Do you own U.S. property or shares? Even if you’re not a U.S. citizen, your estate may be subject to tax.

You may be subject to U.S. estate tax if the market value of the U.S. property owned is greater than US$60,000. Your estate will then have to file an estate tax return in the nine months following the date of death, even if no tax is payable.

Property most often subject to estate tax includes land and buildings, U.S. securities (shares, bonds, ETF, etc.), tangible property located permanently in the U.S. (vehicles, boats, works of art, etc.), safety deposit box contents but not the funds in a personal U.S. bank account.

Estate taxes are calculated on the market value of the property using progressive rates ranging from 18% to 40%.

Calculating your tax credit

However, under the Canada-United States tax treaty, you are entitled to a credit in calculating the estate taxes. The credit is based on the proportion of property in the U.S. at the time of death to worldwide property.

As a result of this credit, generally, no estate tax is payable if the value of the worldwide estate is below the applicable exemption threshold, which is US$11.58M in 2020.

Your estate may also qualify for a marital credit if the U.S. assets are bequeathed to the person to whom you are legally married. Note that the Canadian capital gains tax can be reduced by deducting U.S. estate taxes.

Planning your estate

Legislation provides that in 2026, the estate tax exemption threshold will revert to the 2017 level of $5.49M. This exemption is a highly politicized issue and in our firm, we consider it more prudent to plan on the basis of a US$5.49M exemption.

In fact, it is essential to properly plan for what will happen at the time of your death, particularly in order to pay as little estate tax as possible and facilitate the transfer of ownership to your heirs.

How you hold your assets is especially important. There are a number of strategies to avoid U.S. estate tax, such as transferring the property to a Canadian personal trust or corporation and dividing the ownership of an asset.

It is recommended that you seek advice from an international tax specialist.

Next article

In the United States, each state has its own tax system, with specific rules, obligations and tax credits.

Canadian businesses exporting to the U.S. may have some state tax obligations in those states where they do business. The criteria vary by state.

These obligations are in addition to their U.S. federal tax and commodity tax obligations.

Additionally, many states have a variety of tax levying methods which could be based on income tax, gross receipts or net assets in the state, minimum gross receipts, etc.

According to the Tax Foundation’s 2019 tax rates, 44 states impose a corporate tax, with rates ranging from 2.5% to 12%. Four states (Nevada, Ohio, Texas and Washington) impose a gross receipts tax instead of corporate income taxes. The combined rate of the state corporate tax and U.S. federal tax (21%) is an average of about 25%, considering that state tax is deductible from federal tax.

Do you have nexus?

Nexus means you have a taxable presence in each state where you do business because you have a sufficient connection with the state.

Each state has its own definition of nexus, as a result, the types of activities that create a taxable presence vary from state to state. Generally, the following activities create nexus:

  • Having an office or a business establishment in the state;
  • Owning property in a state (e.g. consignment inventory);
  • Providing installation services in a state;
  • Having employees in a state who solicit the sale of services;
  • Delivering products in a state using your own trucks.

In some states, an economic presence may be sufficient to create nexus. The volume of sales in a state (in dollars and as a percentage of total sales) determines the level of economic presence that triggers nexus.

Note that the criteria for determining nexus for state tax differ from those for commodity tax purposes.

Tax exemptions

In many states, even if you have nexus, you may be exempt from the state income tax (and other types of tax, depending on the state), under Public Law (PL) 86-272.

In this case, your activities in the state must be limited to those stipulated in PL 86-272, i.e. soliciting the sale of tangible property (but not services).

Also of note, PL 86-272 is a federal law, and some states will not apply it to foreign corporations.

Additionally, if you have nexus, you may also be exempt from paying tax in states that are parties to the Convention Between Canada and the United States of America.

In this case, you must not have a permanent establishment in the state, as defined in the tax convention. For example, the presence of an employee in the U.S. who has authority to sign contracts is considered a permanent establishment but using independent agents or simply storing goods are not (for more information on this topic, consult our U.S. federal tax article).

Tax returns

You are required to file tax returns in every state where you have nexus within three and a half months from the end of your fiscal year end (two and a half months if it ends on June 30th). You can, however, apply for a six-month extension by paying the estimated tax.

Some states do not require the filing of tax returns if you use PL 86-272.

To summarize, there are numerous considerations when it comes to your tax obligations in each U.S. state where you do business. We invite you to contact our team if you have any questions in this respect.

Next article

Olivier Gariépy
Senior Manager | CPA, CA, M.Fisc. | Tax

What are the tax obligations of a Canadian company doing business in the United States? Several criteria apply.

Canadian businesses exporting to the U.S. may have some federal tax obligations, in addition to state and commodity taxes.

The obligations apply uniformly for the federal tax but in the case of state and commodity taxes the criteria depend on the state where business is carried out.

A Canadian corporation is required to pay federal corporate income tax if it satisfies the following three conditions:

1. Carries on a business

It operates a business in the United States, according to criteria determined by the Internal Revenue Service (IRS) and case law (but not legislation). This generally means any regular, continuous activity in the United States, such as:

  • Regularly soliciting and selling goods and services to U.S. customers;
  • Providing services in the U.S. by employees of a Canadian corporation.

Conversely, as a general rule, an isolated or sporadic activity (such as one sale of goods during the year) does not constitute carrying on a business in the U.S.

2. U.S. income

It has U.S. source income that derives from the business in the U.S. There are various factors to determine whether the income is U.S. or Canadian source income, such as the location the services are provided or goods manufactured and where the ownership of the goods is transferred.

3. Permanent establishment

It has a permanent establishment in the U.S., that is, a fixed place of business, as defined in the Convention Between Canada and the United States of America. The criteria relate to the nature of the physical premises occupied in the U.S. and the status and authority of the individuals or corporations that participate in business development in the country. Here are some examples of a permanent establishment:

  • An office;
  • A branch;
  • A factory;
  • A construction site that lasts more than 12 months;
  • The presence in the U.S. of an employee who has authority to sign contracts (during a trade show for example).

However, the following are not considered a permanent establishment:

  • The use of independent representatives;
  • Simply storing goods.

Mandatory reporting

If you do not have U.S. source income, you do not have to file a U.S. federal income tax return.

However, if you carry on a business in the U.S. and derive U.S. source income from it, here are the rules that apply to your situation:

1. You have a permanent establishment: income therefrom is taxable in Canada and the U.S. However, pursuant to the Canadian foreign tax credit, you will not pay double taxes on this income. The federal government levies a fixed 21% corporate tax rate. When applicable state taxes are included, the combined rate is an average of about 25%.

You are required to file U.S. tax returns within three and a half months from the end of your fiscal year (two and a half months if it ends on June 30th). You can, however, apply for a six-month extension by paying the estimated tax.

2. If you do not have a permanent establishment: your business income will only be taxed in Canada. However, you must nevertheless file a U.S. tax return and the required form to have the tax convention apply (Form 8833) within five and a half months from your fiscal year end.

Remember that these rules apply to U.S. federal tax. You must analyze your situation to determine your tax obligations in every state where you carry on a business.

Do you have questions about your U.S. tax obligations? Do you need sound advice? We invite you to contact our team of international tax specialists.

30 Jan 2020  |  Written by :

Olivier Gariépy is a tax expert at Raymond Chabot Grant Thornton. Contact him today!

See the profile

Next article

Adviser Alert − January 2020

The Grant Thornton International IFRS team has published the 2020 version of the IFRS Example Interim Consolidated Financial Statements, which has been revised and updated to reflect changes in IAS 34 Interim Financial Reporting (IAS 34) and other IFRS that are effective for the year ending December 31, 2020.

Download the document below.