U.S. tax for Canadian corporations doing business, selling a product, services, and owning rental properties in the U.S. can be complex and challenging. It is very important to understand the U.S. basis of taxation and filing requirements for Canadian corporation doing business as a foreign corporation through a branch or having a U.S. subsidiary. Please keep in mind that U.S. tax does not only stop with federal tax but each state has its own unique laws which add another layer of complexity.
When a Canadian corporation does business in the United States, they are considered a “Foreign Person” by the IRS. Furthermore, the U.S. taxes such entities on any income that is effectively connected to the U.S. part of the business or trade. Additionally, some US-sourced income that is not connected with the U.S. business or trade may be taxed as well which Fixed, Determinable, Annual and Periodic (FDAP).
Read more in detail about effectively connected, FDAP, Determining if a U.S. Trade or Business Exists, U.S. Foreign Corporate Income Tax, U.S. Corporate Tax on ECI, U.S. Corporate Tax Brackets for FDAP (as of 2015), Branch Profit Tax, Branch Level Interest Tax and Foreign Interest in Real Property Tax Act.
Any Canadian corporation that is carrying on business in the United States has an obligation to file federal taxes. These obligations can emerge when business is conducted through a US-based permanent establishment (PE) or having income effectively connected with U.S. trade or business. Both forms 1120-F, U.S. Income Tax Return of a Foreign Corporation and 8833, Treaty-Based Return Position Disclosure are required.
For those Canadian businesses wishing to expand their operations into the United States, there are several challenges they will need to work through during the initial stages. For instance, they will need to know how to structure their U.S. operations from a taxation standpoint. Canadian companies in the U.S. have the choice of opening up a U.S. branch of operations or forming a U.S. subsidiary.
All Canadian corporations are taxable on their global income. This includes any US-source income. There is a difference, however, if a Canadian controlled private corporation (CCPC) conducts business in the U.S.