interact with Canadian tax laws. U.S. tax planning for corporations is one of the services we offer our clients in our service packages. This is a complicated area, and it’s easy to get poor advice that has costly consequences.
These are some of the significant cross-border tax issues:
Corporate Structure – LLCs
U.S. Limited Liability Corporations (LLCs) are simple, flexible structures that are very effective for U.S. business activities. For U.S. tax purposes, LLC earnings may flow through to the LLC’s partners or owners, rather than being taxed in the entity.
Your U.S. business partners may suggest an LLC as your business structure. However, Canada does not recognize the flow-through provisions of the LLC so your Canadian corporation could face double taxation on U.S. activities. We can set up a more effective corporate structure for these situations and mitigate the tax if an LLC is required.
Loaning & Repatriating Funds
A loan or transfer of funds from a U.S. corporation to a Canadian subsidiary, or from a Canadian corporation to a U.S. subsidiary, is subject to rules limiting the amount of interest that can be deducted. Both Canada and the IRS impose reporting requirements governing the transfer of funds, and severe penalties may be imposed for non-compliance, especially by the IRS. Dividends to a parent company located in the other country are subject to withholding taxes, Canada’s foreign affiliate tax rules, and new U.S. laws introduced at the end of 2017. It is crucial to understand the applicable laws and get early advice in order to cost-effectively transfer funds.
Carrying On Business in the U.S.
If you have started doing business with U.S. customers, you may be required to file a U.S. corporate tax return and pay U.S. taxes. You may also have additional information reporting requirements that carry penalties for non-compliance.
As a general rule, under the Canada – U.S. Tax Treaty, you are only subject to U.S. tax on the income from a “permanent establishment”—a fixed place of business in the U.S. or a project to which you regularly send employees to the U.S. to conduct business. See U.S. Corporate Tax Return for more details.
If you’re planning to do business in the U.S., advance planning is required to set up a proper tax-effective structure, including determining whether or when you may require a U.S. subsidiary or affiliate.
Transfer pricing—the price charged between related parties in the U.S. and Canada for services and goods—can be subject to scrutiny by the CRA and IRS, although the focus is generally on larger corporations and significant amounts.
To date, Canadian corporations preferred to charge relatively higher prices to U.S. related companies to maximize Canadian income, since Canada’s corporate tax rates were lower than U.S. corporate rates. However, the transfer pricing rules mitigate the transfer of tax between the jurisdictions as they require corporations to adopt an arm’s length principle in dealing with related international corporations. It is important to document the basis for the transfer pricing. The new 2017 US tax rules may also affect the preference for allocation between the countries.
Establishing transfer prices that will be acceptable to the CRA and IRS requires careful planning. Talk to an experienced cross-border accountant early in the process to reduce your risk of being penalized.