Cross-border taxation United States and Canada

Treatment of Canadians Working in the United States and Vice Versa

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Canada-U.S. Tax Treaty: Article XXIV aims to prevent double taxation and ensure credit for taxes paid in the other country. Residents working across the border must comply with both the U.S. Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA), declaring their worldwide income but benefiting from exemptions such as the Foreign Tax Credit (FTC) to minimize dual tax obligations.

Tips for Cross-Border Expanding Businesses

 

Entity Structuring and Restructuring: Companies should consider structures like Limited Liability Companies (LLCs) or corporations for their U.S. operations to benefit from pass-through taxation, which can be advantageous under certain conditions.

Application of FIRPTA

 

Canadian businesses selling real estate in the U.S. must comply with the Foreign Investment in Real Property Tax Act (FIRPTA), requiring a 15% withholding on the gross amount of sale, unless exemptions apply (e.g., if the buyer uses the property as their primary residence).

State and Local Specific Taxation (SALT)

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Compliance with Local Requirements: Businesses must navigate the complexity of local tax jurisdictions, ensuring compliance with economic nexus thresholds as defined by the South Dakota v. Wayfair decision, mandating sales tax collection even without physical presence.

To provide you with the most accurate and up-to-date information regarding economic nexus thresholds for sales tax in 2024, here's a summary of key requirements by state:

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• California: Economic nexus threshold set at $500,000 in sales, including combined sales of tangible personal property delivered in the state by the retailer and all related parties. Services are excluded from this calculation.

• New York: Among the highest thresholds, at $500,000 and at least 100 transactions over the last four fiscal quarters.

• Texas and Tennessee: These states have a $500,000 threshold in retail sales, including taxable services, over the preceding 12 months.

• Michigan and Minnesota: The threshold is $100,000 or 200 transactions in the calendar year for Michigan, and any 12-month period for Minnesota.

• Massachusetts: Following a 2019 update, the threshold is set at $100,000 without counting the number of transactions.

• Illinois and Pennsylvania: These states also require sellers to meet either $100,000 or 200 transactions over the previous 12 months to be required to collect sales tax.

• Nebraska, Nevada, and Utah: A $100,000 or 200 transactions threshold applies, considering the current or previous calendar year.

 

This information is critical for Canadian businesses considering selling products in the U.S., as they must understand and comply with these rules to avoid penalties and optimize their tax planning. It's also advisable to explore creating structures like LLCs to leverage tax and compliance benefits across multiple states and consider the use of trusts for better asset and profit management.

For a Canadian resident managing a corporation incorporated in Canada (INC), using a structure combining a trust and an LLC in the U.S. can offer specific tax and operational advantages. Here are some key points:

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Tax Optimization

 

Favorable Tax Treatment of LLCs:

In the U.S., LLCs benefit from pass-through taxation, meaning profits are taxed directly to owners without corporate-level taxation. For a Canadian resident, this can be advantageous if U.S.-generated income primarily flows back to Canada, potentially reducing the overall tax burden depending on available foreign tax credits and tax treaties.

Tax Treatment of LLCs in Canada: Although LLCs are considered fiscally transparent entities in the U.S., they are often treated as separate corporations for Canadian tax purposes. This can create tax complexity but also planning opportunities to minimize taxation.

 

Asset Protection

Trust-Based Protection: Using a trust to hold interests in an LLC can provide an additional layer of asset protection against creditors and litigation while offering efficient succession planning for U.S. assets. This is particularly relevant for real estate assets or other significant investments in the U.S.