Some Canadian companies doing business in the U.S. consider the ultimate U.S. tax-planning strategy to be staying off the Internal Revenue Service (I.R.S.) radar. However, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act — both revenue-raisers for health care — have many companies rethinking this as the most effective strategy.
This new legislation requires that all U.S. businesses must report to the I.R.S. any payments of more than US$600 made to a Canadian company for goods or services. The acts are targeting unreported income; once a payment is in the I.R.S.’s system, the agency has a much better chance of catching non-filers or underreporters. The good news for Canadian companies is that this provision won’t take effect until Jan. 1, 2012, which gives ample time to plan.
Once the new provision takes effect, U.S. purchasers will be required to meet new reporting obligations, which will force the companies involved to acquire Taxpayer Identification Numbers (TINs). Unfortunately for Canadian companies, the pursuit of TINs can be a fairly frustrating process, and there are onerous penalties for non-compliance. If the Canadian company does not have a TIN, the U.S. firm will be penalized an amount determined by the I.R.S. Many U.S. companies will seek to avoid this situation by opting to withhold payments on Canadian invoices when no U.S. TIN is provided. (The Canadian company can file a return to get the money, if no taxes are due.) To avoid delayed or withheld payments — and to avoid administrative headaches in the future — Canadian companies need to begin planning today.
First, businesses that can effectively use the Canada-U.S. Tax Treaty to avoid U.S. taxation should document their ability to do so, from both a technical U.S. tax perspective and an operational one. These companies should ensure they are in full compliance with all filing obligations (specifically, I.R.S. Form 1120F). Second, Canadian companies that are more aggressively claiming treaty benefits should consider alternative structures that can alleviate some of the pressure without significantly altering the way they do business in the U.S.
Soon enough, the I.R.S. will know exactly which Canadian companies do business in the U.S. — and how much that business is worth. Staying off the I.R.S.’s radar will no longer be an option. To avoid hefty penalties, it’s time to start planning now.