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.

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 2019) levy a sales tax in their territory. Unlike the GST, QST and HST, it is not a value added tax, rather, it is imposed once on the final consumer, which may be a business. Five states do not have a sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.

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

These are sales carried out in the United States. Accordingly, the location where a sale is carried out as well as the sales and delivery conditions are often very important when determining the tax implications of a sale.

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 (employee or independent);
  • Sales solicitation;
  • Delivery using the company’s own trucks;
  • Leasing or maintenance 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 file tax returns on a regular basis even if you do not collect sales tax.

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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 as stated in legislation and which varies 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.

29 Jan 2020  |  Written by :

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

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Wayne Tessier
General Manager | Auray Sourcing | Human resources consulting

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.

24 Jan 2020  |  Written by :

Wayne Tessier is an international recruiting expert at Raymond Chabot Grant Thornton. Contact him...

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Clara Demers
Manager | Management consulting

When it comes to business transfers, setting up a family council can be a winning strategy for ensuring the sustainability of a business.

Over the next few years, many Quebec businesses will be transferred to buyers from within the family circle.

In some cases, it’s also possible that external buyers will also be involved, but the fact remains the same: multigenerational management is an issue that family businesses must face.

Starting an entrepreneurial succession process is a long and complex project. In the context of a family succession, the stakes, emotions and feelings are put to the test. It’s like airing problems and issues that are usually private.

Preserving the harmony thanks to a family council

The family council is a key structure when the family grows and the family-business relationship becomes more complex. It provides an opportunity for family members to express themselves. However, setting up a family council is not automatic.

It’s important to understand the family history, ties and relationships between family members. When we undertake a business succession assignment, it’s essential to have a human approach and a proper grasp of all aspects involved.

This is even more true in a family succession context. It’s almost like interfering in people’s private and professional lives; some discussions will be easy, but others will be more difficult and painful. The complexity of the case will determine whether or not to involve a family council. In complex family succession cases, a family council can be very useful for all parties involved.

What is seen in most cases is that when the future management team, which includes external members and others from within the family circle, meets, some things may be left unsaid. And if they are not addressed, these unspoken things can be detrimental to the proper functioning of the management team. That’s where the family council may have a role to play.

When setting up the family council, it’s important to define a broad framework and structure that includes all family members. It’s also essential to identify a common goal. Achieving this goal requires active listening and honest participation by all.

The family council’s mission is to preserve family harmony while ensuring the business’s stability. To achieve this, everything depends on good communication between the participants.

The family council as a place of exchange

Our approach to the practice is very human; our desire is to satisfy everyone, and in order to achieve this, we must let everyone express themselves and hear them. We set up a family council in which we play the role of mediator. This council meets about twice a year and offers all family members the opportunity to share their opinions and resolve certain situations.

The family council is an ideal place to communicate, exchange and set policies and procedures concerning family members, such as hiring them in the organization.

Family council sessions are not family meetings; their purpose is to resolve situations and address concerns. In a family succession context, there is tension and disagreement. Our role is to guide these meetings, but to do so, all family members must be present.

Family councils are opportunities for everyone to express themselves and be heard. It’s not about interfering in family life, but rather it’s a window where everyone can speak and be heard.

What do the external buyers think?

This approach is very well received by external parties taking over, who encourage and respect this practice. It’s also in their interest to put all the chances on their side to ensure the sustainability of the business. Moreover, the family council is not a decision-making forum, so this does not bother external buyers who are in favour of such an action. Instead, it helps preserve harmony.

Preparing the next generation

The family council also helps to raise awareness and prepare the future generation that will take over the business. By valuing members, they act on the family’s behalf to preserve its heritage, which will have a positive impact on the company’s sustainability.

For more information, feel free to contact our team.

22 Jan 2020  |  Written by :

Clara Demers is your expert in management consulting at Raymond Chabot Grant Thornton. Contact her...

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Building on the Base Erosion and Profit Shifting (BEPS) initiative that culminated in the Multilateral Instrument (MLI), which has achieved fundamental changes to treaties, the Organisation for Economic Cooperation and Development’s (OECD) Secretariat continues to pursue an in-depth and comprehensive international tax reform.

In the fall of 2019, the OECD’s Secretariat issued a consultation document on digital taxation (“Pillar 1”). This document proposed new taxation rules to ensure that digital businesses pay tax in the jurisdictions in which they operate even if they do not have a traditional physical presence (nexus or a permanent establishment).

In November2019, the OECD Secretariat issued the Global Anti-Base Erosion Proposal (GloBe”) – Pillar 2 document in which it outlined its proposals to further reform international taxation. As discussed below, the proposals are far-reaching, and the OECD has received over 3,000 pages of feedback from various stakeholders.

Pillar Two’s objective is to implement a worldwide minimum income tax system and to ensure that there is also a minimum amount of cash tax is paid by multinationals (MNEs). At this time, the Secretariat has not indicated an income threshold; hence, it could apply to larger MNEs (for example those that are subject to transfer pricing country-by-country (CbC) rules because their sales are greater than €750 million) and to smaller entities. Also, the Pillar Two proposal has not specified what the minimum target income tax rate should be.

Components of Pillar Two – GloBE

The four components of the GloBE are:

  • An income inclusion rule to allow a jurisdiction to tax the income of a foreign branch or a controlled foreign corporation (CFC) if that income is taxed at an effective rate that is below the minimum rate;
  • An undertaxed payments rule to deny a deduction or impose a withholding tax on payments to a related party if that payment is taxed at an effective rate that is below the minimum rate;
  • A switch-over rule to support the income inclusion rule that would introduce a treaty provision that would allow a switch from an exemption to a credit method if income of a permanent establishment (PE) is taxed at an effective rate that is below the minimum rate. This rule could also apply to immoveable properties that are not part of a PE;
  • A subject to tax rule to support the undertaxed payment rule by subjecting payments that are taxed at a rate below the minimum rate subject to withholding tax and/or by denying the tax treaties’ benefits.

There is a significant overlap between the four components of GloBE and it is far from clear how they will interact with each other or whether countries will be provided a choice as to the means to be used to achieve the Pillar Two objective of establishing a minimum effective tax rate.

Tax base and consolidated financial statements

The GloBE suggests that consolidated financial statements should be used to determine the tax base. The use of consolidated financial statement raises a number of issues, such as:

  • The choice of Generally Accepted Accounting Principles (GAAP) to be used (US, Japanese, International Financial Reporting Standards or local GAAP);
  • The impact of items denominated in foreign currencies on the Currency Translation Account (CTA);
  • The taxation of foreign exchange operations and the choice of currency for the payment of taxes;
  • The impact of permanent and temporary differences;
  • The appropriateness of changes to the tax base as a result of accounting principle changes;
  • The ability to audit consolidated financial statements by local taxation authorities;
  • The ability to standardize tax rules – for example to take into account the diversity of tax treatment for the deductibility of stock-based compensation, the deductibility of interest expense, etc.

Interaction between Pillar One and Pillar Two

The interaction between Pillar One and Pillar Two proposals is unclear. Presumably, Pillar One on digital taxation would apply to a MNE before Pillar Two applies. Therefore, it would seem logical that any taxes paid as a result of the application of Pillar One would be taken into account in computing the minimum taxes paid on income. However, the interaction and the interdependency of the two Pillars need clarification.

Another critical element that has not been addressed is to determine how and where the tax would be collected according to the organisational structure of the company. We believe that the GloBE proposal should be applied at the ultimate parent level. For example, A owns B and B owns C. A would apply the GloBE provisions to the income generated by B and by C. And, as long as A applies the GloBE proposal to the income generated by B and by C, B would not apply the provisions to the income generated by C. However, the proposal could also be interpreted as being applicable at each level in the organisational structure where a branch or a subsidiary is controlled by a member of the group. The determination of which legal entity or entities in the group are within the scope of the proposal is another critical issue that needs to be addressed. A bottoms-up approach toward taxation at each level in the organisational structure would be immensely complex and time consuming for taxpayers.

Lastly, the interaction with a particular jurisdiction’s CFC rules must be taken into account, otherwise, double or triple taxation could arise.

Too soon for GloBE?

As noted above, BEPS has introduced important changes to tax systems within the OECD. As a result, significant measures to protect countries’ tax base have recently been introduced in various countries including the following:

  • Interest deductibility rules (generally based on a percentage of EBITDA – earnings before interest, taxes, depreciation and amortization);
  • CFC legislation that should contribute to achieve a minimum taxation rate if it is properly implemented;
  • Anti-hybrid legislation that eliminates tax arbitrage obtained from exploiting various tax classifications by the countries;
  • Tightening of rules to limit tax benefits that may be obtained with regard to intellectual property;
  • The introduction of a principal purpose test in tax treaties which will greatly limit the ability to obtain lower withholding tax rates in the source jurisdiction if taxpayers do not have substantive economic presence in the country of residence via the MLI;
  • Modifications to transfer pricing guidelines (BEPS action items 8-10);
  • Tax treaty provisions regarding PE status (BEPS action 7).

We believe that the OECD should continue to monitor the effectiveness and efficiency of these recently introduced changes and should continue to study measures that reform international taxation with approaches similar to GloBE or Pillar One proposals.

If the enacted measures outlined above do not achieve the tax policy objectives of protecting national taxation bases and of having MNEs paying a minimum tax due to meaningful CFC legislation, the introduction of GloBE type measures should then be seen as a means to this end.

Torn world – is there sufficient consensus to implement international tax changes?

The Pillar One and the Pillar Two proposals can only be achieved if there is a consensus among jurisdictions – otherwise double taxation will result.

In early December, the US Treasury Secretary indicated that the US has “serious concerns” with respect to certain aspects of Pillar One (digital taxation) proposals that could constitute a mandatory departure from the arm’s length principle and from the related nexus rules. The Secretary also announced that the US fully supports a GILTI-like Pillar Two proposal (“Global Intangible Low-Taxed Income” ) – perhaps by restricting the type of changes that the US is likely to accept in order to reach a consensus on reforming international taxation.

International taxation and digital taxation will continue to fuel discussions within the international community, including G20. For example, the Office of the US Trade Representatives (USTR) outlined a proposal on December 2 to impose additional duties of US$2.4 billion on French products (including champagne, cheese, cast-iron cookware) in response to the recently introduced French digital service tax.

For a more in-depth discussion of the issues raised by the GloBE proposals, please consult our detailed comments to the OECD.