THINKING OF SETTING UP A COMPANY IN THE UNITED STATES?
AND IF YOU WAIT A LITTLE LONGER…
AND IF YOU WAIT A LITTLE LONGER…
The Canada-U.S. Tax Treaty allows Canadian companies to operate in the U.S. to a certain degree before the IRS(Internal Revenue Service) takes thousands of dollars out of their pockets. What you need to know is that, contrary to popular belief, corporate tax rates are generally higher in the U.S. than in Canada!
Tax rates at a glance :
- The U.S. federal government (IRS) alone imposes a tax rate on U.S. corporate profits ranging from 15% to 34% (the maximum rate being fully reached at $335k in net income); then come the states, whose tax rates generally vary from 5% to 10%; then come the
cities… -
Canadian corporate rates are the most competitive in the world; the combined fixed rate charged to
Canadian corporations (Quebec) is 19% on the first $500k of profits, then 26.9% on the excess as of January 1, 2012.
So, as long as a Canadian company can do business in the U.S. from Canada, it’s the most tax-efficient option.
The following activities are permitted in the U.S. under the Tax Treaty, without having the effect of subjecting the Canadian company to U.S. tax:
- sales via an American distributor;
- sales via an independent American agent;
- sales via a U.S. representative (employee or agent who carries out solicitation activities);
- sales via a Canadian representative (employee or agent who carries out solicitation activities);
- attendance at one or more trade shows;
- goods in storage.
However, in order to be exempt from U.S. tax under the Treaty, a Canadian company must not engage in the following activities in the United States:
- no contract may be signed on US territory;
- no sales may be made at a trade show in the United States;
- the company must have no U.S. office or other fixed office, and must not advertise as such;
- for service providers, each project must last no longer than 183 days;
- a construction site must not exceed 12 months.
Finally, to claim tax relief under the Treaty, Canadian companies must file an annual U.S. tax return(Form 1120-F “U.S. Income Tax Return of a Foreign Corporation”) in conjunction with the exemption form(Form 8833 “Treaty-Based Return Position Disclosure”). The penalty for failure to declare one’s tax position under the Convention is US$10,000 for each item of income not declared. It should be noted that several U.S. states do not respect the Tax Treaty, and so may subject Canadian companies to taxes or other levies applicable within their state; however, tax credits and deductions are available in Canada.
Enjoy your stay in the U.S. with your Canadian company!
