EXPANDING
INTO THE UNITED STATES
The question is a loaded one because one person's
definition of expansion in to the U.S. may be completely different from the
next person's definition. It also changes base upon the size of the
organization.
Whether you are large or small, be prepared for a $5,000
extra accounting bill per year as a rough minimum. You might get it for
$3,000 extra but a rough rule of thumb is that you can triple whatever you
are paying now. So if you are paying an accountant $5,000 now, expect a
$15,000 bill after your expansion, no matter how small. The reason is
simple. Either you find one of the few organizations (like ours) who can
handle both sides of the border internally, or you pay a U.S. accountant
for their basic services and a Canadian accountant for their basic services
and then pay a small fortune to have them try and convert the information
back and forth for the purposes of foreign tax credits and dividend
stripping and flow through shares, and ---- well, you get the idea.
The following is an anecdotal discourse. For a look at
all the visas available, you need my 25 page treatise on entering the U.S.
for any reason. This is available by local Vancouver area fax for $10.70 or
mail at $16.05 (inc GST). Fax your request to (604) 913-9133
UNINCORPORATED
ONE OR TWO PERSON BUSINESS
INCOME TAX CONSIDERATIONS
A one or two person computer programming business doing
100 % of its business in Canada could get one U.S. contract and find itself
doing 90% or even 100% of its business in the U.S. without ever leaving
Canada. In this case, there would be no tax liability and no filing
requirements for U.S. tax if all the work was performed in Canada.
Even, if some of the work was performed in the U.S.,
there would be no tax liability if no permanent establishment was opened in
the U.S. because ARTICLE XIV of the U.S. / CANADA Income Tax Treaty would
exempt the U.S. source money from U.S. tax if there is no permanent
establishment in the U.S. Please note that there may be a State Tax
liability though if the state does not recognize TREATY DEDUCTIONS. In any
case, if any of the work is performed in the U.S. (including the trip to
sell the service or product) the individuals involved MUST file a return to
claim the exemption from U.S. tax and U.S. social security.
The mistake that businesses make is that they were told
back in 1985 that they didn't have to pay U.S. tax under the circumstances
without realizing that they still had to file a U.S. tax return and the
minimum penalty for failure to file with a "TREATY BASED"
exemption from tax is $1,000 U.S. per year.
IMMIGRATION
CONSIDERATIONS
A B-1 Visa would qualify the
individuals above to:
1. Negotiate the contract for price and expectations.
2. Install the software or hardware and provide initial training on
site.
3. Re-install and upgrade and troubleshoot as long as the work was done
under an original contract. If the product had been warranted for one year
for instance, it could be looked after for that year. After that period,
the Canadian could not work on or support the product within the U.S.A.
with a B-1 visa.
Selling a new product would allow for the Canadian to
work on the site on the new product as in 1, 2 & 3 above, but if the
Canadian sort of slipped over and worked on the original product, he or she
could be deported from the U.S. Please note that the service aspect has to
apply to the original contract and warranty period and cannot be extended,
once sold.
Please also note that a B-1 does NOT qualify you to
collect money. You can take the order but have the U.S. client mail their
cheque (check) to Canada.
Note that you do not usually get a piece of paper with a
B-1 visa. It is a paperless visa for Canadians. You also cannot move to the
U.S., although you could certainly rent an apartment in an area where you
spend a lot of time AS LONG AS YOU KEEP YOUR RESIDENCE IN CANADA.
A T-N visa would be more appropriate
in the above situation if there was to be ongoing work and part of the
actual production of the product or software was to take place on the U.S.
clients premises. In this case, the individuals involved would qualify to
work in the U.S. under the North American Free Trade Agreement if they had
an appropriate University degree (or a diploma with related experience - or
5 years or more of specific technical experience in a field which does not
usually have a recognized University degree such as management consulting).
For instance, a U.S. political party might want a
Canadian advertising agency to provide them with a specialist to run a fund
raising campaign. A Canadian with 5 provable years of management consulting
in political fundraising would likely qualify to work on that campaign in
the U.S. with a T-N visa.
Please note that a T-N is only issued for periods of one
year or less although it may be renewed annually. You may also move to the
United States with a T-N, put your kids in school, etc. However, your
spouse and children cannot work themselves in the U.S. unless they qualify
for a working visa of their own.
If the persons who have to go to the U.S. do not qualify
as professionals (Bill Gates would have trouble qualifying under this set
of rules), it might be necessary to open a "branch" in the U.S.
Please note that as soon as you open a branch in the U.S. whether it is
incorporated or not, you have absolute U.S. tax liability and must file all
relevant tax returns. However, this might be a small price, if it allows a
principal to work in the states after an executive transfer under an L-1
Visa.
An L-1 visa allows the holder to work
and live in the U.S. as does the T-N above. It is much harder to get unless
the enterprise is large. If you are opening a new branch, financial
statements have to be provided showing that the operation has a financial
chance of success. (If the U.S. branch is more than a year old this
requirement is waived). In addition, it does not work easily for one or two
person businesses because the Canadian business MUST remain in business
essentially as it was.
To qualify, the person transferred must have been in a
management or supervisory or extremely technical position with the Canadian
operation for one year or more before the transfer. Originally, he or she
had to working for the year before the transfer but INS will now allow a
year's employment in the past (officially last three years).
So, if the idea is that the Canadian wants to close down
his or her business and MOVE to the U.S., another solution would be the
purchase of a U.S. visa. For this, you need many tens of thousand of
dollars, but as Dennis Olsen (an ex U.S. Consul in Vancouver)
explained in the January 1, 1995 CEN-TAPEDE, there is more than one
way to get an E-2 visa. For instance, if all you have is
$75,000 U.S., you have to buy a business worth $100,000 or less because
they like you to have paid 70 to 75% of the purchase price. This leaves the
peculiar situation that a person paying $100,000 cash for a $100,000
printing business in Bellingham would qualify but a person with $400,000
would not qualify to get a E-2 visa if they were buying a $1,000,000
trailer court. (Dennis does give some creative methods to conform to the
rules and spirit of the legislation and still make it possible for the
Government officer to approve your visa. See the last page for more
information on getting back issues and making a donation to CRIME STOPPERS.
The disadvantage of the E-2 visa is that if the business
dies, so does the E-2. You go back to Canada. One client with a million
dollar house in Los Angeles and a major business had to uproot his family
and move back to Vancouver when they were outbid for their concession
location during the rebuilding of LAX (Los Angeles Airport).
100
TIMES ACROSS THE BORDER
Of course, the small businessman can ignore this advice
and just get across the border by "saying" he or she is going to
visit their sister, going to Disneyland, going shopping in Bellingham, or
looking to buy a car in Portland. The problem is that he or she has now
likely committed a criminal offence and if they are found out can have
their car seized, be fined, and banned from the U.S. As I was writing this
part a 70 or so year old father came in to pick up some material I
mentioned on the ROGERS program. His son has been working in the U.S. for
years by using the above mentioned reasons as an explanation to the INS
officer at the border when he was going south to work.
I told him that the situation is like AIDS or fatal
motor vehicle accidents. The majority of people dying of AIDS today are
likely dying ten years after the situation which caused them to contract
the HIV virus. With the exception of the blood transfusion cases, most
persons with AIDS have it because of unsafe sexual practices. Lying at the
border is just like unsafe sex. With fatal motor vehicle accidents, it is
the same thing. Most people are killed within 10 miles of their house. They
have driven through the same intersection or driven home after too many
drinks 100 or more times before the fatal accident.
My statement is that most people who have a problem at
the U.S. border have likely been across 100 times or more. This creates two
situation:
1. The person gets "cocky" and brazen about the situation and
doesn't keep their ducks in order. They used to make sure that nothing in
their luggage would indicate that they are working in the U.S. This trip
their luggage contains an engineering report, business cards with a U.S.
address, copies of their U.S. Visa Bill with 99% of their expenses in the
U.S., an Arizona driver's licence and their birth certificate showing that
they were born in Manitoba.
2. INS is keeping a computer record of your entries. When there are more
than 100 entries, the law of averages catches up. One Realtor who was just
banned from the U.S. (and her summer / winter place) told me that INS
printed out four full pages detailing her crossings. Something did not
click and she has been banned permanently from the U.S. She was lucky that
her car was not seized. (I still remember answering a negative question
honestly at the Osooyos / Oroville crossing and having the INS officer say
that he was glad I had answered truthfully because he would have seized our
motorhome otherwise. - He still banned me from the U.S. at the time though
and I had to go through the Waiver process to regain entry.) Yep - I speak
here from personal experience.
LARGER
BUSINESSES WITH MANY EMPLOYEES
TAX IMPLICATIONS
This business will likely open a branch. They will have
to file a U.S. corporate tax return. The big question is whether they will
open incorporate a new U.S. company or just have their Canadian company
have a branch office. It is likely easier and cheaper to just open up as a
branch of the Canadian Company. The Accounting is so much cheaper that you
would have to be making a fortune before having a U.S. incorporation makes
any real tax sense.
If so, the business will have to file either a Corporate
1120F (if a Canadian company) or a 1120 if a U.S. company. In addition, the
company has to be prepared for sales tax in any states that they operate
in. For an example of what is required, see the last page of the November,
1996 CEN-TAPEDE.
IMMIGRATION IMPLICATIONS
In this case, we have a real problem because the
business has a branch. With rare exceptions a B-1 visa is not valid. This
is because the Canadian executive cannot represent the U.S. branch without
a working visa. That's correct. There is a beautiful office and legally,
the Canadian executive visiting the U.S. branch cannot attend a Director's
meeting, cannot answer the phone (for the office - he can of course, take a
call from Canada unless it is something to do with the U.S. branch), cannot
sit down and make up an order for the U.S. branch although he can make up
an order for the Canadian Head Office. You see, he or she cannot work in
the U.S. for a U.S. entity.
He or she needs an L-1, T-N or maybe one of the H visas
if a person of exceptional knowledge.
Again, having a business card on your person with the
U.S. and Canadian business addresses on it will get you turned back for
sure.
WATCH OUT
FOR SHAREHOLDER TRANSFERS
There is more information on this in the Sept 1994 and
the Oct 95 newsletters. Suffice it to say, that if you get into major
business in the U.S. and you transfer money back and forth between yourself
and a US corporation, you must file a 5472 form. Penalties for failure to
file this form go up to $10,000 every thirty days. The sad part here is
that I have never seen a Canadian bring in their U.S. prepared return with
this form filled in by the U.S. accountant.
On the next page is a reply to a question from a reader.
(I have numbered the paragraphs)
By E-Mail
Thursday, Jan 2, 1997
David
You can use my situation, but not my name for your
newsletter.
1. I have just made some changes in my business (incorporated in B.C.)
so that most of my income is going to come from sale of an information
product that will be sold in the United States. I am advertising in U.S.
trade magazines and the product will be mailed from Canada (for now). The
majority of payments will be charge card although I will receive some U.S.
cheques by mail. I have all these things set up and I am just waiting for
results from my test before rolling this program out nationally.
2. Initially, I want to live in Canada but if this takes off, I will
want to be aware of the tax benefits of how I set it up. Since it is an
information product, I could live anywhere in the U.S. or Canada although I
would clearly prefer to live in the Vancouver area. All I need is a 1-800 #
and a box address. I read your newsletter and see how complicated
everything is when you live in one country and your income comes from
another.
3. Perhaps you could make me aware of the potential "watchouts"
for things I could encounter. Also, at what point does it become worthwhile
to consider moving to the U.S. for tax purposes? What are the complications
and how easy is it? Since the product I am selling is information, it
doesn't really matter to me where t is shipped from, other than the fact
that I want to make sure it is being shipped correctly. Is how I set it up
now on a temporary basis, crucial to what I do long term?
At some point I know I will need to book an appointment
with you, but for now, I want to wait and see the results from my test.
My reply.
Without talking to you and knowing what the product is,
where it is made, who owns the copyright, whether you are the actual
developer, and how much money is actually involved, it is impossible to
answer this question with any real degree of accuracy. You should have
talked to us first BEFORE the test market.
However, in general terms, I will make an effort to
guide you.
1. It doesn't matter how you are paid. What matters is where you are
conducting the business, and where it "seems" you are conducting
your business. If you are using a Canadian Box Number and the clients or
potential clients clearly understand that they are dealing with a company
in Canada, you are simply a mail order B.C. business.
In this situation, you are only required to file a
Canadian Federal and B.C. T2 Corporate Income Tax Return.
However, I am willing to bet that you have gone down to
Blaine, or Custer or Bellingham and have set up a P.O. Box there so that it
"looks" like you are a U.S. based business. In this case, even a
post office box can be considered to be a "permanent
establishment" in the United States and you have to file a U.S. 1120F
Federal Tax return.
In addition, you are responsible for collecting sales
taxes in some states. Washington State will be very interested of course
and you can look at page 202 of the November 96 CEN-TAPEDE for an
example of a letter from the Washington Department of Revenue to a Canadian
business selling into the U.S. from a Washington State address.
What this means is that as a Washington based business,
you have to collect and remit Washington State sales tax for any sales made
to Washington State residents.
If you were to have an address in Colorado, Ohio,
California and another thirty states, you would also have to collect sales
tax for those states.
And if your product was a "licenced business"
which could be considered a franchise, advertising it in a publication
which goes into Wisconsin, could result in a "criminal" charge
for trying to a sell a franchise without being registered within the state.
The first few pages of this will also give you more
things to consider.
