Canada and the United States share a robust trading relationship. Their intertwined economies mean that businesses operating across the border must navigate the tax rules of both countries. The Canada-US tax treaty aims to prevent double taxation, but understanding the nuances of tax obligations can be challenging.
Key Points:
- US Income Tax Complexity: The US income tax system, for both individuals and businesses, is intricate. This article offers a high-level overview, but it’s crucial to consult a tax expert familiar with both Canadian and US tax systems for specific advice
- Three Scenarios for Canadian Businesses with US Income:
- Unincorporated Business: If you operate as an individual.
- Canadian Corporation: If you operate as a Canadian corporation
- US Non-resident LLC: If you operate through an LLC set up in the US.
- Canadian Businesses Selling to US Customers from Canada:
- If you’re a Canadian business selling online to US customers and dispatching orders from Canada, this is considered an export.
- Individuals: No US income tax return required. Report business income on Canada’s T2125 on T1.
- Corporations: No US income tax return required. Report income on Canada’s T2 Corporation income tax return.
- Non-Resident LLC in the US: File Form 5472 with the 1120 Proforma with IRS. In Canada, file T2 for the LLC.
- Sales to US Customers from US Warehouse:
- If you use warehouse services in the US (like Amazon’s FBA) but don’t have an office or employee there, you have US Effectively Connected Income (ECI).
- Individuals: File 1040-NR in the US and claim a treaty-based position with form 8833. Report income in Canada on T2125.
- Corporations: File form 1120-F in the US and claim a treaty-based position with form 8833. Report income in Canada on T2.
- Non-Resident LLCs in the US: File Form 5472, Form 8833, and 1040NR in the US. Report income in Canada on T2.
- Canadian Businesses with Offices or Employees in the US:
- If you have a physical presence in the US, you have a Permanent Establishment (PE) there.
- Individuals: File 1040-NR and pay taxes in the US. Report worldwide income in Canada on T1.
- Corporations: File form 1120-F in the US. Report income in Canada on T2.
- Non-Resident LLC in the US: File 5472 and 1040 NR in the US. Report income in Canada on T2.
- US State Income Taxes: The US-Canada tax treaty is federal. Some US states, like California, might tax income even if it’s minimal.
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