Whether you want to think about it or not, tax time is coming — soon. And over the years, we’ve spent some time writing on the high cost of filing your business taxes late, on how to avoid a tax audit and (gulp) tips for surviving a CRA audit. Each one of these blogs focused on Canadian businesses filing taxes with the Canada Revenue Agency. But what if your business may also need to deal with the IRS in the U.S.? How do you even begin to know where to start?
The first thing you need to know is that when it comes to earning U.S. revenues and filing U.S. income taxes, the jurisdiction where your company is incorporated is what matters most. If your business is incorporated in Canada (federally or provincially), then it is a Canadian company and is only required to file Canadian income taxes. If you are incorporated in the U.S. then you must file tax returns with the IRS, but do not have to file Canadian income taxes (because you are not Canadian).
For example, say our marketing team at Smart Foundations, which is incorporated in Ontario, were to provide services for an American client, who then pays with a cheque in U.S. dollars. The total amount would be converted to Canadians funds, deposited in our Canadian bank account and recorded in our business records as such. At tax time, this foreign income would simply be reported as part of our total business income calculations. The same process applies to a Canadian-based business that may sell and ship products to the U.S.
If you see your business in this example then you can breathe a sigh of relief and carry on. But if your business is incorporated in the U.S., as a U.S. corporation you must file U.S. taxes with the IRS federally and with the appropriate state where you are located or incorporated.
Consult a tax professional
U.S. taxes are far more complex than Canadian taxes; it’s not that they are overly difficult, it’s that they are vastly different.
In certain circumstances, Canadian businesses will have to report sales taxes in the U.S. This is complicated since there are vastly different rules in each state and these rules are changing rapidly due to recent Supreme Court rulings allowing states to tax certain transactions even if you do not have a physical location in the state.
Our best advice? Before performing any business activities in the U.S., get expert advice from a U.S. tax professional. Solving tax problems in Canada can be enough of a headache, trying to resolve a tax issue without professional advice in the U.S. (or any other country, for that matter) can lead to nothing but frustration … and wasted money.