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CORPORATE TAX ADVERTORIAL


Thinking of expanding your business to the United States?


DON’T OVERLOOK THE US TAX IMPLICATIONS!


Many Canadian businesses that have been successful in the Canadian market naturally turn to the US to continue the momentum of their growth. However, many do not realise that extending the activities of their Canadian business to the US can come with a burden of potential tax exposures. If companies are to focus on building the business rather than defending against tax assessments and steep penalties, tax planning and structuring are essential, says Canadian international tax specialist Trowbridge Professional Corporation.


US trade or business According to the US Internal Revenue Service (IRS), a non-US entity becomes subject to US federal corporate income tax when it earns income that is effectively connected to a US trade or business. The threshold for this level of activity (and the corresponding US tax filing requirement) is not well defined in the Internal Revenue Code or the corresponding regulations. Rather, the determination is based on the facts and circumstances of each situation, relying upon case law and other rulings where a common understanding of what activities constitute a trade or business have been developed over time. A US trade or business stems from considerable, continuous and regular activity within the US.


Treaty protection While the Canadian company may need to file a US corporate tax return, the extent of the taxation depends on whether or not the activities being conducted in the US fall within those protected by the US-Canada Tax Treaty. If that’s the case, the filing requirement is not eliminated, but it is certainly simplified and far more limited in that the US corporate tax return is used simply as a means to disclose the Treaty position being relied upon and the revenues attributed to the US.


Choosing not to file Penalties associated with the failure to file the return to claim the Treaty position are as follows: 1. The IRS may assess a $10,000 penalty for each Treaty position that was not disclosed on a timely filed return.


2. The IRS may deny all deductions


associated with the revenue earned, resulting in the US federal corporate tax rate being applied against revenue as opposed to the net taxable income.


3. The statute of limitations never starts running. Thus, the IRS would have an unlimited look-back period to assess tax, penalties, and interest, if any applies.


All of these risks and penalties can be mitigated with the simple timely filing of a US ‘protective’ tax return. The cost of engaging a professional services firm is insignificant when compared with the benefits associated with the protection from the Treaty positions being reported to the IRS on an annual basis.


Permanent establishment The US-Canada Tax Treaty protects activities from taxation in the US to the extent they do not rise to the level of a permanent establishment. A permanent establishment can result from a fixed place of business in the US, a dependent agent habitually concluding contracts in the US, or the performance of services exceeding 183 days in the US. If a Canadian company’s activities are deemed


to be those of a ‘permanent establishment’ (also referred to as a ‘branch’), it will result in US federal corporate income tax being assessed on the business profits attributed to the activities of the permanent establishment. In this circumstance, the Canadian company would again file a US federal corporate income tax return but it would no longer fall within the limited reporting on a ‘protective return’ described above. Rather, the US corporate income tax return would be completed in its entirety, including the reporting of the revenues, cost of


goods sold, and deductions apportioned to the US business activities in addition to a special tax on branch profits, if applicable. While an explanation of these calculations


is beyond the scope of this article, suffice it to say that the IRS would expect its share of the business profits attributable to the business that has been established in the US.


State corporate taxes The Canadian company shouldn’t neglect to recognise that there are also 50 states eager to sink their teeth into their ‘fair share’ of the pie. While 47 of those states administer some sort of corporate tax regime, a startling revelation to most new US corporate taxpayers is that not one of them follows the IRS’s method of determining a trade or business or a permanent establishment. Rather, the states use a determination of ‘nexus’ as a benchmark for determining whether the state corporate tax revenue department is permitted to assess tax on an out-of-state taxpayer. Further consulting and planning must be held around the implication of state corporate taxes. Thoughtful consideration in advance can save


time, effort and money in the long term, not to mention the stress avoided by not getting caught on the wrong side of the rules of the intricate web of the US federal and state corporate tax system.


For more information, please contact: Lionel Chen, Director of US Corporate Tax T: 416-214-7833, extension 148 E: lionel.chen@trowbridge.ca


Original article provided by Amy Shumate, CPA CA, CPA (Illinois), MSc Tax, MBA.


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