Tax Impacts and Obligations of Canadian Businesses Operating in the US

These days, it’s easy for a business to expand into international markets. For Canadians, one of the biggest–and easiest–foreign markets to work in is the US. It’s made easy because the cultures and languages are alike, there’s a close proximity, and the laws are similar enough that businesses feel comfortable operating between the two countries.

That said, there are still complexities to Canadian businesses operating in the US. The US has numerous different sales tax jurisdictions, and the rules aren’t always easy to understand, let alone follow. Here are some of the implications and obligations you’ll face if you operate in the US.

Federal US taxation

Generally speaking, if your business makes money in the US you could end up owing US taxes or at least have to meet filing requirements. That’s because under US tax law, a non-resident–including individuals and businesses–are subject to US federal tax if their income is connected with the conduct of a trade or business within the US.

Basically, if you carry out a trade or business in the US at any time in a year, you could be required to pay US tax in that taxation year.

It’s not that simple, however, because Canada and the US have a tax treaty, which gives Canadian businesses some relief from having to pay US federal tax. Canadian residents only pay US taxes on their business in the US if their business is carried out through a permanent establishment in the US.

So, if you’re a business in Canada and you have no offices, branches, factories, workshops, mines, buildings, construction sites or rigs in the US, and no person in the US regularly acting on your behalf to carry out contracts, you will still have to file in the US but you won’t have to pay taxes in the US.

If you have a location in the US or a person who regularly acts on your behalf in the US, then you’ll likely be required to pay taxes in the US. If a Canadian-controlled private corporation conducts business in the US through a permanent establishment, any income made through that establishment won’t qualify for the small business deduction.

State US taxation

The US states aren’t bound to the federal tax treaty, so depending on the state you have business in, you may still pay state tax even if you’re eligible under the Canada – US tax treaty. Some US states impose income tax on all companies that conduct business in their state, even if there is no permanent establishment in that state.

Sales taxes

The US has many different sales tax jurisdictions, which can vary between states, counties, and even municipalities. There are also different industry specific taxes that vary. Even if you don’t have a permanent establishment in the US, it’s wise to ensure you or your financial advisor understands your obligations when you conduct business in the US.

Other important tax factors

Your corporate structure may play a role in how you’re taxed. As your business grows and expands, and as your company’s needs change, your corporate structure could also change. This could trigger different tax obligations and filing requirements.

Final thoughts

If you conduct business in the US, you could be responsible for a variety of different taxes. Even if you aren’t required to pay federal tax because you have no permanent establishment in the US, you may still have to pay state taxes, as well as a variety of sales taxes.

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