Guest Blog – Mark N. Mercer, CPA, Tax Principal, Lumsden McCormick, LLP
Canadian companies seeking to extend their opportunities into US markets face many legal and tax obligations, yet these requirements are not as daunting as one might initially imagine.
A Canadian corporation engaged in US trade or business is taxable in the US on income effectively connected with that trade or business. A Canadian corporation conducting business in the US may also be subject to taxation in one or more US states. A very minimal level of business activity within a state may create a nexus or presence in that state. Once this presence is established, the company is required to conform to that state’s taxation laws and file returns. States are not obligated to honor the terms of international federal tax treaties, consequently a company may be exempt from US federal income tax pursuant to the provisions of a tax treaty, yet subject to tax in one or more states.
If you will be making sales in New York State that are subject to sales tax (sales of tangible personal property) you must register with the Tax Department and obtain a “Certificate of Authority” within 20 days before beginning business in New York State. If sales are to a destination in New York State then a sales tax would need to be collected and periodically remitted to New York State. Sales tax returns would have to be filed either monthly, quarterly or annually depending on the level of sales activity. Most states have similar sales tax nexus rules and it would need to be determined if the state where the final destination of the sale is requires the business to collect that states sales tax.
If you are a Canadian company, and you have customers in the US, odds are those customers are going to request you fill out a W8-BEN form (Certificate of Foreign Status of Beneficial Owner for US Tax Withholding”), since a 30% withholding tax on income might be applicable to payments that US taxpayers make to a foreign person, which includes foreign corporations. However, there are many exemptions from the withholding requirement. When filing out this form the form asks for your US Employer Identification Number (EIN). Therefore it is recommended you apply for a US EIN by using the Internal Revenue Services’ website. Identification numbers usually can be received immediately online. Once you get your US EIN then you can fill out the W8-BEN for your customer and then get full payment.
Along with the tax rules for Canadian companies doing business in the US, many states have stepped up audits, increased penalties and are actively identifying Canadian non-filers. As well, there are a growing number of information sharing agreements among the states and with US Customs and the Internal Revenue Service.
Canadian companies considering doing business in the US will have many other legal and operational considerations in addition to the above tax rules. These other considerations may include deciding whether to incorporate in the US or operate as a branch, and deciding whether there are specific obligations for US product approval and product liability issues.
Lumsden & McCormick, LLP is a leading local tax and accounting firm. Several of the firm’s members specialize in Canadian cross border tax planning, including transfer pricing, export subsidies, multistate tax planning, and repatriation of profits. For more information please contact: Mark N. Mercer, CPA, Tax Principal, Lumsden McCormick, LLP, (716) 856-3300 or http://www.lumsdencpa.com