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MenuI'm a business in Canada (QC) that mostly does business with USA based clients over the web. What taxes do I need to apply?
I understand how taxes work within Canada, but when I am dealing with US customers, what taxes apply and do I need to collect taxes to give to the US gov, Candian gov or both? Do I need to register with the US to collect taxes there? How does the income I'm getting from the US (in US dollars) factor in to my Canadian income taxes? According to Canadian laws, I don't need to collect taxes on my services within Canada unless I make over a certain amount in revenue (40K I think). Does income from the US count towards that revenue? I don't want to get in trouble with the CRA or IRS, but everyone I ask gives me a different answer about how this works.
Answers
I will answer this is the simplest form I can. Basically in every country to conduct business in you will need to pay taxes in that country. If you have an office, employees or your revenue comes from that country you have to pay taxes. These taxes will include State, Federal and Sales Tax. Moreover, this at the beginning will make you think you are paying double tax since this income also has to be paid with your local government, but it isn't so bad. This could be a great opportunity to build a tax strategy where you can take advantage of multi country taxation which can lower your overall tax bracket. There are several steps you have to do to conduct business in the US, such as incorporating first as a foreign corporation in the state you chose (Preferably one with no state tax) then filing your taxes. Your tax preparer in Canada will have to take this in consideration since there are forms he has to fill out to cancel either you Canadian Income Tax or your US tax preparer to fill out the return not to pay taxes here but in Canada... whichever tax you have to pay depending on the international treaties they have.
You can review the IRS publication 559 for further guidance as well.
I agree, you will have separate US taxes on the US earned income.
You can take a credit in Canada for foreign taxes paid in the US. You should not pay tax twice on the same income.
Is the product or service you are selling subject to sales tax? You have to provide more info to determine that tax.
Anytime you conduct business within the U.S. or with U.S. based customers, you should consider the various federal and state tax implications that may apply to your business.
Generally, a foreign business is subject to U.S. federal income taxes if that business is engaged in a U.S. trade or business and has income effectively connected (ECI) with such U.S. trade or business. If your only connection to the U.S. are sales to U.S. customers, that is generally not enough to create a taxable nexus with the U.S.
Factors that may create a U.S. trade or business with effectively connected income may include, but are not limited to, having employees based in the U.S., a fixed office location in the U.S. and if you are personally traveling to the U.S. to perform the work.
The other issue is whether tax treaty benefits may apply. Assuming you qualify for treaty benefits under the U.S.-Canada tax treaty, Canadian businesses are only subject to income taxes in the U.S. if they operate a permanent establishment in the U.S., as defined in Article 5 of the tax treaty.
If it's determined that your company is engaged in U.S. trade or business and is subject to income taxes, you'll be deemed to operate a branch in the U.S. A foreign corporation with a U.S. branch needs to file a Form 1120-F and report it's U.S. effectively connected earnings.
When you claim the GST/HST you paid on your business expenses as an input tax credit, reduce the amounts of the business expenses you show on Form T2125, Statement of Business or Professional Activities, by the amount of the input tax credit. When you were claiming their wages or fees as an expense, you would deduct any GST/HST if you had already claimed it as GST/HST paid out when you filed your GST/HST return for the appropriate period. Likewise, if you had hired someone or subcontracted some work to someone in a province that has Quebec Sales Tax or Provincial Sales Tax, such as British Columbia, Saskatchewan, Manitoba, then you would include that tax in your expense claim for wages or fees. Note that you cannot claim any drawings or salaries paid to the owner of the business.
You can read more here: https://www.thebalancesmb.com/business-expenses-for-canadian-income-tax-2948642
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
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