During the last few years, Uncle Sam has been talking to his cousins in Ottawa. These discussions resulted in amendments to the Canada-U.S. Tax Treaty (the Treaty) and new initiatives to share tax filing information on both sides of the border. If you travel or do business in the United States, or plan to do so, there are a number of U.S. tax issues about which you should be aware.
U.S. Corporate Income Taxes
If your company does business in the United States, you will be exempt from U.S. federal income tax under the Treaty if there is no "permanent establishment" in the U.S. But Uncle Sam will require you to file a tax return to claim your Treaty exemption if your trade or business is "effectively connected with the conduct of a trade or business in the U.S."
Although there are rules in the Treaty to help determine if you have a "permanent establishment," there is limited statutory guidance for determining if your trade or business is "effectively connected with the conduct of a trade or business in the U.S." The determination will be based on the facts and circumstances of your situation. Generally, it takes only minimal U.S. activity to meet this threshold.
If you have, or intend to have, a "permanent establishment" in the United States, proper tax planning will be needed to minimize the overall tax burden arising from Canadian and U.S. income tax on the business activities in the U.S. Each U.S. state has its own rules concerning corporate income tax. These rules vary significantly and most states do not follow the Treaty. There are even some U.S. cities and localities that impose their own corporate income taxes.
Payroll Taxes
Uncle Sam is interested in more than just corporate income taxes. If an employee of your Canadian corporation takes a business trip to the United States, the U.S. workdays will, in most cases, create a U.S. federal reporting requirement even if the employee would be exempt from U.S. federal tax under the Treaty. There might even be a state reporting requirement. In addition, your company may be obligated to report the U.S. source compensation for the U.S. workdays on a wage reporting slip, and may have to deal with U.S. withholding obligations.
Sales Taxes and Use Taxes
While there are no federal sales taxes or use taxes, each state has some type of sales tax or use tax regime, and the rules vary significantly from state to state. In some states, it takes only a minimal amount of activity to trigger filing obligations. If your company is selling or plans to sell in a U.S. state, you should be aware of the rules applicable in that state. As with corporate income taxes, some U.S. cities also impose their own sales taxes.
Personal Income Taxes
If you are a non-resident of the United States, Uncle Sam will seek to tax you only on your U.S. source income. If you are deemed to be a resident of the U.S., or if you are a U.S. citizen, you will be taxed on your worldwide income. Two tests, the Green Card Test and the Substantial Presence Test, will apply to determine whether you are a U.S. resident.
Green Card Test
If you hold a U.S. Green Card, you are deemed to be a resident of the U.S. and will be required to file a U.S. tax return. Since you would also be a resident of Canada for Canadian tax purposes, the Treaty provides tie-breaker rules to determine where you will pay taxes. If, under these rules, you are deemed to be a resident of Canada and a nonresident of the U.S., Uncle Sam will still require you to file a U.S. tax return.
Substantial Presence Test
The Substantial Presence Test is based on days of presence in the United States during the current and previous two calendar years. It is a rolling average test. For example, to calculate the number of days for 2010, add all the days of presence in the U.S. in 2010 plus 1/3 of the days in 2009 plus 1/6 of the days in 2008. If the calculation results in 183 days or more, you would meet the Substantial Presence Test for 2010. If you spend less than 183 days or more in the U.S. in 2010, you will only have to file a two-page Closer Connection Form. If you spend more than 183 days or more in the U.S. in 2010, a U.S. tax return is required. Again, since you would also be a resident of Canada for Canadian income tax purposes, the tie-breaker rules in the Treaty will apply. If you are deemed to be a resident of Canada and a non-resident of the U.S., Uncle Sam will want you to file a tax return to claim Treaty protection.
As with corporate taxes, each U.S. state has different rules for personal income tax. Those rules can vary significantly, and most states do not follow the Treaty. If you spend time working in a U.S. state, you should review the applicable rules for that state. Some U.S. cities impose their own personal income taxes as well.
As in Canada, penalties can apply for failure to file the appropriate U.S. tax documentation. But with all these different taxes and different rules, it can be difficult to know your obligations.
Contact your Collins Barrow advisor to discuss what, if any, U.S. tax compliance obligations you have and what tax planning is required. Collins Barrow also has access to a full range of U.S.-based tax resources through our affiliation with Baker Tilley International.
Mark Brewster, CMA, is a Tax Manager in the London office of Collins Barrow .
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