Doing Business in the U.S. Part 2

If you are doing a substantial amount of business in the U.S., and Permanent Establishment, or Nexus applies to you, then you must carefully consider the best entity to use to do the U.S. business.  There are typically 4 Structures used in the U.S. to do business:

          1. C-Corporations

          2. S-Corporations

          3. Limited Liability Corporations (LLC's)
          4.Trusts

Here are some basic points on each:

C-Corps:

•          Taxed similar to Canadian Corps except dividends are treated different. (no gross up or dividend tax credit)

•          Anyone can own a C-Corp.

S-Corps:

•          You typically have to be a U.S. Citizen or Resident (U.S. Person) to own an S-Corp.

•          With S-Corps there can be no Corporate tax.

LLC's

• These are not advisable for Canadians as there may be a possibility of double taxation

Trusts:

•          Typically are only used by U.S. persons.

•          Trusts can be effective when partnering with a U.S. person

There are more options than what I’ve listed here and there is much to know about each.  You should also consider where to incorporate.  The decision on where to incorporate generally depends on where the corporation does/will do business. If the company is primarily doing business in one state, it is generally recommended that the incorporation should be done in that state. If the company is doing business in several states, you can incorporate in Delaware and file to qualify to do business in the other states the company conducts business in. The company only pays tax in Delaware if it actually is doing business there (there is a nominal annual fee paid to Delaware). The company files tax returns in each state it is doing business generally using the allocation method in which profit is allocated to an individual state based on property, payroll and sales factors.  For companies with no presence in any state, the Delaware Corporation is typically recommended, however it is not the only option. 

This now wraps up our series on Cross Border.  If you have any questions or comments on the blogs, please let me know.  We work closely with Cross Border experts so if we can’t answer your question, they will. In my next blogs we will get back to Canada which is more my expertise.  

Cross Border Brings Complications Part 2

Another issue that can arise is when couples split and one moves to the U.S. while the other stays in Canada.  It is imperative to do an inventory of all your assets, liabilities, income and expenses before the move happens as there are many tax considerations in moving to the U.S.  Of course, you should always know your assets, liabilities, income and expenses at any given time for many purposes!  Always keep in mind that if you are leaving Canada you will most likely have tax consequences.  For example, many assets that you owned while living in Canada can incur tax when you leave.  CRA can tax you as if you sold the asset, even though you want to keep the asset.  This is a disposition or departure tax that can arise on many assets that you own and want to keep when you leave Canada.  Of course, if you plan ahead you can avoid the majority of taxes.  As always, the more you plan in advance the better your chances of eliminating taxes!

There are many other considerations.  For example, your will that you created with a lawyer here in Canada may not be valid in the U.S because the wording isn’t consistent with the laws of a state. Another consideration is that if you spend too much time in the U.S., even if you are just visiting, you may need to file appropriate filings to the IRS. There are other considerations on investing across border as there are many different rules depending on what type of investment it is.

Much planning is needed for any cross border situation.  The more you plan in advance, the better off you are.  Kustom Design does not specialize in cross border, however we work with other firms who do specialize in this area and we do have some knowledge in this area from these strategic alliances.  Keep in mind that things are changing rapidly, thus it is necessary to be connected to professionals that are focused in this area.  Kustom Design is always current in Canadian tax knowledge and we are in alliance with other firms that stay current in cross border knowledge. 

In the next blogs we will go into some basics of traveling, investing and doing business in the U.S. Whether you are a Canadian thinking about leaving Canada, or you are from the U.S. or another country and have recently come to Canada, don’t hesitate to contact us on your questions or comments!

Cross Border Brings Complications, Part 1

Many people never do anything out of Canada so they don’t have to be concerned with the complications of planning cross border.  However, there are many people that spend time in the U.S. and in other countries, invest across border, do business across border, and more.  Many people just get caught in the moment and move forward without seeking professional guidance.  If you are traveling out of the country for any extended time, investing across border or doing business across the border there are key details you must know.  The key point that I want to make here is that whenever you are doing anything cross border, it is imperative to see a professional or multiple professionals that can help to ensure you plan for any tax and reporting consequences that you may have to deal with.  For this blog and the next (parts 1 & 2), we will be mostly talk about cross border in the sense of Canadians dealing and traveling to the U.S. and as always the details in the blogs are date sensitive to the current dates that the blogs are written on.

To start with, let’s talk about some of the main issues that seem to arise when dealing and traveling cross border.  If you or your spouse have dual citizenship or have assets in the U.S. you most likely will have to file a U.S. tax return.  Many don’t file and it can catch up with them later down the road.  Many people just deal with the tax authority where they currently live, CRA in Canada the IRS in the U.S., and many people don’t even understand that there is a tax treaty between Canada and U.S. that determines how many things work for cross border assets, transactions, traveling and more!  Many people get double taxed by not understanding what the treaty offers.  For example the IRS tends to tax capital gains made on RRSPs if the holder is residing in the U.S. Worse, if the holder returns to Canada and discharges the RRSP, the holder gets no tax credit for tax already paid in the U.S. However, in a situation like this, it is possible to defer taxes by invoking the Canada/U.S. Treaty to stop the double taxation. The Canada/U.S. Treaty has been revised multiple times since its 1980 inception and will continue to evolve.  The Treaty can override sections of the Canadian and U.S. Tax Acts to help ensure double taxation doesn’t happen.