Canadian ​corporations ​and ​individuals ​with ​business ​interests ​in ​the ​United ​States ​are ​often ​confused about ​when ​to ​file ​a ​U.S. ​tax ​return.

Canadian ​individuals ​providing ​services ​to ​U.S. ​customers ​or ​Canadian ​corporations ​engaged ​in ​a ​U.S. trade ​or ​business ​are ​required ​to ​file ​a ​U.S. ​tax ​return ​with ​both ​the ​Internal ​Revenue ​Service ​(IRS) ​and possibly ​U.S. ​states ​to ​report ​their ​income ​received ​from ​U.S. ​sources. ​This ​U.S. ​tax ​filing ​is ​in ​addition ​to the ​Canadian ​tax ​filing ​requirement ​of ​reporting ​worldwide ​income.

 

An ​individual ​who ​is ​not ​a ​U.S. ​citizen, ​U.S. ​resident ​alien ​or ​green ​card ​holder ​reports ​U.S. ​source ​income on ​Form ​1040NR, ​U.S. ​Nonresident ​Alien ​Income ​Tax ​Return. ​Canadian ​corporations ​providing ​goods ​or services ​into ​the ​U.S. ​report ​their ​U.S. ​source ​income ​using ​Form ​1120-F, U.S. ​Income ​Tax ​Return ​of ​a Foreign ​Corporation.

U.S. ​source ​income ​connected ​to ​a ​U.S. ​place ​of ​business ​is ​reported ​net ​of ​deductions and taxed ​at ​a graduated ​rate ​or ​at ​reduced rates ​under ​the ​Canada-U.S. ​income ​tax ​treaty. ​Passive ​U.S. ​income, ​such as ​dividends, ​are ​taxed ​at ​a ​flat ​tax ​rate.

For ​Canadian ​corporations ​doing ​business ​in ​the ​U.S., ​the ​type ​of ​U.S. ​tax ​return ​depends ​on ​whether ​their business ​is ​carried ​on ​in ​the ​U.S. ​through ​a permanent ​establishment. ​A ​permanent ​establishment is defined ​in ​Article ​V ​of the Canada-U.S. ​tax ​treaty as a place ​of ​management, ​branch, ​office, ​factory or workshop. It includes having ​a ​person physically located ​in ​the ​U.S. ​who ​exercises ​an ​authority ​in ​the
U.S. ​to ​conclude ​contracts ​for ​the ​corporation. ​It ​does ​not ​include either ​the ​mere ​purchase ​of ​goods ​or merchandise ​or ​the ​mere ​provision ​of ​executive, ​managerial ​or ​administrative ​facilities ​or ​services. Carrying ​on ​business ​in ​the ​U.S. ​through ​a ​permanent ​establishment ​requires ​the ​filing ​of ​a ​U.S. ​branch tax ​return, ​Form ​1120-F, ​and ​paying ​U.S. ​corporate ​tax ​on ​U.S. ​taxable ​income.

Carrying ​on ​business ​in ​the ​U.S. ​without ​a ​permanent ​establishment ​requires ​the ​filing ​of ​a ​U.S. ​protective return, ​also ​Form ​1120-F, ​but ​in ​this ​case, ​it ​is ​a ​Treaty ​based ​tax ​filing. ​The ​return ​asserts ​to ​the ​IRS ​that although ​the ​Canadian ​company ​has ​U.S. ​source ​income, ​it ​meets ​an ​exception ​from ​U.S. ​taxation ​under provisions ​of ​the ​Canada-U.S. ​tax ​convention. ​Failure ​to ​file ​a ​Treaty ​protective ​return ​on ​time ​can ​result in ​significant ​U.S. ​penalties ​and ​the ​loss ​of ​the ​desired ​Treaty ​protection. ​Penalties ​are ​imposed ​on ​the gross ​U.S. ​revenues ​at ​a ​tax ​rate ​of ​30% ​without ​regard ​to ​any ​tax ​deductions.

Knowing ​whether ​your ​business ​has ​a ​permanent ​establishment ​is ​critical ​to ​filing ​the ​correct ​U.S. ​tax return. Where ​U.S. ​source ​income ​is ​taxable ​in ​the ​U.S., ​Canadian ​corporations ​and ​individuals ​can ​claim a ​foreign ​tax ​credit ​on ​their ​Canadian ​tax ​return ​for ​U.S. ​tax ​paid, ​thereby ​avoiding ​double ​taxation on ​U.S. source ​income.

A ​Canadian ​corporation ​that ​carries ​on ​business ​through ​a ​permanent ​establishment ​in ​the ​U.S ​must ​file Form ​1120-F ​by ​the ​15th ​day ​of ​the ​4th ​month ​after ​the ​end ​of ​its ​tax ​year. Assuming ​a ​year ​end ​of December ​31, ​the ​tax ​filing ​is ​due ​April ​15 ​of ​the ​following ​year.

A ​Canadian ​corporation ​carrying ​on ​business ​without ​a ​permanent ​establishment ​in ​the ​U.S. ​must ​file Form ​1120-F ​by ​the ​15th ​day ​of ​the ​6th ​month ​after ​the ​end ​of ​its ​tax ​year. ​A ​corporation ​with ​a ​year ​end of ​December ​31 ​must ​file ​a ​tax ​return ​on ​June ​15 ​of ​the ​following ​year.

An ​extension ​of ​time ​to ​file ​a ​tax ​return ​may ​be ​requested ​by ​the ​corporation. ​The ​request ​must ​be ​made by ​the ​original ​due ​date; ​the ​extended ​due ​date ​will ​be ​6 ​months ​after ​the ​original ​filing ​date ​for ​a corporation ​that ​carries ​on ​business ​through ​a ​permanent ​establishment and ​4 ​months ​after ​the ​original filing ​date ​for ​a ​corporation ​carrying ​on ​business ​without ​a ​permanent ​establishment.

An ​extension ​of ​time ​to ​file ​a ​tax ​return ​does ​not ​extend ​the ​time ​to ​pay ​a ​tax ​liability; ​the ​liability ​must ​be paid ​by ​the ​original ​due ​date.

Individuals ​who ​are ​non-U.S. ​persons ​or ​residents ​with ​U.S. ​source ​income ​are ​required ​to ​file ​U.S. ​tax returns ​by ​the ​June ​15 ​of ​the ​following ​year ​unless ​they ​have ​tax ​withholdings ​at ​source ​(ie. ​from employment ​income) ​in ​which ​case ​the ​filing ​deadline ​is ​April ​15.

All ​U.S. tax ​filers ​are required to ​have ​a ​taxpayer ​identification ​number. ​For ​individuals, ​this ​number ​is ​an Individual ​Taxpayer ​Identification ​Number ​and ​can ​be ​obtained ​by ​filing ​Form ​W-7. ​For ​corporations, ​this number ​is ​an ​Employer ​Identification ​Number and ​can ​be ​obtained ​by ​filing ​Form ​SS-4. ​Once ​a ​number ​is
assigned, ​the ​IRS ​will ​process ​the ​tax ​return.

Interested ​in ​learning ​more ​about ​filing ​U.S. ​tax ​returns? Contact ​us!

Thanks for sharing!