Webinar: BizTax Cross-Border: Expanding Your Canadian Business into the U.S.

[MUSIC] >> Well, good morning, everyone, and thanks for joining us. My name is Nemiar Halik. I'm a U.S. cross-border managing director at Anderson from Beautiful Vancouver, and I'm joined today with my colleague and managing director from Calgary, Del Franco. >> Good morning, everyone. Thanks, Nemiar. I also am I Canadian CPA, U.S. CPA, have been in the cross-border business for many years, dealing with corporate structuring, planning, immigration, not that I'm a lawyer, but I have an understanding of immigration and what kind of structure we need to be implementing. And also, Canadian and U.S. tax compliance. Not that I do the returns, but I review them, so thanks, Nemiar. >> Thank you, Dale, and hey, look, I'm really excited to share this next hour with you, Dale. This is a topic that has actually come up after a roundtable with the other managing directors a few weeks ago, and we were trying to answer the question of, why does now feel a bit like a different moment for Canadian companies looking at the U.S.? And really, if you step back the last year and a half, or so it seems like the entire cross-border landscape has changed quite a bit. You've got a more aggressive or, you know, say, more attractive U.S. tax environment, post OB-3, which is the U.S. legislation that was passed last July 4th. We've got some supply chain reshoring, and even a lot of our client-based both for me and Dale, we're seeing a lot of capital and IP flowing into the U.S., especially in the tech space and AI and manufacturing, which is a lot of what the OB-3 was meant to attract. OB-3 is a legislation of the U.S. that was passed last July 4th. So a lot of Canadian businesses are asking, you know, do we need to be in the U.S. to grow? You know, I think two years ago, you know, they were considering U.S. growth, whereas now they're really looking at how do we model entry into the U.S.? So some of it is reacting to tariffs. Some of it is, you know, still chasing after U.S. customers, but increasingly in tech, they're really, you know, following the capital and the talent density in the U.S. So hopefully in today's session, you know, it's not just to give you how the rules work, but how is this actually shaping decisions for Canadians? Because, you know, going to the U.S., it's a big decision, you know, and if you get the tax wrong, it can become a pretty expensive mistake. Just to clarify for everybody out there, OB-3 is one big beautiful bill, but Numeric prefers to use the acronym OB-3, and you're right about Canadians expanding into the U.S. I had a client last week reach out to me and saying, you know, he has a product that he wants to expand into the U.S. because the U.S. economy is far bigger than the Canadian economy. And because this product also was manufactured, he felt that he could get it manufactured in the U.S. to avoid tariffs and try and reduce his costs. And then also, we had a conversation about what's your exit strategy, which he was completely surprised by. And he said, "What do you mean?" And I said, "Well, you're starting this business in the U.S. What do you want to do with it? How are you going to get out of it?" So I, we talked about IPO, we talked about private equity, but then I said, you know, generally what happens with private corporations is you're looking at a strategic purchaser. And the strategic purchaser likely would be in the U.S. when you're dealing with U.S. manufacturing products. So it makes sense to expand into the U.S. and then also have your intellectual property located within the right entity in the event that a strategic purchaser comes along. Now before we jump into that deal, so that's actually why this is a hot topic for us. I just do want to do a quick housekeeping rules. There. So as an as per credit sponsor, we are able to offer continuing professional education CPE credits for today's webinar. In order to qualify, you do need to answer all three polling questions that will appear during the 15-minute session. This will pop up at various times throughout the webinar. So please do make sure you are tuned and respond to promptly to each of the questions. We do encourage you to ask questions throughout the webinar using the Q&A function. While we may not be able to address all the questions immediately, we have set aside about 10 to 15 minutes at the end of the session to go through as many as we can. And we really do welcome your engagement. Once the webinar does end, you will see a short survey that will automatically pop up. We would greatly appreciate if you could take a moment to complete it. Your feedback does really help us improve future webinars and continue to bring relevant variable content to you. One other note, if you look on the bottom of the screen there, you'll see you can enable also the closed captioning. So simply click on the live transcript button at the bottom of your Zoom window and select Show Subtitles. This can be helpful if you're in a noisy environment or just prefer to follow along with text. And with that, Dale, maybe you want to walk us through the agenda here. So we have five different topics that we want to chat about today. The first is taxation of a cross-border business. You know what that looks like? How does that happen? The second is taxation of Canadian individuals in the U.S. So that's from a tax perspective. And we'll also talk briefly about immigration because you cannot work in the U.S. unless you are lawfully permitted to do so through a visa or a green card or something like that. The third topic would be cross-border entity structure options. And this is really important when you're structuring your business because it has to make sense from a repatriation strategy. It has to make sense from immigration strategy if you're wanting to move Canadian employees to the U.S. to work in the U.S. And it has to also deal with proper alignment and the ability to claim foreign tax credits. And one of the things that we'll be highlighting on is U.S. LLC's limited liability companies, not corporations, but companies. The fourth thing we're going to chat about is repatriating U.S. profits back to Canada. What's the best way to do that? How should it be done? And then the fifth thing will be just touching on U.S. taxation, state taxation, excuse me, from the point of view of physical nexus, economic nexus, and other U.S. state tax issues. Thanks for that, Dale. Well, let's get this grounded in a real scenario. You're expanding your business into the U.S. In one scenario where we're seeing a lot of this is in the tech sector. We'll try to weave in some examples that we have real life examples from some clients that are in the tech sector. For example, if you've got a Canadian software as a service company, they come to us and they'll say, hey, we're starting to pick up some U.S. customers. We don't necessarily have a U.S. entity yet. We're really just testing the market. What point for a Canadian company does this become a U.S. tax issue? It happens earlier than most Canadians expect. When are you actually doing business in the U.S.? That very first entry point. It's actually a pretty low threshold in terms of what does it actually mean to be doing business in the U.S.? From a U.S. perspective, that entry point isn't incorporation. It isn't necessarily, it isn't, oh, I actually have an entity set up in the U.S., so therefore I'm doing business in the U.S. It's actually centered more around what is your U.S. activity. If you have, and this is again a very common scenario, we see with a lot of our clients as they're marching towards having a full U.S. trader business. First, you've got a Canadian founder who is flying naturally into the U.S. to hopefully close deals. Maybe they're going down there to do some contracts or negotiate with U.S. customers. Or they're just picking up a revenue. They have revenue from U.S. customers that's tied to the U.S. market, but it's not a one-off. It's starting to become more of a recurring revenue. That's where you're not necessarily testing the waters. You're actually participating in the U.S. You have what is known as a U.S. trade or business. Now, the concept of a U.S. trader business. That's not a bright line rule. It's more a question of facts and circumstances. Is there enough presence for your Canadian entity that regularly and continually doing what looks like a business that's operating in the U.S.? If you're thinking again about that from a software, the service company, or if you're looking at it from a tech company, it's looking at your sales activity. It's looking at it throughout the years. Looking at, for example, what type of customer support do you have for those U.S. contacts? I don't think we talk clients. It's not that you wake up one day and you say, "Okay, I woke up today and I have a U.S. trader business." You often drift into that as your U.S. activity skills. I'd say, "Stop." One would be, "Do I have a U.S. trader business? Am I doing business in the U.S.? That's top one." Stop two is looking at, "Okay, well, once you know that you're engaged in a U.S. trader business, the next question we have with our clients is, well, what of that income can the IRS actually tax?" And this comes down to two different tax concepts. One is what's known as sourcing. So what is a source of that income? Is it Canadian sourcing? Comes in U.S. sourcing? Could be other jurisdictions. And is it effectively connected. income. So let's get a little bit more nuanced and think about it from a software as a service company. So for a software as a service company, you've got cloud transactions happening. It's on demand, network access to let's say a computer hardware or it could be digital content. So how do you source that income? So sourcing that income previously used to say, well, you know, this could be where our servers are. But that's actually there's there's proposed regulations that came out. I want to say January of 2025. So a year ago, a little over a year ago, that gave a little more clarity here for cloud transactions. How do you source that income? And instead of what they're looking at, it's not just where the revenue is or where the server is located, they're looking at the overall activity. You know, what activity did you have that actually generated that revenue? So if you're, you know, running a Canadian, it's a Canadian corporate entity. So software is a service company. Your servers are in Canada. You've got the software developers, software engineers, and they're in Toronto. Well, the scenario is, well, I've got US enterprise customers. Great. That's what we want. We want to access that, you know, bigger market in the US. But now you're looking, what is the activity that you're doing to generate that revenue? And if you have your sales leads that are flying to New York twice to close the deal, do you have contracts that are being negotiated with US-based executives? Or maybe, you know, after you sign the contract, you've got a customer, success team, or supporting that sitting in Vancouver that are running weekly onboarding calls without US client. You know, your support team is actively solving issues for a US customer, even if they're doing remotely. They're not in the US. But they're doing this activity that's really starting to create US source income. So a lot of these sales efforts are economically tied to the US. Well, then we say, you know, you are really getting into this space where you have US source income. So then the next question is, well, is that income effectively connected to your US trader business, your US activity? And if it is, then we get into that concept of effectively connected income ECI. And that's what get taxed in the US from a domestic law perspective on a net basis. So the proposed regulations that came out on cloud transactions, it's really, if you think about it, it's the IRS trying to catch up with how fast this space is moving. You know, how do I characterize this income? And where do we source this income? Because you can't rely on outdated rules, you know, where you say, well, the services are performed entirely in Canada than the source of income must be in Canada. Well, that probably worked out great, but not so much when you're in a space where you have things happening over the cloud. So with that, you know, the concept that I want you to walk away here as kind of your first two questions is remember that the US trader business threshold for having a US trader business is actually very low. You know, you have executive traveling to the US employee traveling to the US. So if you have a US trader business, you have a US filing obligation. But the next step of that is, you know, if you have the US Canada treaty and you're protected by the US Canada treaty, what that does is it offers you more protections. It doesn't remove that exposure. You still have a US trader business, you know, the US can still say you have a filing obligation, obligation. But what that means with the US Canada treaty is you're looking at the concept of permanent establishment. And what permanent establishment means is under the US Canada treaty, business profits are generally only taxable in the US if you have a US permanent establishment. And that's a higher threshold. So here you're looking at things of, you know, do I have a fixed place of business? Do I have an employee or we call a dependent agent, you know, going to the US who is, you know, signing and concluding on contracts in the US are the negotiating with clients, you know, rejecting or accepting their credit worthiness based on the history of the client. Or, you know, in a consulting or, you know, services type business, you have what's known as services PE. So if you have employees, Canadian employees that are, you know, going down to the US and they're spending a sufficient amount of time in the US, you know, generally about 183 days in a 12 month period, even if you don't actually have a fixed office, a fixed place of business, in the US, you can actually have a permanent establishment. So, you know, the thought process here, I just want you to think is that, you know, going from that low threshold of, I have a US trader business. I'm likely doing it, you know, a business in the US to a permanent establishment. It is a sliding scale. It's not based on, you know, here's how much revenue I'm making in the US. Here's the scale of the, you know, revenue I'm earning from the US. It's more looking at your overall US activity. And as your US activity grows and we're seeing this, you know, where you have, you know, more travel because you need people to go down to the US to close deals or just scope out who are the customers or vendors or you have people crossing the borders or making more, you know, local US involvement with contracts, you go shading. That's where the sliding scale goes from, well, you have a US trader business and now you have a permanent establishment. And once you have a US permanent establishment, that's when your US business profits become taxable at the US federal level, you know, to the IRS. And how do you manage this? Well, if you're a Canadian company and we're going to go into structuring here in a little bit, but if you have a Canadian company and you now have a US permanent establishment, you know, you want to be able to manage your taxes so you're not double taxed. And that's why we rely on foreign tax credits. You know, and the foreign tax credits are great assuming you have the right structure because you want to make sure that, you know, the income type that you have and the type of structure you have will allow for the timing match to be eligible to use the foreign tax credits in both Canada and the US. One thing I like to add, Numer, is the concept of ECI, we had a client that came in and said, we have a problem. We went to a Canadian CPA and we said, we've got this US branch. So we have effectively connected income in the US. The CPA said, are you making any money? And they said, no, we're not. And he said, you don't have to worry, you don't have to file anything. You don't have to file an income tax return is what he told them, but the problem with the US, there's more than just an income tax return. There's also what's called informational returns. So in the concept of this US branch, there's a form, it's called 54.72 where you're filing and reporting in respect of 25% and more specified shareholder that's foreign. And the penalty for late filing of 54.72 is now $25,000 US. These guys had 10 years of misfiling. So it's an automatic $250,000 US penalty. So it's not just about income tax returns, it's also about the informational reporting that's required. And it can be very problematic. So make sure you're getting proper guys in respect of what your situation is so that you don't get these surprises. Yeah, that's a really good point. And the interesting thing about those 54.72s is one other flag that I see often is even when you have, like sometimes you'll have a Canadian who got advice to set up their structure in the US as an LLC. And in their mind, oh, the LLC doesn't have a lot of activity happening in it. All I've done is maybe inject some capital, I've capitalized that LLC. And the challenge you have with that is there's still a 54.72 filing obligation. And those penalties that you get from the IRS, and besides of being pretty scary notice, they're automatic. So the IRS as soon as it sees that you have a father return or you are late in filing it, those 54.72 obligations, even though in your mind as a Canadian business owner, it is a shell of a business. There's nothing happening in the US. It's a, in your mind, a disregard entity. Everything is happening in Canada. I haven't even done a related party transaction other than just capitalizing my LLC. Those $25,000 penalties are automatic. And you're going to get an IRS notice and you're going to have to deal with following up with IRS to find ways if you can abate or mitigate those penalties. And previously, a taxpayer had the ability to file a reasonable cause argument in respect to those penalties. But effectively, I think what's happened is, and you can comment on this in the mirror. I think what's happened is the IRS has basically said, if you want to get a file a reasonable cause argument, go to the US tax court and deal with that. You know, it's far more expensive than paying the penalty. Yeah, pleading ignorance is not a reasonable cause. Yeah, it's, and you know, there are, there are ways to go back to the IRS and challenge these, but at the end of the day, the $25,000 penalty, you know, once you get that notice, it is automatic. It's not even you're dealing with an IRS agent yet. It's just the, the IRS knows immediately, this is delinquent. And there's a requirement to pay and file. And with that, we're going to jump into our first polling question. So the first question is, at what point, sorry, just have to move this is my way. Sorry, at what point do you believe a Canadian business becomes subject to US taxation? So A, only after incorporating US entity, B, once employees or an active, or an office are established in the US, C, when business activity creates a US trader business, and D only might a permanent establishment exist under the treaty. So that's a good question. Obviously, only one answer is the most correct answer. So you've got what a minute to submit your answer. Yeah, and the reason it's a good question is a lot of times what I find is when Canadian companies are talking to us about, you know, their US activity or their US presence. They're a bit surprised and say, well, I have actually no permanent presence in the US. Like, I don't have necessarily an office, a brick and mortar store. You know, we're not, we're not, we're not, we haven't established a US entity. Why is my Canadian company that is doing work in Canada that has revenue from US customers, you know, being subject to US tax at all? You know, they'll tell me, I don't have a permanent, you know, they'll do it, you know, sometimes a, for lack of better words in a chat GPT answer of, I'm not permanent in the US, but that's not the question here. It's more, do you have that lower threshold of a US trader business that says you're subject to tax? Looks like most people got that answer correct. It is when your business activity creates a US trader business answer C. So, next we'll talk about taxation of Canadian individuals. There's a variety of topics here to discuss. And again, this is based on carrying on a business in the United States. It's either through domestic legislation and SPT stands as an acronym for Substantial Presence Test and we'll talk about that in a second or it's under a treaty position. And when we're talking about treaty, we should also mention that treaty generally, not generally, but it applies to federal taxation and not necessarily to all states. For example, California does not recognize the Canada US tax treaty. So, you have to look at things differently when you're dealing with a state, a specific statement. And unfortunately, there's 50 of them and each state has different legislation. So, for example, if we're talking about California as it just did, if you're carrying on a business in California, you could be subject to California state taxation even though you don't have a permanent establishment for federal tax purposes. I should speak about SPT. SPT is one of the things in the attorney code where if you're deemed to be substantially present in the US, if you meet that test, and it's a formulaic calculation. Number of days in the current year, one third of the prior year, one sixth of the year prior to that. If that number aggregates 183 or more, you're deemed to be substantially present in the US. Therefore, you are considered a US tax person for all things US tax, including some of the forms that are required to be filed, F bars, firm bank account reporting, all of those types of things. But then you do have the ability to tie break to Canada, but you have to be in the treaty to tie break to Canada. And I'll get to that in a second. So, the treaty, as I said, when we're looking at Article 4, that's where we determine residents. Article 5 is PE. And if you aren't deemed to have a PE under Article 5, then Article 7 reads that any business profits are taxed in the country of residents and not where you're providing that service because you don't have a PE. Onto sourcing rules, as Namir mentioned, these are very important because sourcing rules, what that does, is two things essentially. First of all, it determines what taxing jurisdiction has the first right of taxation on that income. So, if it's sourced from the US, the IRS has the first right to tax. Then the second thing that's important with the sourcing rules is looking at which taxing jurisdiction then provides a foreign tax credit. So, if it's sourced in the US, then Canada will provide a foreign tax credit. But when we're looking at Canadian foreign tax credits, which I'll talk about in a minute, they're restricted to the extent of the Canadian tax legislation. Immigration requirements. Again, federal tax, this is a concept that a lot of people don't understand. Federal tax is different than US immigration. So, under federal tax rules, as I mentioned, we've got the 183-day test under immigration rules. We have a 180-day test. So, it's different. And just because things are done for tax purposes, doesn't mean that they are aligned for immigration purposes. So, you can't confuse the two different sets of legislation. And you have to make sure you're aligned with both sets of legislation. As I've talked about, sorry, go ahead. I was just going to add to that too. One of the comments I hear you always letting clients know as well, not only that the immigration and tax rules are different, but it's really critical for businesses and individuals that are traveling to the US that they have a really good job tracking system where they're really tracking the number of days that they're in the US. It needs to be really tracked on a day-by-day basis. This is critical information. It's not just because you're on side from an immigration perspective, it's not necessarily on-site from tax. And it's not just that one year. You're looking back at it. It's a three-year rolling period. Correct. That's right. And you can access an I-94. If you go to the I-94 website and enter in your passport number, you should be able to get the days that you were in the US and/or Canada based on your I-94. But remember, that's not a perfect solution. You should be tracking your days. And even a partial day is considered a day when we're looking at this, and there's some exceptions to what doesn't constitute a day if you're ill and that sort of thing, and you're not able to travel. So you have to really look at the day count requirements to make sure whether you're looking at SPT or if you're looking at immigration. One thing that we should talk about is Canada taxes an individual based on residency. And that's a factual resident or deemed resident. You can be deemed to be a resident of Canada if you're so journeying in Canada, or if you did not factually depart Canada because it, you know, maybe one spouse left and the other spouse and family, you know, stayed in Canada, that would not constitute a factual departure in the eyes of the CRA. The US, on the other hand, tax is based on residency, factual or deemed, deemed being as, or SPT. But it also is one of the few countries in the world. I think there's two that tax based on citizenship. So you can be a US citizen, and no matter where you reside, you're still taxed on your worldwide income. So a Canadian resident who is a US citizen is not, they're taxed on their worldwide income because they're a resident of Canada, but because they're a US citizen, they're also taxed in the US on their worldwide income. That's where the foreign tax credit regime comes in. That's where we're looking at sourcing, and that's where we have to, you know, do the, the, the dual tax return if you will. The problem with, you know, having a US tax return in 1040, which is equivalent to a T1, a 1040 is due April 50th. You can get an extension, the US allows extensions, but it's due April 15th. A Canadian T1 is due April 30th. So if we have a US citizen resident in Canada who's receiving K1 type of income, K1's equivalent to a T513, so you're, you're getting an allocation from a partnership. Generally, what happens is those K1s aren't available to timely father or US return. So either you put an estimate on your Canadian return, so you can file by April 30th, or you don't put anything on the Canadian return and a mint. We recently had a client where we put an estimate for the K1 on the Canadian T1, and unfortunately, the estimate was based on prior year, when the actual K1 came in, it was significantly lower than what the estimate of income was, which unfortunately triggered an audit by CRA. They're wondering how the heck can you have that much lower of income? And we're talking, you know, lots, lots of dollars here, lots of zeros. And it triggered an audit, and we just have to deal with it. So there's filing problems when you have US citizens that are resident in this case in Canada. Tybreaker rules contained in the treaty. So as I mentioned, article four, you can go look at residency, and you can follow the rules, order of priority, about your ability to tie break back to Canada, for example. But what's really, really important is you must be in the treaty to rely on the treaty. And what I mean by that is you would have to be deemed to be a resident of the US, for example, under the Sipsatch Presence Test, and also a factual resident of Canada. You can't say, well, I'm going to rely on the treaty if you're not in the treaty in respect of both tax and jurisdictions. So just, there's too many practitioners will say, oh, well, we'll just rely on the treaty. But if you're not in the treaty, you can't do so. If you then, if you are relying on the treaty, it's very, very important to file a treaty based position with respect to that tax and jurisdiction. So for example, we could have a Canadian corporation that doesn't have a PE in the US. We file an 1120-F, 1120 is equivalent to a T2, dash F means foreign. So it's basically a nil return, but you have to disclose on form 8833 to the IRS that these are the treaty positions I'm relying on. And here's the quantum of US source income that I'm taking a treaty position in respect of. So generally, the 8833 would be, I'm relying on Article 5 because I don't have a PE. And therefore, I'm relying on Article 7 because business profits are outtaxed in Canada. But you have to file that 1120F. Just saying that I meet the tests in the treaty or the requirements of the treaty is not sufficient. Foreign tax credits, again, sourcing becomes important and then which jurisdiction is going to provide the foreign tax credit. In Canada, the foreign tax credit is the lesser of the actual foreign taxes paid or the Canadian tax otherwise payable. And too many people just think, well, I'll put the foreign tax credit on my return. But if there's no Canadian tax otherwise payable in respect of that, so say, for example, you have a US citizen resident in Canada who receives a capital dividend, which not a good thing. But they receive a capital dividend which is not taxable in Canada as an individual shareholder. But it's taxable in the US because there's no concept of capital dividend in the US. So the US return will be prepared, the 1040 taxes are paid. And unfortunately some Canadian practitioners will just pick up that foreign tax credit and put it on the Canadian return even though the Canadian tax payable otherwise payable is zero. As I'm sure all of us in this audience know CRA follows up on foreign tax credits and looks for supporting documentation to make sure that the foreign tax credit claimed is accurate and appropriately supportable. - And a couple of notes on that daily, you mentioned the 1120F, you know, even when you have a Canadian entity that is filing that return in the US and they're thinking, well, I've established that I don't have a US permanent establishment. So I'm not going to be taxed on my income in the US. And sometimes we've heard business owners say, well, I think I'm gonna take the decision of just not filing that return at all 'cause it seems like it's pretty low risk. And the risk you run there is if you do not file anything at all with the IRS, 'cause in your mind, again, it's gonna be a contingent on their risk profile. What you're doing there is you're actually exposing the Canadian entity where the IRS will say if you haven't filed that 1120F, that treaty protected return, what you're doing there is you're actually denying your ability to potentially take any deductions on your gross income. So if you have gross revenue in the US, by filing that 1120F protective return, you're ensuring that you're able to take any deductions, you know, expenses against that revenue, should the IRS come back and challenge you on that permanent establishment position? So it's essentially saying, hey, this is the position we're taking, that there's no permanent establishment, and should the IRS challenge it, you'll still be able to take those deductions 'cause you file the return. But if you do not file it, then you essentially lose that privilege or that ability to take those deductions against your gross income by not filing it all. And I think fund-based trivia, I think the only other country that has citizen should base taxation besides the US, I think is Eritrea, I believe that's correct. All right, so we'll jump into probably one of the most important decision points for Canadian businesses, as they march into having a US establishment and they say, well, we know we have a US trader business, we'd like to set up a entity, what's the right entity structure? And I have to say structure problems, the structure question, 'cause we talked about exposure, we talked about sourcing, we talked about trading protection, all of that's gonna flow through your structure. So your structure problems, if you don't plan correctly and early, these will show up later as tax problems. And you really wanna be sure that you're picking the right structure 'cause this is gonna shape your liability, this will, your tax bill, your ability to then take some of the profits from the US back home and even your long-term exit options. So often when we're having these very early conversations with founders about what is your business, what are you looking to do in the US, we're already having the conversations about, well, what are your long-term exit options as a founder, what are you looking to do as kind of your final exit strategy? And the reason this matters is, look, Canada and the US, we don't always agree, not on hockey and not often on how to tax your business. So if you've got the wrong structure, you might end up with double tax, you might lose your tax credits, you might have some personal liability on business debts. But if you've got the right structure, you can manage your risk, you can optimize your tax position and keep your cross-border operations running smoothly and focusing on growing your business. We'll talk about some of these business structures here. So a general partnership, that's a pretty easy one to set up that doesn't really require any formal filing, set-up costs are minimal. The challenge you have with a general partnership is every partner in that partnership is personally liable for all debts and obligations of the business. So something goes wrong in the US, your Canadian companies' assets, or even, for example, your personal assets, if you're an individual partner, they're all in the line. So big risk, especially if you're in the US legal environment. But the GP is a flow through entity for both US and Canada. So the partnership itself, it doesn't pay tax, but the profits and losses will flow up to the partners who will put them on their own tax return. Again, this is efficient, if you're gonna be following the US tax returns as a partner, but, again, general partnership, generally not advised, not very practical. It's a non-starred generally for US expansion because of the unlimited liability. But could be an option if you have low risk projects or like a short-term showing mentorship, but rarely for a serious US market entry. Limited partnerships, these are a bit more complex, this introduces two classes of partners. So you've got general partners who have, they're the ones managing the business, they have unlimited liability. Typically, this is set up as a corporation, again, to limit the liability to an individual partner. And then limited partners, they will be the passive investors. And so their liability is limited to their investment. This is a bit more work than a GP, it is pretty straightforward. But again, that general partner faces unlimited liability. In practice, where we see limited partnerships, they tend to be in investment projects or also join ventureships, especially where you have passive investors involved. But again, if you have an operating business, the need for a general partner can be a reason not to look at a limited partnership. And then you've got this hybrid structure. You may have seen these in the US. They're also pretty popular. It's a LLLP, there's also a double four LLLP. So what the LLP is, the limited liability partnership is it's a variation of the limited partnership. It's available in some US states. And here, both the general partners and the limited partners will enjoy limited liability protection, not all states recognize this. And more critically for Canadian lens, this is treated as a hybrid entity. So what that means is it's a flow through in the US, but in Canada, it's treated as a corporation. And so this can result in a misalignment of the taxpayer identity and your ability to claim some of those foreign tax credits that Dale just walked us through. Then you've got limited liability companies. Now, limited liability companies, and I will say these are the darlings of US entrepreneurs. They're very popular hybrid vehicles in the US. And the reason for that is they're very easy to set up. They're quite flexible. They offer limited liability, credit protection to all the members. So members are protected from personal liability, just like shareholders in a corporation. Similar, you're filing an article of organization with a state, you have to draft an operating agreement, and you're in business. Sounds great. The problem with it is often what happens with a limited liability company is you go to a US advisor and they'll tell you absolutely go with a limited liability company. But as a hybrid entity, which is what a limited liability company can be, is it can be treated as a flow through, so either as a partnership or a disregard entity, which is driven by the number of owners you have, or if you file an election, where is in Canada? This can be treated as a corporation, not a flow through, not a partnership, not a disregard entity. So this creates a classic tax mismatch, right? So the US tax says the members directly, but then canne sees this as a separate taxpayer. And so the result could be, again, if this is not planned correctly, or if you don't have the right elections in place, or you don't have an indirect ownership instead, you'll end up paying taxes in both countries on the same income with no foreign tax credit relief. Again, this is probably one of the most common, I think Dale, you probably see this quite regularly, costly mistakes, Canadian businesses expanding into the US. And if you think of it in a mirror, if you have more than one member in the LLC, as you said, it's taxed as a, or treated as a partnership for US purposes. So it's a partnership for US purposes. It's a corporation for Canadian purposes. So what we'll have for US purposes is the partnership allocates income to the partners, and if they're Canadian resident partners, they're gonna be picking up their income, that income on their tax turn, whether it's a corporation, individual. That's an allocation of income. Whereas if we have from the Canadian lens, the only tax there's going to be is on distributions, not allocation of income, but distribution from the LLC, which CRA will treat as a dividend. Now the issue is, let's say in year one, we had an allocation of income, year two, there's no income to allocate, but there's a distribution. So because CRA looks at that distribution as a dividend, there should have been a tax withheld and remitted, which likely was not done. So we end up with all of these issues with, is it an income, or is it a distribution, and when is it taxable, and who's the taxpayer, and the ability to claim foreign tax credits? Because if we have individuals as partners, they're picking that up on their personal tax returns, whereas if it's a corporation, then we've got dividend income and two separate taxpayers, and it just causes all kinds of problems. So that's why we recommend direct ownership by Canadian residents is not recommended. However, you can, in sort of a perfect world, if you can structure the timing of the allocation of income and the distribution in the same taxation year and the same amount, you may be able to make it work a little bit better, but again, you'd want to have the member being a corporation so that it's also receiving that dividend. So it's just not a recommended investment vehicle. That's right. You could structure around that mismatch to your point there, Dale. And the last one, they're just the USC Corporation. What a C-Corp offers in the U.S. is the shareholders will enjoy full limb liability protection, really from a practical consideration here. This is pretty clean. It's pretty predictable. You're harmonizing the treatment in the U.S. and Canada. The main downside really with the USC Corporation is there is potential for double taxation because it's not a flow through. And what I mean by that is you're getting taxed at the corporate level and then again at the shareholder level. So you just need to make sure if you're going down the C-Corp route in the U.S. that you've got proper planning, you know, such as how you're timing your dividends, your management fees, and leveraging tree benefits. So we'll go into how to repay your profits next. But just, you know, again, the takeaway I want to just give our audience here is there really isn't any one-size-fits-all answer. You know, the choice of your annual is a pretty critical question and it is really foundational to your U.S. expansion. ChatGPT is not your friend. You know, if you're going to get an answer, you spend a lot more time and energy and cost fixing the wrong answer. And look, if you're a Canadian business looking to expand into the U.S., especially in tech or if you have a software-to-service company or a fast-growing sector, you know, get that expert advice early, map out your goals. You know, it's not a one-variable equation. What is your risk tolerance and your long-term plans? And, you know, the best, the best structure you're going to get, we get this question off and, well, what's my best structure? Well, the best structure is the one that's going to fit your business, aligns your tax treatment, you know, keeps you focused on growth. And, you know, answer some of the questions at the founder level. You know, are you planning to move to a son of your destination somehow sometime later as, you know, as you grow the business or maybe exit your business? So think about these questions early as early as you can. And with that, we're going to. Before we jump to that, if you can back up a second, please remember. So one thing I want to add is because you're talking about tech sector and AI and things like that, perhaps. In Canada, we have a CCP concept of a CCPC and the ability to claim a lifetime capital gains exemption. If those shares qualify as a small business corporation, the U.S. has a concept that's similar. It's a qualifying small business stock. And basically, it has to be a C Corp for QSBS treatment. You have to hold that stock for five years. And there's certain industries that are eligible for QSBS type of treatment. But the benefit of it is the ability to claim $15 million of the capital gain is exempt on an annual basis in respect of the sale of that QSBS. So there's things that you need to consider and plan for because if you, you know, have the ability to sell those shares later on and one, it wasn't a C Corp until you didn't hold it for five years, but it just blew the ability to use QSBS type of treatment. So planning is very important at the, as you may have said, at the early stages. Yeah, and you're talking exit strategy as founders as they're talking about how to start their business and scale their business and grow their business. But these are why these questions matter. You really have to have a long range scope of view for where are you going to be? Not only is it business, but also shareholders. What are your motivations? What are your kind of long-term strategies for you and the business? And with that deal, we're going to jump into our vocation number two. Please. So question number two, which of the following structures is generally not recommended for direct use by Canadian businesses expanding into the US due to cross-border tax mismatches? A, U.S.E. corporation, B, limited partnership, C, limited liability company held directly by Canadian parent or D, general partnership? Yeah, you know, like I said, this comes up pretty often for us. They all are in our business and that, you know, we see companies are often asking us to clean up after they realize that they've gone through, you know, what was otherwise good, you know, sound tax advice for a U.S. client in the U.S. to set up a LLC. But, you know, the concern you have is which of these structures I'm not giving you the answer. You know, which of these answers may take away the relief that you get for double taxation, your ability to use foreign tax credits and that's a critical piece of the cross-border structure question. Which one you choose will have an impact? Again, assuming this is a business that's earning revenue as a cross-border structure. And with that, looks like most people got our answer correct, it is letter C, limited liability company held directly by Canadian parent. And the word directly matters because, you know, again, there are ways to structure this to manage that mismatch as a hybrid entity. With that, we're going to talk about now. Dales are going to jump us into ways to repatriate your U.S. Yeah, so great, you know, you set up a U.S. business, becomes very successful. Let's assume it's a U.S. C. Corp. Then how do we repatriate those profits back to Canada? So there's generally three types of methods to repatriate those profits. One is management fees. And we need to consider transfer pricing and the ability to have contemporaneous documentation. So if we have a can code with a U.S. subsidiary, we can do a management fee, but it's important to remember that one, the management fee must be reasonable because of transfer pricing. And transfer pricing in respect of both taxing jurisdictions. And also, I always am a firm believer that if we've got a can code, there needs to be a Canadian employee in that company because if there is no employee, who's providing the management services to the U.S. sub? So we need to make sure that we have Canadian employees that have the ability to provide these services. And then we can repatriate the management fees. Caution that, you know, there's certain things that we have to watch for in the FAPI regime, but that's beyond the scope of this presentation. Dividends is very popular. There's subjectual withholding tax. Canada has surplus pools. So Namiro spoke about earnings in profits, which is tax retained earnings in the U.S. And Canada has a similar concept. There's exempt surplus, hybrid surplus, taxable surplus, and pre-acquisition surplus. Regulation 5900 has rules in respect of exempt, taxable, and pre-ac dividends. Regulation 5901 is the ordering of the surplus distributions. But generally, we pay an exempt surplus to the extent that there's E&P earned from active business income. Any excess distribution would perhaps fall in the hybrid. And then next would be taxable in pre-acquisition. So it's important to note that not only the IRS wants an E&P calculation in place prior to a distribution, CRA wants an exempt surplus calculation, if you will, prior to an exempt surplus being received from that U.S. subsidiary. And that exempt surplus dividend, you can follow through in regular or in subsections 113, one of the income tax act, and just see how it's taxed for Canadian tax purposes. But if it's a corporate to corporate dividend, it's subject to a 5% withholding tax to the IRS. And that has to be remitted on a timely basis. That tax is not recoverable in Canada. So we do have a bit of tax leakage because the exempt surplus dividend is not taxable in Canada to that Canadian corporation. As I said previously, foreign tax is the lesser of, foreign tax is paid, or Canadian tax otherwise payable because CTOP is zero. have tax rate to the 5%. So it's just one of the things that you need to be mindful of. The other is inter-company debt. In Canada, we have lots of inter-company debt without an element of interest on that debt. There's rules in respect of 21C if, you know, if we borrow money to advance, then we have to have, you know, some form of earning income on that debt. But generally, a lot of the Canadian corporations is done without interest. In the US, if there's no inter-corporate interest on that debt, then the IRS has the ability to re-characterize that debt as equity. And specifically, if it's not properly documented that it is debt, we don't have interest on respect to that debt. And then, Numeral talked to this a bit about, you know, the ability to deduct that interest by what the US sub would be paying up to Canada. So there's definitely rules when revealing the form corporations in the United States. That's our idea. I mean, really what the IRS is trying to do there with inter-company debt is, you know, the IRS wants to know that the loan is actually a genuine loan. You've got a written agreement, you've got regular payments, you know, and if you're charging an unreasonably low interest rate or no interest rate at all, you know, it can re-characterize that debt as equity. And you know, the challenge there is if, you know, that does get re-characterized as equity, you know, how you're repatriating that back to Canada can have an impact on the denial of interest deduction, you know, with the holding that happens if it's not treated as a dividend versus an interest payment. The only thing I'll just add here is kind of in the interest of time, when you're thinking about inter-company debt and you're comparing, you know, a Canadian bar versus, you know, a U.S. bar. You know, with a Canadian bar where they're looking at, you know, do you have too much debt into little equity, you know, you've got that one and a half ratio for a debt to equity look at from a Canadian bar with perspective. From a U.S. bar with perspective, you know, they're looking at one, are you a small U.S. taxpayer, and I think in 2025, that's like a $31 million average receipts that they look at over the last three years. And, you know, if you're below that, you don't have to worry about the U.S. is, you know, equivalent of business interest deductibility rules. But if you are, then essentially, the interest expense that you're able to deduct as a U.S. bar or as a U.S. company, that's going to be capped at 30% of your adjusted taxable income. And so, just make sure, if you've got this, you know, you're looking at careful structuring how you're financing this, whether it's through debt or equity, and you're documenting this to make sure you're preserving your tax efficiency and hopefully avoiding any surprises. Well, sorry. And then the next thing, I want to chat about here is state taxes. And the reason this matters is you're not just dealing with the U.S. federal taxes at the IRS's level. You're also dealing with not only 50 states, but you're also dealing with the local jurisdictions that could be at the county level, it could be at a city level. So there are a lot more jurisdictions to be dealing with below the federal level. And this is an often underestimated risk for Canadians. You know, they expand in the U.S. they have their federal exposure managed, but they do forget about the state and local tax, which is one of the main reasons we often see with, you know, a lot of M&A work that we do are due diligence. This is one of the main reasons why those due diligence can fail. It's a major exposure area. And, you know, the reason for that is we talked earlier about permanent establishment. And that's a federal U.S. IRS tax concept, whereas states have a much lower bar for what subjects you do tax. And that's that lower threshold is known as nexus. So that's kind of the minimum amount of connection you need to have with a state for them to have the right to tax you. You know, previously it used to be this concept of physical presence. You know, that's kind of a traditional trigger. You know, if you have an office in the state, if you have an inventory in the state of a warehouse in the state or employee working from that state, you know, you probably have nexus in that state. But again, you know, the economics of how businesses are transacting and generating revenue, you know, remotely is different than as it was 20 or 30 years ago. And so we have this concept of economic nexus. And there's there's different variations of this. But essentially what you need to know and kind of going back to our tech sector and e-commerce and software is a service company. This is why this matters. And this is why this matters because it's looking at not physical presence, but it's looking at your overall economic activity without having any physical presence required in that state. And so this could be triggered if you have exceeded a certain sales revenue in a state. So that could be, for example, your over $100,000 or you have more than 100 transactions. So you could be sitting in Toronto selling your software to customers in California in New York, never having set foot in the United States. And maybe you don't even have a U.S. permanent establishment. So you're not subject to taxes at the IRS level, but you'll find that you're going to have filing obligations in those states. So California as an example, California actually goes out of its way to say they don't adopt the U.S. Canada treaty. So it will not offer you that protection. So you're saying none of my income is taxed in California. And I just want to remind you that in the U.S., it's not just looking at corporate income tax, you know, which is the tax on your net profits. But you have to look at a whole variety of different taxes. You've got, you know, sales and use tax. And, you know, this is a pretty critical and complex area for, you know, tech companies or software as a service company because states have wildly different rules on whether, again, the characterization of that income, you know, whether software or digital service or a subscription is even taxable. And failing to collect and remit sales taxes can be not only a significant tax liability, but you could become personally liable for that uncollected tax. And again, you know, a lot of our tech company clients, they're looking at kind of the big picture, you know, the exit strategy in the long game. And, you know, from a due diligence perspective, you don't want to miss this. You know, then you also have payroll taxes. Again, if you have U.S. employees, franchise taxes, this is taxes that are based not on income, but more on your overall net worth or capital. Another one that tends to surprise our Canadian clients. So, you know, just make sure, take away, you know, state tax, it's not an afterthought. It really should be a foundational part of your U.S. expansion strategy. And with that, we're going to go to our final polling question. [ Silence ] [ Silence ] [ Silence ] [ Silence ] [ Silence ] [ Silence ] [BLANK_AUDIO] [BLANK_AUDIO] [BLANK_AUDIO] [BLANK_AUDIO]