A brief discussion about Canadian corporations doing business in the United States.

1. Corporations Doing Business in the United
States
Any advice is not intended or written by MacKay LLP to be used, and cannot be used by a client or any other person or
entity for the purpose of (1) avoiding penalties that may be imposed on any taxpayer or (2) promoting, marketing, or
recommending to any party any matters addressed herein.

2. SUMMARY OF CONTENTS
Federal Taxation
 No Taxable Presence,
 Through a U.S. Branch, or
 Through a U.S. Subsidiary Corporation
State Taxation
 What Creates State Income Tax Nexus?
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3. CANADIAN COMPANIES INVESTING
THROUGH A BRANCH
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4. CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH
 First: U.S. Domestic Law
 U.S. Effectively Connected Income (“ECI”)
 Less expenses attributable to that ECI
 Keep good records
 35% Net basis taxation
 Creditable in Canada against corporate tax
 5% or 30% withholding tax on repatriated cash
 Carry net operating losses forward
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5. CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH
 Treaty Protection Overrides Domestic Law
 ECI only taxed if earned through a
Permanent Establishment (“PE”)
 No PE means US operations may be protected
from US tax
 Note: PE protection generally not available
for:
 interest,
 dividends,
 rents, and
 royalties
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6. CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH
 What Creates PE?
 Physical “Place of Business”
 Office in the U.S.
 Factory
 Mineral property
 Activities of Employees (or Other Dependent
Agents)
 Canadian employee or agent concludes contract in the
United States
 U.S. sales agent with U.S. address on business cards
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7. CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH
 New “Deemed PE” Rules
 Test # 1 (Key-Person Services):
o Any employee
» present more than 183 days (during any 12 month
period) and
» that individual produces income that is more than
50% of the company’s gross active business
revenues during that period.
o Services are to unrelated parties.
o Personal days count!
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8. CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH
 New “Deemed PE” Rules (Continued)
 Test # 2 (Large-Project Services):
o Any employee(s) or agent(s) who are
» present more than 183 days (during any 12 month
period),
» the services are provided to unrelated residents or
those who have a PE (and the services are related
to that PE), and
» the services are for a single or “connected project”
o “Connected” means a coherent whole, commercially
and geographically.
o Days do not include non-working days.
o Multiple employees on same day counted as one day.
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9. CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH
 What Doesn’t Create PE?
 Maintaining a storage facility located in the
U.S.
 Using independent contractors to generate
sales in the U.S.
 Conclusion of contracts is irrelevant.
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10. CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH
Operating Without a PE
 No office in the United States
 Limited scope for any dependent agents in the United States
 File Treaty Based Return
 US corporate tax return for foreign corporations
 Relays taxpayer information and notifies IRS of reliance on Treaty
 What does it achieve?
 Only pay Canadian tax on business income and not US tax
 Treat return should:
 protects the right to claim deductions if the IRS says you have a PE
 Treat return starts statute of limitations
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11. CANADIAN COMPANIES OPERATING
THROUGH A U.S. ENTITY
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12. CANADIAN COMPANIES OPERATING THROUGH A U.S. ENTITY
 Various U.S. Domestic Entities
 S-Corporation
 LLCs
 Partnerships / Limited Partnerships
 C-Corporations
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13. CANADIAN COMPANIES OPERATING THROUGH A U.S. ENTITY
 Partnerships
 Canadian corporate partners may have a
branch in the United States
 Required to file corporate income tax return
 Canadian individual partners may have US
effectively connected income
 Required to file individual income tax return
 Individual partners pay tax at equal to higher
of Canadian and US marginal personal tax
rates
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14. STATE NEXUS ISSUES
STATE NEXUS ISSUES
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15. STATE NEXUS ISSUES
 What is Nexus or “Doing Business”?
 Definition of nexus varies by state
 Visits, equipment, offices in a state can
cause nexus in that state
 Treaty Protection
 Usually unavailable at the state or local level
 Public Law 86-272
 Can protect taxpayer with minimal state
presence from paying state income tax
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16. STATE NEXUS ISSUES
 PL 86-272 Does Not Protect
 Use of facilities for storage, display or delivery of
goods
 Maintenance of stock
 Maintenance of stock for processing by another
 Purchase of goods
 Collection of information
 Advertising, supply of information or similar activities
that are preparatory or auxiliary character
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17. OTHER STATE TAXES
PL 86-272 also does not apply to:
 Franchise Taxes
 Alternative to income tax
 Based on factors other than net income
 Gross Receipts
 Gross Profit
 Capital Stock Tax
 Sales and Use Tax
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18. QUESTIONS?
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19. Kevin Duxbury, CA David Turchen, CA, CPA (PA)
Senior Manager, U.S. Tax Manager, U.S. Tax
1100 – 1177 West Hastings St 1100 – 1177 West Hastings St
Vancouver, BC V6E 4T5 Vancouver, BC V6E 4T5
604-697-5260 604-697-5265
kevinduxbury@van.mackay.ca davidturchen@van.mackay.ca
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