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.

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.

Updated on January 23, 2024

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 2023) 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.