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US Canada Cross-Border Business Transactions
2009 ASWA Northwest Regional Conference
Presented By Gail Kruk, CGA Larson Gross
p.l.l.c. May 15, 2009
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Introduction
Larson Gross p.l.l.c. Larson Gross is a leading
accounting firm servicing individuals and closely
held businesses throughout Northwest Washington
and British Columbia. In addition to recognized
expertise in the areas of business valuation,
estates and trusts, construction, agriculture,
and manufacturing, Larson Gross provides tax and
business consulting services to clients who are
involved in cross border activities involving the
US and Canada.
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Introduction
The Larson Gross Cross Border Services Team For
over 40 years Larson Gross has been assisting
businesses in the United States and British
Columbia navigate the maze of taxation issues
encountered when expanding across the US/Canada
border. Offering both U.S. and Canadian
expertise we help clients from both sides chart a
course that manages risk and maximizes tax
benefits.
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Topics to be covered

• Cross-border corporate structures
• Canadian tax issues for US companies doing
  business in Canada
• US tax issues for Canadian companies doing
  business in the US
• Tax issues related to cross-border employees
• 5. US Canada Tax Convention Update

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A Word of Caution

• What works in the US may not work in Canada!
• Avoid adverse tax situations by understanding the
  interaction of the US Internal Revenue Code with
  the Canadian Income Tax Act and any applicable
  Canada-US tax treaty provisions
• Identify other tax issues including state and
  provincial income taxes, sales taxes and payroll
  taxes
• Consider immigration and employee work
  authorization requirements

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How Businesses Typically Do Business Cross Border

• Sell goods to the other country from their home
  site, no cross border entry
• Sell goods to the other country through sales
  people that are physically present in that other
  country
• Warehousing goods in the other country
• Provide services in the other country using US or
  Canadian employees or contractors
• Open a foreign branch
• Set up a foreign subsidiary

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Business Entity Choices

• Entities choices which pay income tax at the
  individual owner level
• Proprietorship an unincorporated business,
  owned by a single individual
• Partnership an unincorporated business, owned
  by 2 or more individuals and/or corporations
• Limited Liability Company (LLC) a US entity
  that has corporate attributes, owned by 1 or more
  individuals
• S Corporations a US corporation that has
  partnership attributes, owned by 1 or more
  individuals

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Business Entity Choices

• Entities choices which pay income tax
• US C Corporation an incorporated entity which
  is set up under State law. Provides limited
  liability protection and pays tax on the net
  income generated
• Canadian Corporation an incorporated entity
  can be set up under Canadian Federal or
  Provincial laws. Provides limited liability
  protection and pays tax on the net income
  generated

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Expanding into Canada

• Issues to consider if using your US entity to do
  business in Canada
• Are you considered to be doing business in
  Canada?
• If you are doing business in Canada, are you
  doing so through a permanent establishment?
• These 2 points will determine whether the US
  Corporation has reporting requirements to Canada,
  and whether it will be subject to Canadian taxes
  on its Canadian source income.
• Tax treaty between the US and Canada provides
  relief from double taxation.

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Expanding into Canada

• Definition of Doing Business in Canada
• Non-resident entity solicits orders or offers
  anything for sale in Canada through an agent or
  servant, whether the contract or transaction is
  to be completed inside or outside or partly
  inside or partly outside of Canada
• Non-resident (or agent acting on behalf of
  non-resident) produces, grows, mines, creates,
  manufactures, fabricates, improves, packs,
  preserves or constructs in whole or in part,
  anything in Canada, regardless of whether it is
  exported from Canada prior to sale
• Non-resident disposes of certain types of
  Canadian property

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Expanding into Canada

• Definition of Permanent Establishment
• Entity maintains a fixed place of business,
  including a place of management, a branch, an
  office, a factory, a workshop, a mine, an oil or
  gas well, or any other place of extraction of
  natural resources
• A building site or construction or installation
  project that lasts more than 12 months
• A person, other than an independent agent, who
  acts on behalf of the corporation and has
  authority to conclude contracts on behalf of the
  entity, and habitually exercises that right

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Expanding into Canada

• Definition of Permanent Establishment as a result
  of the Fifth Protocol for service providers
• The services are provided by a single individual
  who is present in Canada for at least 183 days in
  any 12 month period (previously was 183 days in
  any calendar year)
• More than 50 of the Gross Active Business
  Revenues of the entity are derived from the
  services performed in Canada (this test only
  applicable if services provided by a single
  individual)
• PE definition is also applicable for Canadians
  doing business in the US

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Expanding into the US

• Issues to consider if using your Canadian entity
  to do business in the US
• Are you carrying on a US trade or business under
  US domestic law?
• If you are carrying on a US trade or business in
  the US, are you doing so through a permanent
  establishment?
• Similar to our discussion regarding Canada, these
  2 issues will determine what type of filing you
  will have for US Federal purposes, and whether
  you will be subject to US federal tax
• Tax treaty is in place to avoid double taxation

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Expanding into the US

• Definition of US Trade or Business
• An entity is engaged in a US trade or business
  when it is involved in a profit-oriented activity
  within the US, either directly or indirectly, or
  through agents, when the activity is regular,
  substantial and continuous
• Permanent Establishment is based on the treaty
  definition as previously discussed

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Expanding into the US

• Other issues to consider
• Individual states do not recognize the tax treaty
  between Canada and the US
• States look at Nexus (or significant presence) to
  determine if entity is subject taxes
• Nexus has much lower threshold than PE
• Canadian entity could be exempt from US federal
  taxes based on the tax treaty, but could be
  subject to State income taxes, sales taxes etc.

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Cross-Border Employees

• Issues
• How do you transfer key employees from the US to
  Canada, or vise versa?
• How do you hire a Canadian citizen/resident to
  work for your US company, or vise versa?
• Should these employees be on a US or Canadian
  payroll?
• How these individuals are taxed by Canada, by
  the US
• Social Security or Canada Pension Plan and the
  Totalization Agreement between Canada and the US

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US-Canada Tax Treaty Update

• Fifth Protocol entered into force on December 15,
  2008
• Major changes include
• Article IV Residence
• Relieving rules for LLCs doing business in
  Canada, effective for tax years commencing after
  2008
• Denial rules for ULCs, effective for tax years
  commencing January 1, 2010
• Article V Permanent Establishment
• Changes to definition of PE for service
  providers, effective for 3rd tax year ending
  after Dec. 15, 2008

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US-Canada Tax Treaty Update

• Article VII Business Profits
• Taxation of business profits attributed to a PE
• Article XI Related Party Interest
• Interest paid or credited during 2008, the rate
  is 7
• Interest paid or credited during 2009, the rate
  is 4
• Interest paid or credited after 2009, the rate
  is 0
• Article XXVI-A Assistance in Collection
• Article XXVII Exchange of information

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Personal Income Tax Rate Comparison
Taxable Income
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Corporate Income Tax Rate Comparison
Taxable Income
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Questions?
Contact Information Gail Kruk, CGA Larson Gross
p.l.l.c. gailk_at_larsongross.com 360.752.8013
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