Business into the United States – how tax issues drive business decision. Slides from Mark Mitchell of GMM Delaware LLC presented on 21st April at the Vancouver Club.

1. Business across the Border
Tax Considerations
Mark Mitchell, Enrolled Agent, MBA, MST
GMM Delaware LLC
US and International Tax Services

2. ANY TAX ADVICE IN THIS PRESENTATION IS NOT INTENDED OR WRITTEN BY GMM
DELAWARE LLC TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER
PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE
IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING
TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
© GMM Delaware LLC 2010. All rights Reserved.
GMM Delaware LLC
US and International Tax Services

3. How do you do business now?
 Sole proprietorship
 Corporation
– Regular corporation
– CCPC (Canadian controlled private corporation)
 Partnership
 Trust
GMM Delaware LLC
US and International Tax Services

4. What drives the current form of your business?
 Limited liability
 Complexity/simplicity
 Customer expectations
 Succession planning
 Who you are in business with
 Tax issues
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US and International Tax Services

5. First rule of cross-border business
 Don’t let tax drive your business structure!
 Otherwise known as “don’t let the tax tail wag the dog”
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6. Forms of doing business in the United States
 Sole proprietorship
 Corporation
 Partnership
 Limited Liability Company
 Trust
GMM Delaware LLC
US and International Tax Services

7. Comparative maximum tax rates
Canada/BC Federal/WA Federal/CA
Sole Proprietorship 43% 35% 40%
Corporation 28% 34% 39%
Branch profits tax or +5% +5%
dividend withholding tax
Partnership No tax No tax No tax
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8. Second rule of cross-border business
 Determine whether you are doing business IN the United
States or doing business WITH the United States
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9. Are you doing business IN the United States?
 Probably not doing business IN the United States if ONLY
activity is:
– Providing services to U.S. customers from Canada
– Making investments from outside the United States
– NOTE: selling widgets to U.S. customers from Canada could be doing
business!
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10. What is “doing business”?
 Low threshold
 “Any personal service performed in the United States or any
other activity within the United States that is regular,
substantial, and continuous enough to constitute the
conduct of a trade or business in the United States”
GMM Delaware LLC
US and International Tax Services

11. What is “U.S. source income”?
 Provision of services in the United States
 Rents from U.S. property
 Sale of inventory inside the United States
 Ignoring investment income for now
 Certain other income “effectively connected”
GMM Delaware LLC
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12. Are you doing business IN the United States?
 Are your activities sufficient to be a business?
 Are your activities giving rise to U.S. source income?
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US and International Tax Services

13. Third rule of cross-border business
 Don’t let attempting to avoid a U.S. business drive your
decisions
 Think about the future, not just the present – marketing,
expanding customer base, servicing your customers
GMM Delaware LLC
US and International Tax Services

14. What is a permanent establishment?
 Simple rule
– No permanent establishment = no federal tax
 Only it’s not so simple
– Different rules for state taxes
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15. Two tests of permanent establishment
 Fixed place of business
– Office, branch, factory, workshop, construction site
– Note that a reserved space at a customer’s office can be a fixed place
of business
 Dependent agent
– Someone who has the authority to negotiate contracts
– Who exercises that authority
– Who is not independent – say an employee
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US and International Tax Services

16. Forth rule of cross-border business
 If you believe that you have no U.S. permanent
establishment, make sure you file a treaty-based return
– $10,000 penalty for failure to comply
– No statute of limitations – the IRS can chase you for all back years
– May be taxed on gross income
 Make sure you review your position each year
– Is paying U.S. tax such a bad thing?
– Depends on what Canadian tax you’re paying, and what additional
tax cost there would be to your business
GMM Delaware LLC
US and International Tax Services

17. So you’re in the U.S. tax net!
 Don’t panic yet
 Need to determine what is the optimal structure
– Minimize overall tax
– Maximize utilization of losses
– Keep things simple
– Allow flexibility for the future
GMM Delaware LLC
US and International Tax Services

18. 1. Branch
Canadian taxpayer operates directly in the United States
 Subject to same federal tax on
U.S operations as U.S. person
Canadian Canadian
 U.S. tax paid will reduce Canadian Corp Individual
tax dollar for dollar (up to
amount of Canadian tax)
 Losses from U.S. operations can
be used in Canada
US US
 Can be difficult to determine Branch Branch
profits/losses of branch,
especially for deductions such as
interest
 Liability and other business issues
GMM Delaware LLC
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19. 2. Subsidiary
Canadian taxpayer incorporates U.S. subsidiary
 Taxed as U.S. person
 U.S. tax paid do not reduce Canadian Canadian
Canadian tax – but see later Corp Individual
 Losses from U.S. operations
cannot be used in Canada
 May be easier to determine
income and expenses of separate
US US
legal entry Corp Corp
 Limited liability and other
business issues
GMM Delaware LLC
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20. Branch versus subsidiary
Branch Subsidiary
Subject to same federal tax on U.S Taxed as U.S. person
operations as U.S. person
U.S. tax paid will reduce Canadian tax U.S. tax paid do not reduce Canadian tax
dollar for dollar (up to amount of – but see later
Canadian tax)
Losses from U.S. operations can be used Losses from U.S. operations cannot be
in Canada used in Canada
Can be difficult to determine May be easier to determine income and
profits/losses of branch, especially for expenses of separate legal entry
deductions such as interest
Liability and other business issues Limited liability and other business issues
GMM Delaware LLC
US and International Tax Services

21. A couple of notes to remember
 What’s an s-corporation?
– “Like” a partnership for U.S. tax purposes
– No entity level federal tax
– Cannot be used by foreign shareholders
 What’s an LLC?
– Generally taxed as a partnership or “branch” for U.S. tax purposes
– No entity level tax
– Problems with Canadian tax
GMM Delaware LLC
US and International Tax Services

22. Fifth rule of cross-border business
 Don’t forget the tax on repatriation of profits!
– US withholding tax or branch profits tax – 5%-15%
– Canadian tax on foreign income – 0%-43%
– If you’re leaving cash in the business, may be less of a concern
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US and International Tax Services

23. Tax on repatriation to Canadian corporation
 If using a branch structure, no tax on first C$500k, thereafter
5%
 If using a U.S. corporation, 5% withholding, provided that
Canadian corporation owns 10% of voting stock of U.S.
corporation
 Otherwise 15%
 If U.S. corporation has “active business”, no Canadian tax on
repatriated earnings (dividends)
 If U.S. branch, likely no Canadian tax due to foreign tax credit
GMM Delaware LLC
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24. Overall comparative maximum tax rates
Canada/BC Federal/WA Federal/CA
Sole Proprietorship 43% 35% 40%
U.S. Corporation 28.5% 34% 39%
Canadian corporation:
Branch profits tax or +5% +5%
dividend withholding tax
Individual Canadian +14.5% +28% +26%
investor
GMM Delaware LLC
US and International Tax Services

25. Note on tax rates
 United States has a lower rate for corporations with “small
profits”
– 15% to $50,000
– 25% on next $25,000
– 34% up to $10,000,000
– Benefit of lower rates is withdrawn
 For individuals, maximum tax rates reached at significantly
higher income than in Canada
– 10%/15%/25%/28% to $104,625
– 33% to $186,825
– Add 0% to 9% for state income tax
GMM Delaware LLC
US and International Tax Services

26. Sixth rule of cross-border business
 Don’t forget about state tax
– Each state has its own tax laws and collects its own taxes
– Localities within states have their own rules and may collect their
own taxes
– No “harmonization” of state taxes – apart from multi-state tax
compact rules
GMM Delaware LLC
US and International Tax Services

27. State (and local) taxes
 Income taxes
 Franchise taxes (what’s that?)
 Capital taxes
 Turnover taxes
 Sales taxes
 Use taxes
 Property taxes
 Excise taxes
 …..and so it goes on!
GMM Delaware LLC
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28. Income and Franchise Taxes
 Based on taxable income
– Modified form of federal taxable income
– Tax deductible for federal income tax purposes
 Based on “apportioned income”, not on determination of
profits realized in a state
 Need to have “nexus” to be subject to state income tax
 If using a branch or permanent establishment, foreign tax
credit in Canada
GMM Delaware LLC
US and International Tax Services

29. What is “nexus”?
 “Minimum” connection with a state
 Not the same as “permanent establishment”
 Specific rules for income tax
– Public Law 86-272 – solicitation rules
 Case law applies for sales taxes
– States are becoming very aggressive in this area
 Can you avoid nexus?
GMM Delaware LLC
US and International Tax Services

30. Sales and use taxes
 Sales tax “similar” to provincial sales tax
 Tax on end-user – not value-added tax
 Sales tax is NOT a taxpayer’s liability – should be added to
price and collected from customer
 Exemption certificates are used to avoid application to
businesses
 Use tax is “self assessment” of tax where items brought into
a state and used in business rather than being sold
GMM Delaware LLC
US and International Tax Services

31. Turnover taxes
 Washington Business and Occupation Tax
 Hawaii General Excise Tax
 Taxes based on gross income
 Far wider application than sales taxes, but generally
significantly lower rate
 Since not income tax, no protection for “solicitation
activities”
 No foreign tax credit for Canadian tax purposes
GMM Delaware LLC
US and International Tax Services

32. The rules again…
1. Don’t let tax drive your business structure!
2. Determine whether you are doing business IN the United
States or doing business WITH the United States
3. Don’t try too hard to avoid having a U.S. business
4. If you believe that you have no U.S. permanent
establishment, make sure you file a treaty-based return
5. Don’t forget the tax on repatriation of profits!
6. Don’t forget about state tax
GMM Delaware LLC
US and International Tax Services

33. And finally... if you are working in the USA
As an employee
– Earning over $10,000 in a year from U.S. activities?
– Costs of your employment paid by a U.S. company or
branch?
– Spending significant amounts of time in any State?
As a sole practitioner
– Do you have a U.S. permanent establishment?
– Do you have nexus in any state?
GMM Delaware LLC
US and International Tax Services

34. Contact details
Mark Mitchell
GMM Delaware LLC
303-1860 Robson Street, Vancouver BC V6G 3C1
Tel. 604-562-0733 Fax. 604-357-1172
Email markmitchell@gmmdelaware.com
GMM Delaware LLC
US and International Tax Services