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IRS Uses US Healthcare to Catch Non-Compliant Canadian Taxpayers – “Universal Coverage” may have new meaning

11/08/2010


Who would have thought US healthcare reform would have such a unique and profound effect in Canada? Buried in the details of “The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act” is a hidden provision that may well change how Canadian Corporations are taxed by the Internal Revenue Service (“IRS”).

Hidden on page 737 of the 906-page legislation is a small provision mandating that all US businesses must report any payments over US$600 made to another person or corporation during the course of their business. In order to comply with this requirement, a US Company will need to report to the IRS all payments, in excess of US$600, made to a Canadian Company for goods or services.

Fortunately for Canadian companies, this provision is not effective until January 1, 2012. The delayed effective date should give most Canadian companies ample time to plan for the requirements of this legislative change. Companies should prepare for the following administrative and substantive changes:

Administrative Annoyances

Once the new provision takes effect, US purchasers will be required to file IRS Form 1099 for all payments for goods or services when the aggregate payment to the company exceeds US$600. In order to meet that reporting obligation, US companies will need to accumulate Taxpayer Identification Numbers (“TINs”) for all companies that they conduct business with. Unfortunately for Canadian companies, the pursuit of TINs has been the source of a fair amount of frustration.

Prior to a US company providing payment to a Canadian company, US businesses have frequently requested a Form W-9 be completed. Form W-9s are for US domestic entities and should not be used by Canadian companies. Frequently the use of a Form W-8 would satisfy the US Company, who would then send payment. The issue with Form W-8s is that they are often completed without disclosing a TIN, which Canadian companies frequently do not have.

Canadian companies should expect significantly greater annoyances with US payors. Due to the onerous nature of the penalties for non-compliance, Canadian companies should expect that many US companies will not pay Canadian invoices without a US TIN being furnished. Alternatively, US companies may withhold 30% of the invoiced amount when payment is provided to the Canadian business.

To avoid delays in payment or withholding from US customers, Canadian companies should begin planning today to avoid tomorrow’s administrative headaches.

Substantive Changes in US Tax Planning

For many Canadian companies, the ultimate US tax planning strategy has been to avoid ever coming onto the IRS radar. However, with the current legislative change requiring the vast majority of US customers be statutorily obligated to report all business payments made to Canadian companies (or, if no TIN is provided; withhold 30% of the payment), the ability to avoid the radar is quickly becoming a thing of the past.

With the new rule coming into effect for all payments after December 31, 2011, most Canadian companies should have adequate time to effectively evaluate any planning opportunities prior to implementation of the statute.

Planning Adjustments
  • Canadian companies that can effectively use the Treaty to avoid US taxation should document such ability from both a technical US tax perspective and an operational one. These companies should ensure they are in full compliance with all filing obligations (specifically IRS Form 1120F).
  • Canadian companies that are more aggressively claiming Treaty benefits should consider alternative structures that can take significant pressure off such “aggressive” positions, without significantly altering the way they do business in the US.

Uncertainty Continues

The magnitude of the hidden change is still being determined. Many US companies are struggling to come to terms with the ramifications of the provision, with considerable grumbling coming from the US small business community. Some have even already begun efforts to repeal or curtail the impact of the legislation.

What the final outcome will be is anyone’s guess. What we do know is that as of today, this legislation will legally require US companies to report to the IRS all business payments over US$600 made to Canadian companies starting January 1, 2012. Once this reporting begins, the IRS will know exactly which Canadian Companies do business in the US and how much business they do. Turns out the IRS’s version of “Universal Coverage” may be more than Canada was expecting. The question is, will you be “Covered”?

For more information please contact myself, or your local MNP Advisor.

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