The US-Canada Tax Convention signed in 1980 or more commonly called as the Tax Treaty covers the foreign tax credits where individuals are protected from double taxation. Cross border tax services are essential in providing the guidelines for the rules and regulations of cross-border taxes.
Let’s assume we have, Savers, a Canadian manufacturer, who wants to test the US market and sent down a sales representative. The tax rules and regulations are as follows:
Subject to federal US tax. The Internal Revenue Code (IRC) enforces universal corporate income tax on a foreign corporation which is “engaged in trade or business” within the US Trade. Business generally requires a series of repetitive business engagements. Thus, when the Savers representative starts to gain sales, Savers may well be engaged in a US trade or business and subject to US tax. However, certain domestic US and Canadian tax law are regularly superseded by the US-Canada Treaty. It provides rules to resolve certain conflicts between domestic laws of US and Canada. To avoid any problem to arise, make sure to have a cross border tax specialist that can help you get an approval from the Canadian office.
Subject to state tax. There are different types of state taxes which includes capital/franchise tax, excise taxes, sales and use tax. Whether a Canadian company is subject to these taxes depends on its activity in the US. This is where a cross border tax specialist can assist you.
Does a Canadian company representative have any tax exposure? Under the US-Canada Treaty, the general rule provides the wages derived by a Canadian with respect to his employments is taxable only in Canada unless he is working in the US. If that is the case, the US can tax the employment income. There are two exceptions to this rule. First exception, no US tax is due if the amount received by the Savers employee does not exceed US$10,000.00. The second exception applies when the Savers employee is not present in the US for over 183 days in any calendar year. A cross-border tax specialist may need you to declare the time of your stay in the US so it’s easier to determine your tax exposure.
Other issues that may arise, independent from the rules and regulations, include tax consequences of disposing or unwinding of the business. The key is to get a cross border tax services that can help you review different issues.