Does my Canadian Corporation Need to File US Returns?

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Question

Hi Phil

I have some questions about my Canadian company that I need answers to.

I run an crypto consulting company from Vancouver but lots of my clients are in the US. I would say that around 70% of my revenue actually comes from the US.

Am I required to file US returns even though I do all the work from Canada and do not have any contractors or employees in the US?

Thanks

XXX XXXXX

Answer

Hi XXX

Thanks for the email.

Yes, it does sound like you have filing requirements in the US. Let me outline some of the issues you’ll likely encounter.

Under the US-Canada income tax treaty an individual or corporation is only taxable on business income earned in the country where they have a “Permanent Establishment” (PE). I won’t get into the specifics of how to assess a PE, however in general terms you would have a PE in the US if:

  • You have a fixed place of business in the country, such as an office, factory, branch, etc.
  • You may also have a PE in the US if you have employees or contractors negotiating business arrangements or contracts with client
  • If employees are performing services for more than 183 days in any 12 month period and more than 50% of your total revenue is attributable to those activities
  • Same test as the above, but with respect to a connected project for customers or clients

Once again, I won’t get into the nuance of assessing whether you have a PE as it sounds like based on the information above you only have a PE in Canada. If this doesn’t sound accurate please let me know.

Now, assuming you don’t have a PE in the US you will only be required to file a “protective” US corporate tax return. In order to communicate with the IRS that although you receive income from the US you are not taxable you’ll need to file a protective 11120-F corporate income tax return with the IRS.

In order to file the return you’ll need to obtain an “Employee Identification Number” for the corporation. You can obtain the number by completing schedule SS-4 and then calling the IRS to receive the number. Luckily the IRS makes the process of obtaining the number quite easy.

Once the number is obtained you’ll be able to file your treaty protected 1120-F return. I won’t go into all the variables of filing the return, however in general terms you’ll need to:

  • Calculate the total amount of gross income from US sources
  • Report this on the 1120-F
  • Claim a treaty deduction for this amount to offset the tax return amount to nil
  • Include an 8833 treaty election form with all the appropriate information and treaty articles with the return

Also note that you may have State tax and State sales tax issues. The states do not follow the Canada-US tax treaty most have very specific rules for when you’re taxable in each state. Unfortunately there’s no easy way to assess State tax other than working through each state at a time.

You’ll also want to ensure that you either file your 1120-F on time or extend the filings via form 7004. If you don’t have a PE in the US the return will be due the 15th day of the 6th month and can be further extended by 6 months via form 7004.

One of the reasons you want to ensure you file your 1120-F on time is that if you don’t file a timely return the IRS can technically tax you on the gross amount of US revenue earned without giving you credit for any expenses. As you can imagine, this would be devastating to most companies.

Now, if in the future your situation changes and you end up having a PE in the US you’ll want to ensure that you file on time and properly extend as the deadline would be 3 months after year end. Not only that but you’ll be taxable in the US on some of your income and will need to ensure you don’t pay double tax by claiming a foreign tax credit in Canada on the US tax that you paid.

As you can see from the information above reviewing tax treaty positions and filing 1120-F can be quick complicated. If you need help please reach out and we can chat.

Cheers

Phil

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