US TAX TREATY ISSUES

There has been a great deal of confusion over the Canada-US Tax Treaty as it regards cross-border business and working arrangements. The revised rules exempt income earned by a Canadian in the US if they did not earn more than $10,000 in the year or if the send less than 183 days in the US in any 12-month period beginning or ending in the particular tax year.

Therefore a Canadian working in the US but being paid by their Canadian employer would not pay any tax as long as they stayed under the 183 days. However, if the US entity is charged-back for the employee than they would be deemed to have been paid in the US and the $10,000 limit would apply.

The Canadian employer has other considerations because, even if the employee will be exempt from tax under the treaty, the Canadian employer may be required to withhold US Federal and state withholdings and submit them to the US authorities. There is an exemption available but this must be filed with the IRS.

DOING BUSINESS IN THE US

In our continuing series of issues for Canadian’s doing business in the US this instalment discusses the differences between US Federal and state rules. Under the Canada-US Tax Treaty there is a relatively clear definition to determine the taxing of a Canadian doing business in the US. The definition of permanent establishment (PE) is that the Canadian business would have a fixed location in the US except for limited activities such as warehousing. If there is no fixed place of business then there can still be PE if the Canadian business has a dependent agent located in the US who has authority to make contracts or bind the Canadian business to agreements. These rules have been expanded somewhat by the newest protocols referred to in the immediately previous article.

However most US states do not adopt the Federal rules and use the principle of nexus to determine taxation within a state. The problem for Canadian businesses is that nexus has as many definitions as there are US states and territories. Nexus can be used to apply income tax, sale tax or franchise tax (generally a form of tax on gross revenue). The applications of nexus can be similar to the Federal PE guidelines or as incidental as the delivery of a single item within the state.

For certainty a Canadian business with any physical presence such as a location, even temporary such as a trade show or having a representative located in the state will likely create nexus as it pertains to state sales tax.

The imposition of state income tax is a little better protected from aggressive action by the states as the result of Federal inter-state trade laws. However a careful review of US operations should be undertaken and it may be prudent to consider filing protective returns in the US to avoid potential tax liability down the road.PROHIBITED INVESTMENTS BY RRSP

New rules have been introduced related to the definition of a qualified investment for RRSP purposes. The new rules will require any RRSP that holds more than 10% of the shares of a corporation will now be subject to a tax equal to 50% of the value of the investment at the time it first becomes prohibited. There will also be a 100% tax on the income or gains from the investment accruing after March 22, 2011.

There is a relief provision to allow an investment that was previously not prohibited that has become prohibited by this rule change. The relief will be the ability to swap the investment out of the RRSP in exchange for investments or cash of equal value as long as the swap is done before 2013.

IN THE COURTS – WHO’S CAR IS IT?

In a recent case, Martin v The Queen, the taxpayers took the position that vehicles registered in their own names but the corporation paid the operating expenses. CRA argued successfully that there was no credible evidence to support the “bare trust” argument that the taxpayers held the vehicles in trust for the corporation.

The lesson here is that a vehicle that is used for corporate business and being treated as a corporate asset should be registered in the name of the corporation. There are certain circumstances, such as the transfer of a vehicle to a corporation from a shareholder or certain financing arrangements that make registration in the corporate name costly. In this case a proper document to support the position that the vehicle is held in trust for the corporation should be completed and kept on file.