Canadians doing business in the U.S.
With the economy in Alberta the way it is, it is no surprise that oilfield workers are searching for business opportunities south of the border. But they and any other Canadians seeking to establish their business in the U.S. may not realize that there can be a lot of red tape to deal with. Proper planning is key before entering into this type of venture.
First, consider how you are going to get yourself and/or your employees across the border. An Immigration lawyer can help to ensure the appropriate visas are obtained to avoid hassles when you arrive at U.S. Customs.
You must also set up an appropriate business structure. Your tax advisor and immigration lawyer should work together on the business structure, because what works for tax purposes may not work for immigration purposes. If you are not being hired as an employee, consider one of the many alternative structures available for doing business in the U.S.: a sole proprietorship, a partnership, an existing Canadian company, setting up a U.S. company, or some combination of those.
There are pros and cons to each type of structure and you should consider liability protection, state tax laws, and the Canada-U.S. Income Tax Treaty (discussed below). While a sole proprietorship may not provide liability protection, it is less costly to maintain. Consider the type of Insurance you carry and whether it covers you in the United States. A corporation may provide liability protection but it will cost more to set up and maintain. There are various ways to set up your corporate structure to give you the best tax and immigration advantage, but each situation will be different.
One word of caution is that the U.S. has multiple types of corporations and partnerships, such as C corporations, S corporations, LLCs, LLPs, LLLPs, etc. Most of these structures can have negative tax consequences for Canadians who own them directly. Careful planning is necessary to ensure you do not end up with a tax structure that causes excessive tax. Normally, you should avoid owning directly any of those structures mentioned above, other than a C Corporation.
Another caution relates to how you use your Canadian corporation if you have one. You may be able to work in the U.S. directly through your Canadian corporation but you will want to check with your Canadian tax advisor to ensure this does not affect your ability to use the Canadian capital gains exemption in the future. You may also use a Canadian corporation to own the shares of a U.S. C Corporation. The same caution applies regarding your Canadian corporation and the capital gains exemption. If that is a concern, you can set up a Canadian sister corporation either to work directly in the U.S. or to hold the shares of the U.S. C corporation.
Sometimes, people want to operate using a U.S. corporation to give the appearance to customers that they are doing business with a U.S. entity. In addition, the U.S. federal corporate tax rate is only 21 per cent plus applicable state tax. In Alberta there may be a tax deferral advantage by using a U.S. C corporation instead of operating out of a Canadian corporation that is currently subject to a tax rate of 26.5 per cent on non-Canadian sourced income. The state in which the corporation operates affects this analysis. For example, Wyoming has no state tax while California’s corporate tax rate is 8.84 per cent. Every situation is different and there is no one structure that works best. All factors must be considered.
Keep in mind that every state you enter will have different rules, and there can be steep penalties for failing to comply with state laws. Ask yourself four questions when entering a new state:
- Do you have to register to do business in the state?
- Will you need a registered agent in the state?
- Will you be subject to U.S. state sales and use taxes?
- Will you be subject to state income tax?
If you are planning to hire employees, state payroll issues will be relevant. Again, each state has different laws regarding unemployment tax, WCB and withholding tax. We recommend you use a payroll service familiar with state laws to assist in this area. You and your employees may also be required to file U.S. personal income tax returns for both U.S. federal and state tax.
As mentioned above, there is an income tax treaty between Canada and the United States. The treaty can help mitigate potential double taxation under the right structure. However, some states do not follow the treaty. Further, in order to take advantage of the treaty provisions, you still must file a U.S. tax return to inform the U.S. government that you are using a particular treaty provision.
One of the common uses of the treaty is the Permanent Establishment Rule. If your Canadian corporation does not have a permanent establishment in the U.S., it is not subject to U.S. federal tax. A permanent establishment can be as simple as a fixed place of business (e.g. an office in the U.S.) or it could be based on the amount of time you spend in the U.S. For example, if you or any of your employees spend 183 days or more in the U.S. in any 12-month period and your company earns more than 50 per cent of its revenue in the U.S., you will be deemed to have created a permanent establishment in the U.S. While creating a permanent establishment means you must pay U.S. tax on your income, there is a foreign tax credit that may be available to offset any tax you would have to pay to Canada on that income (if you are operating directly out of your Canadian corporation.)
When doing business in the U.S., you or your company will likely need a tax identification number. Customers often require the number before they pay you so that they can comply with federal reporting regulations. For individuals, this number is called an Individual Taxpayer Identification Number (ITIN) or a U.S. Social Security Number (SSN) (for those who qualify). For employers/corporations, it is called an Employer Identification Number (EIN).
There are many factors to consider when operating in the U.S. Before entering the country, you should ensure you have in place a team of advisors consisting of an immigration lawyer, Canadian and U.S. tax advisors, Canadian and U.S. corporate lawyers, registered agents and a payroll service, if needed.
Your Baker Tilly tax advisors are here to help you. We can work with you on determining the appropriate company structure, obtaining tax identification numbers and filing the U.S. and Canadian tax returns. Thanks to our affiliation with Baker Tilly in the U.S., we can help you seek advice in particular states as well. We can also put you in contact with other advisors to help make the process easier.
Meet the Author
Shelley Smith
Information is current to November 20, 2019. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.