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!

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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.

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Frédéric Gagné
Senior director | CPA, CA, M.Fisc | Tax

Canadian businesses exporting to the U.S. may have some state commodity (Sales & Use) tax obligations.

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

First of all, it should be mentioned that there is no federal sales tax in the U.S. Each state determines its own tax system, which may include:

  • Sales tax on tangible personal property and some services;
  • Use tax, generally levied on goods and services purchased outside the state to be consumed in the state.

Most states (45 in 2021) levy a sales tax in their territory. Five states do not have a sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. Unlike the GST, QST and HST, the U.S. tax system is not a value added tax, rather, it is imposed once on the final consumer.

In many states, there may also be a local tax, depending on the municipality, district or county where transactions are carried out.

A Canadian corporation must invoice U.S. sales tax in each state where it is required if the following three conditions are satisfied.

1. U.S. Sales

The business must carry out sales in the United States. To determine whether sales are carried out in the U.S., the sales and delivery terms and where the transfer of ownership takes place must be analyzed.

2. Sufficient presence in a state (nexus)

Your business must have a connection or nexus in the state. Each state has its own criteria for determining the connection and they differ from those that apply to state tax. There are two types of nexus:

Traditional nexus

This is a sufficient physical presence or minimum contact in the state, such as:

  • The presence of an office or warehouse;
  • The presence of a representative in the state (employee or independent) who solicits sales on behalf of the company;
  • Delivery using the company’s own trucks;
  • Leasing of goods;
  • The presence of inventory.

Economic nexus

In most states, even if you do not have a physical presence, some economic presence may be sufficient to create nexus. Generally, in these states, the volume of sales or number of transactions determines whether there is economic nexus.

When you have nexus in a state, you have to register and collect Sales & Use tax on your sales in that state. Some states may require the business to register and file tax returns even if it has no taxable sales.

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3. Taxable goods and services

If the first two criteria are met, you have to collect Sales & Use tax in a state when you sell:

  • Tangible personal property;
  • Some services specifically covered by legislation. These services vary depending on the state (advertising, bookkeeping, information, manufacturing, management, marketing, R&D, etc.);
  • Some IT or electronic services as stated in legislation (software or IT support, for example).

It should be noted that the U.S. tax system does not give entitlement to any input tax credits. It is exemption-based: for example, sales for resale and sales to manufacturers are generally exempt.

It’s important to closely monitor your activities in each state to ensure that you meet your tax obligations. Our team of specialists can provide personalized support.

Updated on February 12, 2021.

29 Jan 2020  |  Written by :

Frédéric Gagné is a tax expert at Raymond Chabot Grant Thornton. Contact him today!

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The workforce shortage is a concern for all entrepreneurs. Looking for a solution? Your skilled workers could be abroad.

According to a Grant Thornton International report released in 2019, 40% of business leaders around the world cited a lack of skilled workers as a constraint to their growth.

The workforce shortage—a lasting trend

This trend is not expected to end any time soon and will increase. The number of vacancies will continue to grow in the coming years. In the third quarter of 2019 alone, Statistics Canada reported nearly 138,000 positions to be filled in Quebec, across all sectors, and more than half a million throughout Canada. This number will grow over the next few years. According to Retraite Québec projections, 850,000 workers will leave their jobs between now and 2026.

The situation in Quebec

Statistics prove it: the number of workers in the domestic market is no longer sufficient. In fact, Quebec posts the greatest increase in vacancies in the country. This labour shortage affects many sectors, including manufacturing, retail and distribution, health care and accommodation and food services.

To a certain extent, staff turnovers are predictable, for example, due to retirements. The best way to meet labour needs is to plan on hiring in advance of the expected departure of certain workers. This makes it possible to maintain production and avoid potentially long recruiting periods due to the scarcity of labour on the local market.

Recognizing the symptoms

Considering the pace of the situation in the Quebec job market, companies that are proactive in the area of international recruitment will have a better chance of maintaining their productivity.

Experts have long noted that the number of young graduates is not sufficient to satisfy the demand, with more people retiring than the next generation of workers. Moreover, businesses need to be able to rely on an additional workforce to ensure their growth.

Here are some of the symptoms observed when traditional recruiting is no longer sufficient in a company:

  • Long-standing vacancies;
  • Longer local recruiting time;
  • Increased staff turnover rate;
  • Increased direct and indirect payroll costs;
  • Stagnation of company revenues and loss of contracts;
  • Decrease in production quality.

If your organization is experiencing these symptoms, it may be time to consider other staff recruiting options.

According to Emploi-Québec estimates, the future immigrant population will soon account for one in four workers in the labour supply. This is a pool of available new candidates that few companies are considering, yet it is proving to be a viable solution.

The answer: move out of the traditional pool of candidates

Again, according to Emploi-Québec estimates, young people entering the labour market by 2026 represent only 55% of the labour supply. There is therefore a significant shortfall if we rely solely on the next generation of workers. Recalling retirees and increasing overtime can meet productivity needs, but these are only stop-gap solutions that cannot be sustained in the medium term.

The solution to labour shortages lies in the non-traditional population, such as people with disabilities, Aboriginals, immigrants or internationally recruited workers. If companies continue to opt for traditional staff recruiting methods, they will only be going round in circles since they will have to attract employees from competitors, who will in turn attract them back.

In this context where everyone draws from the same pool of candidates, where there is not enough succession to fill the growth in vacancies and where companies can no longer attract the best candidates by increasing salaries, international recruiting provides a better outcome.

But where do you start?

Recruiting internationally requires customized solutions. While the hiring process may be more complex than in the local market, using qualified, authorized professionals in this field simplifies and accelerates the process.

With a global network of recruiting partners and multidisciplinary teams of professionals, AURAY Sourcing, a subsidiary of Raymond Chabot Grant Thornton, has recognized expertise in talent acquisition, immigration and integration of foreign workers, enabling it to offer a turnkey solution tailored to its clients’ needs.

Here is an overview of an international recruiting process when a company uses AURAY Sourcing’s services:

  • Presentation of the international recruiting process;
  • Needs analysis and definition of recruitment strategies according to the company’s situation;
  • Selection of candidates according to their skills and the eligibility criteria of current temporary immigration programs;
  • Complete management of the immigration process for the company and the candidate (labour market impact study, work permit, extension of status, etc.);
  • Greeting and integration of the candidate through an action plan.

Quality candidates

The selection of candidates is coordinated by international talent acquisition professionals. Based on interview templates and reports, candidates with superior ratings are recommended for further consideration. Each rating is based on an analysis of the resume as well as the entire application.

By leveraging this rigorous process, AURAY is able to offer its clients competent and motivated candidates to come and settle in Quebec and integrate into the culture and the environment. Every effort is made to promote their successful integration.

To find out more about our support services and solutions, contact an AURAY Sourcing expert for a free consultation.