U.S. Federal Corporate Income Tax and Canadian Businesses Operating in the United States. What You Need to Know.
In our latest video, Andersen partner Steven Flynn provides insights on the impact of U.S. federal corporate income tax for Canadian businesses operating in the United States. The video illustrates that there is now more flexibility for Canadian businesses seeking to do business in the U.S. and that Canadian companies can optimize their tax positions in both countries with appropriate tax planning.
In December 2017, sweeping tax legislation changes in the U.S. dropped the U.S. federal corporate income tax rate to a flat rate of 21%. This has given Canadian companies operating in the U.S. greater flexibility and opportunities to reduce their overall U.S. and Canadian corporate income tax.
The focus has shifted from strategies to avoid paying U.S. federal corporate income tax to ensure that it is effectively claimed as a foreign tax credit or other deduction against Canadian income tax. There remain situations where a Canadian corporation operating in the U.S., may still want to reduce or eliminate U.S. federal corporate income tax. Steven reviews some of the options available to achieve that goal, such as:
- charging expenses for services or the use of assets to operate the business in the U.S.,
- royalties on intellectual property that the U.S. entity is using, or
- interest on loans that the Canadian corporation has made to a U.S. subsidiary.
Each of these strategies also requires consideration of U.S. withholding taxes and reporting requirements, as well as transfer pricing requirements on related party transactions.
Steven also discusses the tax impact of whether a Canadian owned business is considered a “permanent establishment” under the Canada-U.S. tax treaty. If it is not, then it is not subject to U.S. federal corporate income tax. There is still an obligation to file a U.S. federal corporate income tax return and penalties for failing to do so. Also, filing a U.S. tax return protects a Canadian business by putting time limits on IRS investigations. There may be situations where a Canadian company did not start as a permanent establishment but evolved to the point where its operations met that definition. The filing of U.S. tax returns helps to determine the point in time when a Canadian corporation became a permanent establishment and became subject to U.S. federal corporate income tax.
You can watch the video on Andersen’s YouTube channel here.
If you are a Canadian business owner considering what entity to use when operating in the U.S. you may also be interested in our video Canadian Investment in the U.S.: Entity Choices.
As with any tax situation, the specific facts involved will affect how the law applies and will determine the outcome. The video provides general commentary and is not intended to be legal or tax advice. If you have questions about U.S. Federal corporate income tax and your business, you should seek professional advice. We invite you to contact us to discuss your situation. We can help you assess your situation, review your options, and implement a plan that best achieves your goals.