We work with hundreds of clients a year that operate their businesses across borders. Canadian clients that are thinking of expanding their business operations to the US can face operational and tax challenges, however the business and financial rewards can be great. Being able to access significant markets in the US can add significantly to the future growth of Canadian companies.
Outlined below are some of the most frequently asked questions by existing and prospective clients with relation to doing business in the US.
Do I need to file US taxes if I do business in the US, or have income from US sources?
What type of tax return you file to report your US source income will depend on a few factors. Primarily whether your business is incorporated or simply a sole proprietorship (other rules pertain to trusts and partnerships).
Canadian corporations (provincially or federally incorporated) that earn US source income need to first assess whether the income earned in the US is attributed to a permanent establishment (PE) within the US. Generally speaking (PE rules are quite complex and involve a deep understanding of the Canada-US tax treaty) a PE is considered a permanent base or office through which income is earned. Corporations that simply earn income from the US for services performed in Canada likely do not have a US PE. In these cases the corporation would file a treaty protected US corporate tax return to properly report this treaty position. This is accomplished by obtaining a US ITIN (see below) and filing a treaty protected 1120-F US corporate income tax return. In most cases no tax will be levied on the US income as only income earned through a US PE will be taxable in the US.
Canadian corporations that are deemed to have a PE in the US would also file and 1120-F, however unlike the treaty protected return above they will be taxed at regular US tax rates on this income. See the discussion below related to claiming your US income on your Canadian returns as well as how to apply foreign tax credits to this income.
Similar rules apply for individual sole proprietors doing business in the US. Those that have a PE will be taxed at regular rates on non-resident personal income tax returns (US 1040NR). And those without a PE will file specific treaty protected forms (8833) to apply there treaty position for that particular year.
Do I have to file State taxes if I do business in a particular State?
Each US state will have specific tax rules on how foreign individuals or corporations are taxed. Although many states follow similar rules to the federal tax rules, they often deviate significant. In fact, some states don’t levy tax on income. Some examples of those States include:
- South Dekota
As each state has specific and separate tax rules for both foreign and domestic tax payers it’s highly advisable to review your state tax implications with a qualified cross border tax accountant.
How to I get a US tax ID number?
In order to file a US 1040NR or 1120-F (individual or corporate tax return) you’ll also need a US tax ID.
In order to obtain a corporate tax EIN number (employer tax identification number) you’ll need to complete form SS-4 and call the IRS directly to obtain the number. This process is much more convenient than the procedure for obtaining an individual tax number as outlined below.
In order to file a 1040NR you’ll either need a US social security number (US citizens and green card holders) or a US Individual Identification Number (ITIN). The easiest way to obtain an ITIN will be to file a W7 (application for an ITIN) with your first 1040NR. You’ll need a certified copy of your Canadian passport in order to ensure a successful W7 application. It’s possible to obtain an ITIN by filing the W7 by itself, however these applications are often rejected. Most W7 applications filed with a 1040NR are accepted the first time (assuming the W7 is properly completed).
How do I report my US income on my Canadian tax return?
Whether you are reporting as a corporation or as an individual you’ll need to ensure you report (and potential pay tax) on your worldwide income, not just income earned in your home country. Therefore, you’ll need to report both your Canadian and US source income on your Canadian tax return. At first glance it may seem that you will be paying tax twice on the same income as you may also require a US tax return to report US income. The Canada-US tax treaty alleviate this potential double tax problem with specific rules allowing individuals and corporations to obtain a credit against domestic taxes for any foreign taxes paid on that same income.
An example will better help illustrate this concept. Let’s assume that an individual earns $100,000 of Canadian source and $100,000 of US source income. Let’s also assume that your Canadian average tax rate is 30% and the US tax rate is 20% and the individual is also reporting the $100,000 of US income on a 1040NR US income tax return. Your total income of $200,000 will be reported on your Canadian tax return and will generate $60,000 of Canadian tax. The $100,000 reported on the 1040NR US income tax return will generate $20,000 of tax. In the absence of a foreign tax credit on the Canadian tax return you’ll end up paying a total tax of $80,000 on the $200,000 of income, or a 40% average rate of tax. Alternatively (and more properly) you should be claiming a foreign tax credit on the Canadian tax return for the US tax paid in that year. As outlined above you’ll have $60,000 of Canadian taxes paid less a foreign tax credit of $20,000 (these amounts needs to be converted) for a net tax payable to Canada of $40,000. The $40,000 net tax to Canada plus the $20,000 you’ve paid to the US equals a total tax of $60,000 or net average tax of 30%.
The example above is only a simply representation of how foreign tax credits work. In practice the mechanics are much more complex and a significant amount of variations and rules apply based on domestic tax and treaty provisions.
Do I need a separate US website for my business?
I get this question all the time. Businesses that have been successful in building their business in Canada often wonder whether they should design a separate website for their US operations.
The answer to this question really depends on a few factors. First, if you currently have an established website I would recommend simply leveraging your existing site in an attempt to attract new US customers or clients. Having some specific US resources and pages on your site will be key and the addition of specific US focused articles will help attract new online visitors.
It will help greatly to have a US physical presence as it’s often a deterrent to US customers/clients if you only have a Canadian address (more in this below).
How do I attract US investors for my business or startup?
Often the move into a new market requires additional capital. Especially if the opportunity is large and potential competition is high. Many Canadian businesses will want to attract additional financing or new capital to fund their entry to the US.
Reaching out to business brokers in the US is a great way to help grow your business. Some additional ideas on how to attract additional US investors are as follows:
- You can reach lots of potential investors by posting ads online. This might be expensive, but you’ll have able to reach you potential audience quickly. Just make sure that you are familiar with securities laws with respect to raising capital before soliciting capital.
- Traditional advertising strategies, although less popular and more expensive than online ads can be a great way to get your business in front of new investors. Find out which publications your most likely investors read and get your ad in front of them.
- Spread the word to your existing network and to your clients or customers (assuming you are comfortable with this). You would be surprised by the opportunities that come out of letting other people know your plans.
- Depending on the amount of capital required you may want to reach our to venture capital firms or some smaller angel investors. These individuals often want to put large sums of money to work, so if you are in need of significant additional capital to push your business to the next level this may be a great option.
Do I need a VISA to do “business in the US”?
Canadian citizens can visit the US for a specific number of days, however often they require specific VISAs to perform business activities within the US. No specific VISAs are required for Canadians that are planning on doing business in the US from Canada, however any Canadian’s considering going down to the US to actively do business in the US should seek out the advice of a competent immigration and business lawyer.
How long can I travel for business to the US?
Some may tell you that you can go down to the US for business for more than 6 months. “Just let the border agent know that you’re going down to vacation” they say. Not only only is this dishonest it could lead to from future difficulties at the border and is never advisable.
In many cases you will be able to visit the US temporarily for business purposes as a “business visitor”. You should be eligible if you are in the US for business meetings, to attend a conference, negotiate a contract or take orders down to the US.
Make sure to engage an experienced immigration lawyer to help you with the nuances of US travel and make sure to be honest with any border agents on the intentions of your stay.
How do I attract US customers or clients to my business?
Canadian businesses can be attracted to the prospects of selling their services and products to US customers for obvious reasons. The potential opportunity for growth for these Canadian businesses can be significant considering the comparable size of the US population (for example, there are most people in the State of California than Canada).
Once you have properly researched the tax, legal and immigration aspects of soliciting US customers it may be time to try and attract those first few new US clients or customers. Here are some potential avenues for additional US business:
- Design a new US based website or leverage your own existing website. If you’re able to attract new US visitors to your current site make sure that there’s some information on potential opportunities for US prospects. You don’t want new leads to hit your site from the US only to find that most of the contact information relates to Canadians. Your site must explicitly state that you also serve US clients and customers.
- Leverage your existing client/customer base and let them know that you can also help serve American clients.
- Use online ad networks to attract new US leads. As discussed above attracting American leads via the internet can be productive. Using ad networks like Google adwords by targeting American client searches can attract lots of new prospects to your site.
- If possible try to setup a new US business address. This can be challenging without a US SSN, however whenever possible having a US address will add greatly to your cross border legitimacy.
Do you have any questions or comments?
For those of you that have further questions or comments on how to do business in the US I highly suggest that you leave a comment below or head over to our forum to ask one of our resident experts your questions. We look forward to hearing from you and hope that we can help with any cross border challenges or questions you may have.