Americans Doing Business in Canada

Allan Madan CPA, CA for Madan Chartered Accountant writes: It has become an increasing trend to see Americans moving north of the 49th parallel. In a recent study Canada has been the home to over 45,000 American immigrants from 2006-2011, an increase of over 31,000 in the previous six year period. With this steady rise it is important for Americans doing business in Canada to understand Canadian taxes and how they might apply to individuals and corporations moving north.

Individual

Canadian Taxes Filing date

If you are a US citizen working in Canada you are required to file a Canadian tax return.  Unlike in the US state and federal taxes are combined into one form the T1 general.  In order to fill out your T1 you will have to obtain a T4 slip Statement of Canadian employment earnings, similar to a W2. This will be delivered by your employer before February 28 of the tax year.

Deemed Resident vs. Non Resident

In Canada you may have to pay taxes even if you are a US citizen. If you are deemed to be a resident by the CRA, then you are required to pay tax on your worldwide income (US and Canadian). To be deemed a Canadian resident, you:

·         Must have significant ties to Canada (permanent home, spouse or children have moved to Canada): or

·         Have resided in Canada for 183 days or more during a calendar year

If you don’t fall under theses two criteria then you are considered a non-resident and are not liable for taxes on only employment income in Canada.

Foreign Tax Credit

In order to prevent its citizens from being double taxed the US allows for any taxes paid to Canada to be deducted from your US taxes payable.  Without the US Foreign tax credit, many American citizens would not conduct their business in Canada

US Business

Definition of US Company doing business in Canada

According to Canada’s tax act in order to qualify as an American company conducting business in Canada you must:

1.       Produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs anything in Canada

2.       Solicits orders or offers anything for sale their through an agent or servant, whether the contract or transaction is completed inside or outside of Canada

3.       Disposes of certain resources properties or Canadian real estate

However Canadian law has interpreted the act providing a broader definition of Americans working in Canada. Even if you are a US based company and make a sale in Canada you are liable for tax.

An example could be if your company sells software to companies and is based in the United States. Say that company also occasionally sells to Canadian corporations all done over the phone. If they have $20 million in sales and $5 million is attributable to Canadian sales they will have to pay tax on this amount. Even if they don’t hold operations in Canada the government of Canada deems this to be Canadian business income and such liable to Canadian taxes. There is some relief in the form of the Canadian US tax treaty.

Canada US Tax Treaty

The US Canada tax treaty was established to prevent double taxation. In the previous example the $5 million that was taxed in Canada would also be taxed in America as worldwide income. This creates a problem as the $5 million is being taxed twice.

To solve the problem permanent establishment must be determined. In Canada PE includes:

-          Fixed place of business such as office, factory or branch

-          A construction or installation project lasting more than 12 months

If your company is considered to have a permanent establishment in Canada then it must pay Canadian taxes on income earned in Canada. If it is considered a non-permanent establishment such as in the example above then it would not be required to pay Canadian income taxes. However it must fill out a Treaty based Exemption form to inform CRA that it is in fact a non-resident corporation. Without the treaty non-permanent establishments like the software company would have to pay Canadian income tax on money earned in Canada.

Options of starting a corporation in Canada

Whether you own a C or S corporation in the states it will be taxed in Canada as a corporation. In Canada, corporations and Individuals are seen as separate entities and taxed accordingly. A corporation will be required to fill out a T2 corporation income tax return and an individual will be required to fill out a T1 personal income tax return.

S corporations which choose to be considered a partnership will also be charged a corporate tax rate. In Canada you cannot pass corporation profits down to shareholders through dividends in order to avoid corporate tax. S-corporations will have to start a subsidiary in Canada and pay income tax on its Canadian operations.

Income tax paid in Canada will be credited to the United States. You will be able to claim a type of foreign tax credit which will give you most if not all tax paid in Canada back.

Whether you are an American company or US individual it is important to know about what taxes may be awaiting you in Canada. If you would like to know more about other taxes please check out our article on Americans Working in Canada and Taxes @ Madan Chartered Accountant.