US Tax 101 - Canadian corporations engaging in a United States

US Tax 101 - Canadian
corporations engaging in a
United States trade or
business
2012
Robert Chayer – RSM Richter Chamberland
Peter Var – RSM Richter Chamberland
Federal Income Tax
Taxation of Income Not Effectively Connected
With U.S. Trade or Business (Passive Income)
• The Internal Revenue Code taxes United States source
passive income of nonresident corporation at a fixed
rate of 30%.
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Federal Income Tax
Taxation of Income Effectively Connected With
U.S. Trade or Business
• A Canadian corporation will be subject to United States
federal income tax if it is engaged in a United States
trade or business and it has income effectively
connected with the United States trade or business;
• The regular tax rates of IRC section 11 apply.
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Federal Income Tax
Definition of U.S. Trade or Business
• Section 864(b)(1) – personal services rendered in the
United States;
• Section 864(b)(2) – Trading in securities and
commodities;
• Higgins vs. Commissioner
o Based on facts and circumstances
o “Elements of continuity, constant repetition, regularity
and extent"
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Federal Income Tax
Definition of U.S. Trade or Business
• Foreign corporations that are partners (limited or
general) in a partnership that is engaged in a United
States trade or business are considered engaged in a
United States trade or business (IRC Section 875);
• Disposition of a United States Real Property Interest
(IRC Section 897).
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Federal Income Tax
U.S. Trade or Business (examples)
• Sales of products in the United States through an agent;
• A taxpayer exported goods from the United States with
activities in the United States that included the
solicitation of orders, the inspection of merchandise, the
making of purchases, the completion of sales, and the
maintenance of an office and bank account;
• A taxpayer entered horses in races in the United States.
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Federal Income Tax
Not a U.S. Trade or Business (examples)
• Rent an office from a U.S. lawyer without obtaining exclusive
use of any room or even a desk in the lawyer's office;
• Operation of a radio station in Mexico - broadcasting was
heard in the United States with United States advertisers;
• Two isolated sales of goods in the United States;
• Authority to do business in the United States and letterhead
with a U.S. address with no other activities;
• Purchase of goods in the United States with direct shipment
from the supplier to foreign customers;
• Gambling winnings from casual gambling activities in the
United States.
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Federal Income Tax
Branch Taxes
• Branch Profit Tax
o Additional Tax on foreign corporation on earnings
and profits repatriated
o Tax rate of 30% (Internal Revenue Code)
• Branch Level Interest Tax
o Additional Tax on foreign corporation on « interest
income » from United State Branch
o Tax rate of 30% (Internal Revenue Code)
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Federal Income Tax
Canada / United States Income Tax Treaty
• Article VII provides that only the profits attributable to a
permanent establishment may be taxed in the United
States
• A permanent establishment includes:
o A fixed place of business;
o A person that habitually exercises his / her ability to
contract;
o Services in the United States for 183 days or more.
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Federal Income Tax
Canada / United States Income Tax Treaty
• Permanent establishment exceptions:
o Facility for the use and maintenance of stock of goods for
storage, display or delivery;
o The maintenance of a stock of goods or merchandise
solely for the purpose of processing by another enterprise;
o The maintenance of a fixed place of business solely for
the purpose of purchasing goods or merchandise, or of
collecting information;
o The maintenance of a fixed place of business solely for
the purpose of carrying on any other activity of a
preparatory or auxiliary character.
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State Taxation
Concept of Nexus
Generally state income tax Nexus exists when an out-ofstate company:
• Derives income from sources within the state;
• Owns or leases property in the state, or;
• Employs personnel who engage in activities that go
beyond those “protected” under federal interstate
commerce laws.
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State Taxation
Examples of Nexus include:
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Repairs or maintenance or service to property sold;
Collection of current or delinquent accounts;
Installation or supervision of installation;
Conducting training courses, seminars or lectures;
Investigating, handling, or otherwise assisting in
resolving customer complaints.
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State Taxation
Examples of Nexus include:
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Approving or accepting orders;
Repossessing property;
Securing deposits on sales;
Picking up or replacing damaged or returned property;
Hiring, training, or supervising personnel, other than
personnel involved only in solicitation.
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State Taxation
Examples of Nexus include:
• Maintaining a sample or display room in excess of two
weeks (14 days) at any one location;
• Carrying samples for sale, exchange or distribution in
any manner for consideration or other value.
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State Taxation
Examples of Nexus include:
• Owning, leasing, using, or maintaining any of the
following facilities or property in-state:
o Repair shop;
o Parts department;
o Any kind of office other than an in-home office;
o Meeting place for directors, officers, or employees;
o Stock of goods.
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State Taxation
Examples of Nexus include:
• Owning, leasing, using, or maintaining any of the
following facilities or property in-state:
o Mobile stores, i.e., vehicles with drivers who are
sales personnel making sales from the vehicles;
o Real property or fixtures to real property of any kind.
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State Taxation
Basis of Income Tax:
• Permanent Establishment
• United States income
• Worldwide
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State Taxation
Sales Tax:
• Generally applicable to the sale of goods (tangible
personal property) and some services;
• Not applicable to real estate;
• Tax applies at the «retail level»;
• Local jurisdiction (counties & cities) may have sales tax
(generally administered by the state);
• No federal sales tax.
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