The choice of state and legal form for incorporating your U.S. entity is important from a tax, legal and financial point of view.

Incorporating an entity in the United States is relatively simple and inexpensive and several forms are possible:

C Corporation (C Corp)

Its characteristics are similar to those of a corporation in Canada. The shareholders’ liability is limited.

S Corporation (S Corp)

Only individuals who are U.S. tax residents can be shareholders of this type of entity. As a result, this type of entity is generally not accessible to Canadians. From a legal perspective, it is a C Corp, however, it is a transparent entity from a tax perspective: it is not the corporation that is taxed on the income, but rather the shareholders.

Partnerships

In these transparent entities, it is the shareholders who are directly taxed on the entity’s profits. Partnerships can be:

  • General partnerships, or GP;
  • Limited partnerships, or LP;
  • Limited liability partnership, or LLP or Limited liability limited partnership or LLLP.

LLC (Limited Liability Company)

This legal form provides legal protection similar to the C Corp and is widely used by Americans. In general, however, Canadians should avoid direct investments in this form of entity, as it can result in double taxation.

This problem arises because tax authorities in the two countries do not view an LLC in the same way. The Canadian tax authorities treat it as a corporation, while the U.S. tax authorities treat it as a transparent entity, meaning that it is the shareholders who are directly taxed on the entity’s income.

In which state should you incorporate?

No, Delaware is not a tax haven. If more than one million companies have chosen to incorporate there, it is simply because Delaware offers a very favourable environment because of the following:

  • quick and easy incorporation process;
  • low incorporation cost and lower annual fees;
  • business-friendly legislation that is regularly updated;
  • presence of courts dedicated to commercial matters;
  • confidentiality regarding the identity and contact information of shareholders and directors;
  • no income tax returns to be filed for the state unless there is activity;
  • no obligation to maintain a head office in the state;
  • no minimum investment required.

That said, the choice of state to incorporate your entity depends on whether you do business in a single state or multiple states.

In a single state

It is preferable to choose the state where you do business, because it is simpler to manage and easier to settle possible disputes with your business partners.

In several states

It is preferable to consider a state where you carry out your main activities or Delaware.

Remember that each state has its own tax system with its own rules, obligations and tax credits. In fact, many states have different types of taxation: income tax, minimum tax based on sales, etc.

Note that you must file a tax return in each state where you have a sufficient physical or economic connection, which is called nexus.

According to the Tax Foundation’s 2020 State Corporate Income Tax Rates and Brackets, 44 states have corporate income taxes and the rates range from 2.5% to 12%. What about Delaware? Its rate is above the average, at 8.7%.

If you are considering incorporating an entity in the U.S., it’s best to consult with lawyers and tax professionals who specialize in cross-border matters.

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The second budget of François Legault’s government is firmly focused on the environment and infrastructure.

The new electrification and climate change framework policy, with a budget envelope of $6.2B between now and 2026, and the $15B increase in the 2020-2030 Quebec Infrastructure Plan are two key measures in this budget.

In addition to major announcements in education (an additional $1.5B over the next five years), culture (an additional $400M over six years), regional economic development (an additional $900M and $650M earmarked for natural resource development between now and 2025), businesses will benefit from key measures to stimulate their development. Here are a few of these measures.

Tax credit for investments and innovation (C3i)

Businesses from all sectors will be able to claim a tax credit equal to 10%, 15% or 20% of eligible investments, depending on their region, for manufacturing and processing equipment, computer hardware and management software. This tax measure represents $526M in financial support over five years.

Incentive deduction for the commercialization of innovations (IDCI)

An amount of $334M from now to 2025 has been granted to encourage businesses in all economic sectors to commercialize Quebec innovations in the province. This tax measure will enable Quebec businesses that develop and market Quebec intellectual property in the province to benefit from a competitive tax rate of 2% on this specific income.

Synergy capital tax credit

Businesses that invest in an eligible SME will be able to claim a non-refundable tax credit equivalent to 30% of the value of their investment in eligible shares.

Eligible investments will be limited to $750 000 per investor per year, for a maximum tax credit of $225 000.

Action plan for foreign investment and export growth

The budget also provides of $110M in financing in the coming years to stimulate the growth of businesses by helping them reach new heights. The Ministère de l’Économie et de l’Innovation will be announcing an action plan in this regard in the near future.

Moreover, an additional amount of $213M is announced to encourage labour market integration and retention. Among others, this should serve to better integrate immigrants in the next five years ($160M), promote in-house training for workers ($29M) and facilitate the integration of people with severely limited capacity for employment ($13.7M). The budget provides $10M to attract qualified workers. Given the current workforce shortage, more extensive assistance to support employers in their international recruiting would have been preferable.

No tax reduction for individuals and balanced budget anticipated in 2020

Of note is the lack of specific measures to counter the negative effects of the rail blockade and COVID-19. According to this budget, the budget will be balanced in 2021, after payment into the Generations Fund.

As well, no tax cuts have been announced for individuals and the tax burden on businesses remains high, except for those that develop and commercialize products derived from intellectual property that will benefit from a reduction in income tax on these innovations. For more information on the tax measures announced in the 2020-2021 budget, read our tax bulletin below.

You can also read our press release here.

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Canadian taxpayers who spend time in the United States may be subject to taxes in this country, based on certain conditions and exemptions prescribed by the law.

Here are the answers to the FAQs posed to our American tax experts on this topic.

Q: If I spend more than 130 days per year in the U.S., am I subject to U.S. taxes?

A: A non-resident of the U.S. is subject to U.S. taxes if he passes the substantial presence test, that is, if he is present in the U.S. for more than 183 days over a three-year period. For the purposes of the application of this test, the number of days in the U.S. is calculated as follows:

Number of days in the U.S.
in the current year X 1

+

Number of days in the U.S.
in the previous year X 1/3

+

Number of days in the U.S.
in the second preceding year X 1/6

Example for 2019:

2019: 1 X 130 days                     =                     130 days

2018: 1/3 X 130 days                  =                       43 days

2017: 1/6 X 130 days                  =                       22 days

Total:                                                                195 days

 

Q: If the result of this calculation is greater than 183 days and I pass the substantial presence test, do I have to file a U.S. tax return as a U.S. resident and be taxed in the U.S. on my world income?

A: There is an exception (closer connection exception) that allows a taxpayer to be considered a non-resident of the U.S.. To take advantage of the closer connection exception, the taxpayer must meet the following conditions:

  • During the current year, the taxpayer was present in the U.S. for less than 183 days;
  • During the current year, the taxpayer’s tax home is not in the U.S.;
  • During the current year, the taxpayer maintained closer economic and social ties with the country of his tax domicile than with the U.S.

If the taxpayer meets these criteria, he must complete and send the IRS Form 8840 (Closer Connection Exception Statement for Aliens) to the Internal Revenue Service before June 15 of the following year.

Q: If during the current year I spend more than 183 days in the U.S., and I do not qualify for the closer connection exception, am I subject to U.S. taxes?

A: Yes. Under U.S. domestic law, you will qualify as a U.S. resident for tax purposes and will therefore be subject to U.S. taxes on your world income. Fortunately, Canada and the U.S. signed a tax treaty that overrides this U.S. law. Under Section IV of this treaty, you may be considered a Canadian resident for tax purposes. In such a case, you will simply have to file a $0 U.S. tax return (1040NR, U.S. Nonresident Alien Income Tax) along with a form that will allow you to avail yourself of the provisions of this tax treaty. The deadline to file these forms is June 15 of the year following the calendar year to which the filing obligation applies.

Please note that this exemption from U.S. tax liability under the tax treaty does not relieve you of the obligation to file U.S. information forms for assets you hold outside the United States. Failure to comply with this requirement could subject you to substantial penalties.

Do you have questions relating to U.S. tax issues? Our tax experts can help you.

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In December 2018, the Canadian Accounting Standards Board (AcSB) amended Section 3856, Financial Instruments, to review, in particular, requirements regarding financial assets originated or acquired and financial liabilities issued or assumed in a related party transaction (hereafter, “related party financial assets and liabilities”).

The amendments apply to fiscal years beginning on or after January 1, 2021 (in April 2020, the AcSB deferred the application date from 2020 to 2021). They apply to entities that prepare their financial statements in accordance with Accounting Standards for Private Enterprises (ASPE) or Accounting Standards for Not-for-Profit Organizations (ASNFPO).

This issue of Flash provides a summary of the main amendments. However, it does not deal with all aspects of the accounting for related party financial assets and liabilities and the related requirements. Readers are encouraged to refer to Section 3856 before making any decisions.

Download the document below.