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This is part three of a five-part series that originally ran in the Western Producer October 15th, 2015.
Title can pass anywhere you specify in a contract, regardless of payment type. If the seller ships the grain through a funds-on-delivery agreement specifying a designated departure or shipping point, title generally passes to the buyer at that departure or shipping point. This is true unless the parties' agreement, as reflected in the underlying documents, i.e. the contract, states otherwise.
If the contract is worded correctly, title passes when the grain crosses the border, but only if the contract specifies that. If the contract is not specific, the IRS could interpret otherwise as it may be difficult to prove what actually happened, having an impact on the sale and your tax.
If title to the grain does not pass until it or particular documents (such as a bill of landing) have been delivered to the buyer, it is deemed to have been passed in the U.S. which makes the transaction U.S. sourced and therefore taxable.
In the absence of a clearly defined contract, title does not pass until the grain is delivered to the buyer, again in the U.S. and again making it taxable.
Location, Location, Location
Most farmers are entering into contracts where final grading (and settlement of payment) happens at the U.S. grain elevator, which establishes the title passage determination. There is a risk the sale will not go through if the right grading is not obtained. The IRS can argue those deals are U.S.-sourced sales because they are completed in the U.S., even if we have a clear title passage in Canada.
This would apply to transactions where 80 percent to 85 percent of the contract value is paid on account once the grain has been shipped, with final settlement occurring only after the grain has reached the elevator in the U.S. and final quantities and grade have been determined at that destination.
If a solicitation of goods is made in the U.S. then the sale is generally deemed to be U.S.-sourced.
At first glance, the rule seems clear – if you pitch your grain in the U.S. to a buyer, the sale is considered U.S.-sourced. However, did you know that if you ask for your grain to be tested at a U.S. grain elevator, with a view to selling it to a U.S. buyer, you could potentially be making a U.S.-sourced sale?
Bottom line, if a farmer or an agent who represents the farmer, is conducting any process or transaction in the U.S., they are at risk of having the grain deemed U.S. sourced.
Effectively Connected With a U.S. Trade or Business
If the facts indicate a U.S.-sourced sale, the activities described above likely are deemed “effectively connected income” with the U.S. and the income (net of appropriate deductions) is taxable at graduated U.S. federal corporate rates under U.S. domestic law. It is important to note that the calculation of the net taxable income is done under U.S. federal income tax law and not Canadian income tax rules. The IRS does not always calculate the same way that Canada Revenue Agency does, which can be a big problem. Further, the current U.S. federal income tax rates can be much higher than in Canada, which means you owe more money at the end of the day.
Click here for the next part in the series ››
Related Topics:IRS; Farmers; U.S. Tax
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