Blog post

Key Points

• U.S. citizens or residents with a Canadian business may need to file U.S. tax returns, even if the business is based in Canada.
• Reporting requirements include filing forms like the FBAR and Form 5471 for foreign corporations owned by U.S. persons.
• The Canada-U.S. tax treaty provides some relief, but careful planning is needed to avoid double taxation.
• Failure to file required forms can result in significant penalties, even if no tax is owed.
• Consulting with a cross-border tax professional is essential to ensure compliance and optimize tax outcomes for a Canadian business owned by a U.S. person.

If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.

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Question

Hi Phil,

I’m a long time subscriber to your newsletter and Facebook group member.

While I have dealt with a lot of expat tax issues myself, I have a tough one which has stumped our accountant in Victoria (maybe she just doesn’t want to get into it)

My Canadian wife is in the process of hiring three contractors for her coaching business. One is located in Canada and the other two are in the USA. Everything will be done virtually and they will be meeting with a few (usually American) clients on a weekly basis which she sends them. The contractors will send an invoice to her every couple of weeks for payment. Some of the contractors have a pre-established business and some don’t.

Our accountant said that it may get complicated because her business could need to set up an office in the USA if American contractors are seeing American clients! She said we may also need a 1040NR return and a business license.

It all sounds like a major headache and we’re not sure what to do! Is there anyone that you know who could help us out with this? It’s a completely online business.

Cheers and many thanks,

XXXXXX

Answer

Hi XXXXXXX

Thanks for the email and for being a member of the expat Facebook page and newsletter.

Yes, you are correct. If the business is fully an online business it will likely only be taxable in Canada. Under the Canada-US treaty business income earned by a Canadian resident will only be taxable to the extent it’s earned through a Permanent Establishment (PE) or usually an office or building. However there are other situations that may deem a PE for US purposes as well.

The PE rules can be quite detailed and hard to interpret, however you could have a PE if more than 50% of the work is done by individuals present in the US or if they close deals for example.

I’ve pasted the Article of the Canada US tax treaty that deals with PE’s, however searching for this topic online might yield results better to understand:

Article V

Permanent Establishment

1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.
2. The term “permanent establishment” shall include especially:

    (a) a place of management;

    (b) a branch;

    (c) an office;

    (d) a factory;

    (e) a workshop; and

    (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

3. A building site or construction or installation project constitutes a permanent establishment if, but only if, it lasts more than 12 months.

4. The use of an installation or drilling rig or ship in a Contracting State to explore for or exploit natural resources constitutes a permanent establishment if, but only if, such use is for more than three months in any twelve-month period.

5. A person acting in a Contracting State on behalf of a resident of the other Contracting State-other than an agent of an independent status to whom paragraph 7 applies-shall be deemed to be a permanent establishment in the first-mentioned State if such person has, and habitually exercises in that State, an authority to conclude contracts in the name of the resident.
6. Notwithstanding the provisions of paragraphs 1, 2 and 5, the term “permanent establishment” shall be deemed not to include a fixed place of business used solely for, or a person referred to in paragraph 5 engaged solely in, one or more of the following activities:

    (a) the use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the resident;

    (b) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display or delivery;

    (c) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;

    (d) the purchase of goods or merchandise, or the collection of information, for the resident; and

    (e) advertising, the supply of information, scientific research or similar activities which have a preparatory or auxiliary character, for the resident.

7. A resident of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.

8. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not constitute either company a permanent establishment of the other.

9. For the purposes of the Convention, the provisions of this Article shall be applied in determining whether any person has a permanent establishment in any State.

Also, depending on the situation, how much income is being earned and in which state the income is being earned you may have GST or state tax issues.

Hope that helps.

Cheers

Phil