Individual contractors from Canada providing services in the U.S. in the capacity of self-employed individuals or utilizing their Canco should be aware that depending on the number of days present and percentage of U.S. gross business income, Article V, paragraph 9 of the Canada/U.S. Tax Treaty may deem them or Canco to have a permanent establishment in the United States. This stems from the 2007 Protocol that in this respect was effective commencing in 2010.
Since 2010, this means that income will be subject to U.S. taxation requiring the filing of U.S. federal and possibly State returns, however foreign tax credit is available on the Canadian tax return.

Previously, independents had to demonstrate that they were not carrying on business in the U.S. through a Read More

Envision a situation where a foreign corporation (“Forco”) buys all of the shares of a private Canadian corporation (“Canco”) for $10 million.

What happens if Canco generates profits, and Forco would like to use those profits to recover the $10 million cost of its investment in Canco?

Can Forco just take funds from Canco up to the amount of that cost without paying any Canadian withholding tax? It should be able to, since it is just trying to recover its cost, right?

Unfortunately, that is not the case. Any dividends that Canco pays to Forco will be subject to Read More

Optimal Ownership Structures

So far, I have discussed the use of Forco within the context of a relatively simple structure where it would be a wholly-owned subsidiary of Canco.
In many situations, that simple structure will be appropriate, but in others situations, there may be a better alternative. Two common variations are discussed below.

Ownership by Canadian Sister Corporation of Canco

If the shareholders of Canco are Canadian resident individuals, consideration should be given to the possible application of the “capital gains exemption”, currently applicable to up to $800,000 in capital gains from the sale of “qualified small business corporation Read More

Transfer Pricing Issues

As is the case with most major counties, Canada has rules in its tax laws aimed at preventing income from being shifted to other jurisdictions by unreasonable transfer pricing [1].

To date, most of the activity of the CRA and reported tax cases has focused more on inbound transfer pricing issues involving charges by multi-national corporations to Canadian subsidiaries. However, the rules can certainly be applied in connection with outbound tax planning of the type being outlined in this series [2].

If the CRA successfully applies these rules, they could lead to a reassessment of Read More