U.S. Tax
Welch LLP provides U.S. tax services to Canadian businesses operating in or selling to customers in the United States may be subject to income tax in the US or may need to collect and remit US state sales tax.
Whether a Canadian company is subject to US federal and/or state taxation depends on several factors, and it is crucial that you know how the rules apply in your jurisdiction. For US federal income tax purposes, the primary factor is whether the company has a permanent establishment in the US. For state income and sales tax purposes, the primary factor is whether the company has nexus within one or more states. Welch will help you understand and maximize the rules as they apply our US tax to your situation.
What we do for U.S. Tax
- Corporate tax return preparation
- Personal tax return preparation
- Federal and state voluntary disclosures
- Sales tax review and compliance
- Strategic tax planning
- Representation to tax authorities
- Due Diligence
- Estate tax for Canadians (US real estate and securities) and US citizens (world-wide assets)
Permanent Establishment (PE)
If a Canadian company has a PE in the US, it is subject to US federal income taxation. A PE is a place of management, branch, office or factory. It also includes a building site or construction or installation project if the construction or installation period exceeds 12 months. In addition, PE rules certain services, and a PE may be deemed to exist based on services performed in the US by Canadian employees.
A company with a PE should file a US federal income tax return. If a Canadian company is operating as a branch in the US, the US federal and state income tax liability will be treated as a foreign tax paid. The company may then be eligible for a foreign tax credit on its Canadian tax return, which should decrease the company’s Canadian tax liability.
A Canadian company that does not have a PE must file an annual US federal tax return to disclose its treaty-based position in order to avoid an annual US$10,000 penalty.
Nexus
The nexus concept examines whether a business has a non-trivial presence in one or more states. It is determined on a state-by-state basis, with the nexus criteria differing for sales tax versus income tax. In determining whether a Canadian business has nexus, we consider whether the business has employees (including those attending trade shows), provides installation or implementation, has inventory stored or has a physical location or property (including intangible property) in a given state.
Rules vary from state to state, and even a temporary presence may be enough to establish nexus.
It is also worth noting that if two businesses are affiliated, the operations of one can be taken into account in determining the nexus status of the other. For example, in New York, if a business without nexus has as little as 5 percent cross-ownership with another business that does have nexus, it can result in the first company having nexus under nexus affiliate rules. Other connections, including the sharing of intellectual property such as trademarks, can also result in nexus affiliate rules applying.
It is crucial to carefully consider the operations of a business in relation to each state in which it operates or has customers.
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Frequently
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Questions
What U.S. tax services does Welch LLP offer?
Welch LLP offers comprehensive U.S. tax solutions for Canadian individuals and businesses with cross-border operations. Our services include corporate and personal U.S. tax return preparation, federal and state voluntary disclosures, sales-tax review and compliance, strategic tax planning, representation to tax authorities, due diligence, and estate-tax advisory for Canadians with U.S. assets or U.S. citizens with worldwide holdings.
How do I know if my Canadian business must pay U.S. taxes?
Whether your business owes U.S. taxes depends on the nature and extent of your operations in the United States. Key considerations include whether your company has a Permanent Establishment (PE) for federal income tax purposes or nexus for state income or sales tax purposes. Welch LLP helps assess your exposure under both federal and state rules and ensures proper compliance while minimizing unnecessary filings or penalties.
What is a Permanent Establishment (PE), and why does it matter?
If your business has an ongoing presence in the United States, you may have what is known as a Permanent Establishment (PE). Generally, a PE exists when a Canadian company has a fixed place of business in the U.S., such as an office, branch, factory, or certain construction sites that continue for a sufficient period of time.
This matters because a PE can mean your company is subject to U.S. federal income tax on income connected to that U.S. presence. The good news is that U.S. tax paid can often be claimed as a foreign tax credit in Canada, helping reduce double taxation.
Even if your company does not have a PE, a U.S. filing may still be required to claim treaty protection. Missing that filing can lead to unanticipated penalties.
What is Nexus, and how does it affect state income and sales tax?
Nexus is the connection between your business and a U.S. state that can create state tax obligations. For Canadian businesses, nexus can arise from having employees, inventory, property, trade show activity, significant sales, or an affiliated business in a state.
It is important to understand that income tax nexus and sales tax nexus are not always the same. Income tax nexus may require your business to file a state income or franchise tax return, while sales tax nexus may require you to register, collect sales tax from customers, and remit it to the state.
Because each state has its own rules, a business may have sales tax obligations without owing income tax, or vice versa.
At Welch LLP, we help Canadian businesses identify where nexus exists and stay compliant with both U.S. state income tax and sales tax requirements.
What are the risks of not filing a U.S. tax return for my Canadian company?
Failing to file a required U.S. tax return can become costly.
Potential consequences may include:
A US $10,000 penalty for failing to disclose a treaty-based position
Federal interest and penalties
State back taxes, interest, and penalties
Increased scrutiny from tax authorities
In some cases, a return is required even when no U.S. tax is ultimately payable. Filing properly helps preserve treaty benefits and supports your overall compliance position.
Why is U.S. tax compliance important for Canadian businesses?
For Canadian businesses operating across the border, U.S. tax rules can apply earlier than expected.
Hiring an employee, storing inventory, attending trade shows, or expanding sales into a new state can all create tax obligations. Understanding those rules early can help you avoid surprises, manage risk, and make informed business decisions.
At Welch LLP, we can help your business:
- Determine whether it has a Permanent Establishment
- Assess state nexus exposure
- Reduce the risk of penalties
- Minimize double taxation where possible
- Meet U.S. filing and disclosure requirements
Related resources
Welch LLP Annual Accounting and Tax Technical Update for Private Enterprises 2024
October 09, 2024 – Gain insight for the year ahead. Our virtual Private Enterprise Accounting & Tax Update webinar will take place on October 9th at 10am.
U.S. Estate Tax for Non-U.S. Persons
September 12, 2024 – Under U.S Tax law, U.S citizens are subject to estate taxation with respect to their worldwide assets, regardless of whether they are residents of the U.S on passing. Certain deceased non-residents of the U.S are subject to U.S estate taxation in respect to their U.S situated assets, and these include:
2023 Personal income tax updates – Canada and US
February 05, 2024 – With personal tax filing season just around the corner, we thought we would take this opportunity to outline some of the recent changes that will impact Canadian and US personal tax filings for the 2023 year.
New Stock Option Rules (Bill C-30) effective July 1, 2021
July 26, 2021 – On June 29, 2021 Parliament passed legislation (Bill C-30) to implement measures from the 2021 Federal Budget. One of those measures is a long-anticipated change to the employee stock option deduction limit for stock options issued by non-CCPC’s, whereby the 50% stock option deduction will be limited to $200,000 worth of shares.
Probate Fee Planning
December 10, 2019 – Separate from income tax that may arise when an individual dies, Ontario has an Estate Administration Tax – which we generally refer to as probate fees.
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