Understanding US Tax Obligations for Canadian Businesses

These days, it’s easy for a business to expand into international markets. For Canadians, one of the biggest–and easiest–foreign markets to work in is the US. It’s made easy because the cultures and languages are alike, there’s a close proximity, and the laws are similar enough that businesses feel comfortable operating between the two countries.

That said, there are still complexities to Canadian businesses operating in the US. The US has numerous different sales tax jurisdictions, and the rules aren’t always easy to understand, let alone follow. Here are some of the implications and obligations you’ll face if you operate in the US.

Federal US taxation

Generally speaking, if your business earns money in the US, you might owe US taxes or need to meet filing requirements. US tax law states non-residents, including businesses, must pay federal tax if their income is US-based.

If you conduct business in the US any time in a year, you might have to pay US taxes.

However, the Canada-US tax treaty offers some relief for Canadian businesses from paying US federal tax. Canadian residents only pay US taxes if their business has a permanent establishment in the US.

If your business has no US offices, branches, factories, workshops, or agents, you must file but not pay US taxes.

If you have a US location or representative, you’ll likely need to pay US taxes. Income from a US permanent establishment won’t qualify for the small business deduction.

State US taxation

The US states aren’t bound to the federal tax treaty, so depending on the state you have business in, you may still pay state tax even if you’re eligible under the Canada – US tax treaty. Some US states impose income tax on all companies that conduct business in their state, even if there is no permanent establishment in that state.

Sales taxes

The US has many different sales tax jurisdictions, which can vary between states, counties, and even municipalities. There are also different industry specific taxes that vary. Even if you don’t have a permanent establishment in the US, it’s wise to ensure you or your financial advisor understands your obligations when you conduct business in the US.

Other important tax factors

Your corporate structure may play a role in how you’re taxed. As your business grows and expands, and as your company’s needs change, your corporate structure could also change. This could trigger different tax obligations and filing requirements.

Final thoughts

If you conduct business in the US, you could be responsible for a variety of different taxes. Even if you aren’t required to pay federal tax because you have no permanent establishment in the US, you may still have to pay state taxes, as well as a variety of sales taxes. Contact us to find out how we can help you navigate business in the US.

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Read more blogs 10 concepts every small business owner needs to understand – Alvarez CPA Inc.