Annie Poitras

Partner | CPA, M. Fisc. | Tax

Updated on January 25, 2024

Is your business growing in the United States? It’s time to consider the relevance of creating a company in the United States (USA).

As a matter of fact, in addition to taxation, which has become more competitive in the United States since the December 2017 tax reform, other various considerations can considerably influence your decision.

First, your decision depends on your company’s situation, its development stage and your projects. As a general rule, it is important to consider incorporating a U.S. entity when your company has certain activities in the United States. For example:

if you export a lot of products or services to the United States;
if you have a certain physical presence in the United States (representatives, American employees, warehouses, etc.);
if a good proportion of your clients are American.

Each case is unique. For a manufacturing company, it’s usually best to wait until it has made a breakthrough in the U.S. market, while a high-tech company may find it advantageous to quickly set up an entity in the United States.

If you think it makes sense to set up a U.S. entity, you should then consider whether there are more advantages than disadvantages to setting up a U.S. entity. There are various considerations.

Advantages

Tax Advantages

U.S. corporations can take advantage of tax consolidation, a benefit that does not exist in Canada. In summary, a corporation with one or more subsidiaries can file a single tax return for all of its entities. This allows it to offset the losses of some entities against the profits of others, thereby reducing its total tax bill.

Furthermore, it’s currently possible to deduct 100% of the value of capital investments for several types of tangible assets, such as machinery and computer equipment, but not buildings. All sectors of activity can benefit from this measure. However, the capital cost allowance will be reduced to 80% in 2023, and will gradually decrease thereafter until it reaches 20% in 2026, the last year of the measure.

In some cases, where U.S. operations become relatively large in relation to those in Canada, incorporating an entity with operations in the U.S. has the additional benefit of ensuring that Canadian shareholders will continue to be entitled to Canadian capital gains relief on the sale of their shares.

Legal Advantages

Incorporation in the United States ensures shareholders’ limited legal liability with respect to U.S. operations. It can also make it easier to obtain work visas.

Commercial Advantages

This can make you more attractive to U.S. clients, as most of them prefer to purchase their goods and services from a U.S. company.

You should also be aware of restrictive measures such as the Buy America provision which requires, in certain areas such as transportation, that goods sold to government agencies contain a certain percentage of U.S. content.

Financial Advantages

U.S. incorporation facilitates access to capital from U.S. investors. They prefer to acquire an interest in a U.S. company because it makes their lives easier, particularly in terms of taxes. Opening a bank account in the United States is simpler, making it easier to do business with your U.S. partners.

Disadvantages

Financial

Incorporating a U.S. company creates additional administrative costs, particularly for the production of financial statements and tax documents. However, the costs of incorporating a company are low.

Tax

This factor has less weight since the U.S. tax reform of December 2017, which lowered the federal corporate tax rate from 35% to 21%. Adding the tax levied by the states (from 2.5% to 12% depending on the state), the combined U.S. rate is about 25% on average in 2023, considering that state tax is deductible from federal tax.

This is still higher than the combined tax rate of 12.2% (federal and Québec in 2023) for Canadian-controlled private corporations (CCPCs) eligible for the small business deduction (SBD). Without the SBD, the combined rate was 26.5% in 2023, which is comparable to that of the United States.

In addition, the United States is less generous than our governments in terms of tax credits, particularly those for research and development (R&D), which are never refundable at the U.S. federal level. Few U.S. states have R&D credits: they mainly offer tax credits related to job creation and to areas that are being revitalized.

Finally, developing a new market and starting up new activities usually generates high expenses and even losses at the beginning of operations. By keeping the losses related to the American business in your Canadian company, you will be able to deduct them against your other Canadian income and thus increase your financial flexibility.

Do you have tax questions about your business? Contact our experts.

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Do you own or rent real estate in the United States? Are you aware of your tax liabilities? Here are the answers to the FAQs asked to our American tax experts on this topic.

Q: If I rent out real property located in the U.S. (condo/house), do I have to file a U.S. tax return?

A: A non-resident of the U.S. who receives rental income from property located in the U.S. is technically subject to a U.S. withholding tax of 30% on the gross rental income. To avoid this holdback, the taxpayer must make an election to file a U.S. tax return and pay U.S. tax on the net rental income. The net rental income is also taxable in Canada. A foreign tax credit will be granted to avoid double taxation.

Q: If I rent out real property located in Florida for a period of six months or less continuously to the same tenant, do I have to collect the Florida sales tax?

A: Yes, and you must remit it within the required deadlines. The Florida State tax is 6% plus any applicable discretionary sales tax (for example 1% for the Broward, Miami-Dade and Palm Beach counties).

In addition, individual counties in Florida may impose a tax for tourism development in the region, in addition to the 6% state sales tax. Most counties require that the property owner register in order to file and remit the development tax directly to the county.

Q: If I sell real estate located in the U.S., do I have to file a U.S. tax return?

A: Yes you do in order to report the capital gain earned, and, if applicable, to pay U.S. tax on this gain.

Q: Must I also report this capital gain in my Canadian income tax return?

A: Yes, it is also taxable in Canada for a Canadian tax resident. You will get a foreign tax credit for the U.S. tax paid on the capital gain.

Q: I sold real estate in the U.S. and a 10% or 15% U.S. withholding tax was applied to the proceeds of sale. Is this right?

A: The sale of U.S. real estate by a non-resident is subject to a 10% or 15% withholding tax on the gross proceeds of sale under Foreign Investment in Real Property Tax Act rules. The buyer may not be required to deduct the withholding if both of the following conditions are satisfied:

The property is sold for less than $300,000 US; and;
The buyer intends to use the property for personal purposes.

Q: When a US return has to be filed, is it necessary to have an ITIN tax number?

Anyone filing a US tax return must apply for an ITIN (Individual Taxpayer Identification Number). This identification number, which is the equivalent of the social insurance number in Canada, is essential for filing tax returns in the United States. Read this article to find out more.

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

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Mylène
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M. Fisc., B.B.A. Fin.

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Jean-François
Poulin

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Annie Poitras

Partner | CPA, M. Fisc. | Tax

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.