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Treaty Returns, Branch Files and Crossing the Border Made Easy

29/10/2015


This is part five of a five-part series that originally ran in the Western Producer on October 29, 2015.

Most transactions with U.S.-based customers by Canadian farmers are​ generating a treaty return for U.S. federal income tax purposes.

MNP strongly recommends producers file this return. By doing this, the producer starts the statute of limitations, protects against the loss of deductions of income (if the IRS thinks the farmer is taxable), and prevents the civil penalties of the IRS making a treaty claim for no tax due, which is a hefty US$10,000 per year for a Canadian corporation and US$1,000 for a sole proprietorship.

Filing a treaty return is a relatively simple and inexpensive task, and protects the producer’s position.

If the farmer’s activities is attributable to a permanent establishment, then filing tax forms becomes even more complex as he or she must file a “branch return,” as in having a branch of your business in the U.S., under U.S. federal income tax rules.

Calculating taxable income under branch returns likely requires a different method of filing and the rate of tax is typically higher than in Canada. Added together, these issues raise the cost to do business in the U.S., sometimes dramatically.

What About the State Tax Issues?

​While state tax rules tend not to be an issue for Canadian producers, it depends on each jurisdiction, how much business you do there. Each state is unique with their own set of rules of who, how, what, and how to tax activities in their system. It is not practical to discuss each state’s requirements but it is important to understand the common items which can create exposure to you.

In many instances the applicable states have an income tax-based system. Whether the Canadian farmer has compliance and tax obligations depends on various factors. The common term used in this discussion is NEXUS, also known as sufficient physical presence. It is the determining factor of whether a farmer must file and even pay income tax in that state.

NEXUS is created if you maintain a temporary or permanent presence of people (employees, service people or independent sales/service agents) or property (inventory, offices, warehouses). The temporary presence is created through traveling people visiting states to call on customers or prospects (among other activities). NEXUS is also created once a substantial physical presence is established. This can vary from state to state, ranging from one to several days. The number of days that can create NEXUS can also vary based on the activity performed in the state. There are many other ways a state can tax you. Above are just examples of potential ways the state can determine your obligations.

Similar to the permanent establishment situation federally, these states can limit the taxable nature of the activities under certain exemption provisions. Careful consideration should be made if the activities will require registration with the state, filing and even tax obligations.

It is important to note many state have a sales tax system you might need to register and collect for. There are also potential farm-based and reseller exemptions which may be available to Canadian producers in many states.

Not filing a return typically means the statute of limitations never began, which can increase the exposure over time. Having a conversation with your accountant and / or a U.S. tax specialist to assess the myriad of pitfalls in U.S. compliance obligations can save you time and money now and in the long run.

U.S. Immigration Issues

The U.S. (just like Canada) is protective of its jobs. Depending on what you want to do in the United States you will need a U.S. immigration permit to enter the country. Some permits or visas are granted automatically at the border. In many instances, the activities you need to do in the U.S. fall into this requirement. Have your passport up-to-date and documents in hand showing you’re not looking to stay in the U.S. long-term as the border services will scrutinize your intentions while in the country.

There may be instances where you will need a work permit. This requires more up front work before you can enter the U.S. and perform the activity.

Always be truthful about your intentions and activities while in the U.S. There have been instances where the border services have denied a producer access because of issues around his or her documentation, causing the transaction to be delayed and even voided. Further, you could potentially be banned from entering the U.S. for a long period of time.

In any case, it is highly recommended you speak with an immigration lawyer about your business trips to the U.S. to ensure that you are onside with this very important requirement.

In conclusion, there are many costly tax pitfalls associated with selling grain into the U.S. The best way to avoid onerous tolls is to fill out all the forms on time and accurately. Talk to your local U.S. tax specialist or contact MNP for more details on how to make the most of your grain harvest on both sides of the border.

MNP is a leading national accounting, tax and business consulting firm for Canada’s agriculture industry. With more than 15,000 agriculture clients and a team of over 600 agriculture specialists, MNP delivers a diverse suite of services to protect farmers and maximize results. Contact your MNP Business Advisor or go to www.mnp.ca for more information.