Expanding to the U.S.: Cross-Border Tax Tips for Canadian Corporations – A Complete Guide by a Montreal CPA Firm Near You

Expanding to the United States offers tremendous growth opportunities for Canadian
businesses, but it also introduces one of the most complex tax environments in the
world. From state-level rules to federal IRS regulations and the Canada–U.S. Tax
Treaty, cross-border operations require careful planning to avoid double taxation,
permanent establishment risks, withholding issues, and compliance penalties. Many
Canadian businesses unknowingly create a taxable presence in the U.S. simply by
hiring contractors, signing leases, storing inventory, or sending employees across the
border. Others incorporate U.S. subsidiaries without understanding the tax
consequences. Whether your business sells online to U.S. customers, exports products,
opens an office, hires staff, or forms a subsidiary, understanding the tax rules for
expanding to the U.S. is essential for protecting profits and staying compliant.
Legal and Regulatory Framework
Cross-border tax obligations for Canadian corporations are governed by multiple layers
of law:

1. IRS Tax Rules (U.S. Federal)
   • U.S. taxable presence is determined by whether the Canadian corporation has a
   Permanent Establishment (PE) under the Canada–U.S. Tax Treaty.
   • If a PE exists, the corporation must file a U.S. federal income tax return (Form 1120-
   F).
   • Even without a PE, protective filings may be required to claim treaty exemption.

2. State Tax Rules
   • Many states do not follow the Tax Treaty.
   • Income tax nexus can be triggered by:
   – employees working in the state
   – holding inventory in the state
   – economic nexus (sales threshold), especially for sales tax
   • State filings vary widely and operate independently of the IRS.

3. Sales Tax (U.S. Equivalent of GST/HST)
   • U.S. sales tax is administered at the state level.
   • Economic nexus applies—often triggered when annual sales exceed $100K or 200
   transactions per state.

4. Withholding Tax Rules
   • Payments such as interest, royalties, and certain service fees may be subject to U.S.
   withholding tax unless reduced by treaty.
   • The Canadian corporation may need to provide a W-8BEN-E to claim treaty benefits.

5. Canadian Tax Considerations
   • CRA requires reporting of foreign subsidiaries using forms like T1134.
   • Income earned through a U.S. entity may require foreign tax credit claims.
   • GST/QST remains applicable to Canadian side operations.
   These combined rules form the legal foundation for expanding to the U.S. as a
   Canadian corporation.
   Key Court Decisions
   Several important decisions highlight the tax risks for cross-border businesses.
   In Dudney v. The Queen, a Canadian consultant working in the U.S. was found not to
   have created a PE because he used client facilities—not his own. This clarified the
   conditions for PE under the treaty.

In Knights of Columbus v. Canada, the court emphasized proper allocation of income
between jurisdictions when cross-border operations occur.
In American Dairy Queen v. Tax Commissioner, state-level nexus rules were upheld
even though the corporation argued treaty protections—confirming that states can
impose taxes despite the treaty.
In TD Securities v. Canada, CRA challenged income allocation in a cross-border
structure and won, reinforcing the need for proper transfer pricing.
These rulings show that cross-border tax compliance must be precise and well
documented.
Why CRA and IRS Target This Issue
Both CRA and the IRS intensely scrutinize cross-border operations because of high risk
and revenue potential.
CRA focuses on:
• unreported foreign subsidiaries
• improper foreign tax credit claims
• Canadian companies shifting income to U.S. entities
• missing Form T1134 filings
• hybrid structures used to avoid tax
The IRS and U.S. states focus on:
• Canadians unknowingly creating taxable presence
• unreported U.S. sales tax obligations
• payroll compliance for employees entering the U.S.
• failure to file Form 1120-F
• businesses relying incorrectly on treaty exemptions
Because cross-border businesses require multi-jurisdiction compliance, both tax
agencies actively monitor and investigate inconsistencies.
Mackisen Strategy
At Mackisen CPA Montreal, we help Canadian companies expand to the U.S.
strategically, safely, and tax-efficiently. Our comprehensive approach includes:
• determining whether a U.S. Permanent Establishment will be created
• assessing whether a U.S. subsidiary (Inc./LLC) or branch structure is optimal
• evaluating state-level nexus for income and sales tax
• preparing W-8BEN-E forms to reduce U.S. withholding tax
• planning transfer pricing for intercompany transactions
• ensuring compliance with CRA foreign reporting (T1134, foreign affiliate rules)

• coordinating both Canadian and U.S. tax filings for integrated reporting
• designing payroll, contractor, and employee structures for cross-border work
• preparing cross-border GST/HST and U.S. sales tax strategies
• reducing double taxation using treaty provisions and foreign tax credits
Our cross-border planning ensures your expansion is legally compliant and financially
optimized.
Real Client Experience
A Canadian e-commerce company exceeded economic nexus thresholds in five U.S.
states without realizing it. States issued assessments. We registered them properly,
corrected filings, and implemented automated sales tax systems.
A consulting firm sent employees to the U.S. regularly, unintentionally creating a
Permanent Establishment. We filed Form 1120-F, negotiated allocations, and eliminated
double tax exposure using the treaty.
Another client formed a U.S. LLC without understanding that CRA treats LLC income as
corporate—not flow-through—creating double taxation. We restructured the entity and
corrected past filings to avoid ongoing tax inefficiencies.
These cases demonstrate the importance of expert cross-border planning before
expanding to the U.S.
Common Questions
Canadian companies ask whether hiring a U.S. contractor creates tax obligations. It
may—if work is done physically in the U.S.
Others ask whether a Canadian corporation can avoid U.S. tax by claiming treaty
exemption. Only if no Permanent Establishment exists and the proper filings are
submitted.
Some ask whether a U.S. bank account or warehouse creates nexus. It can—especially
at the state level.
Another common question: Should I incorporate an LLC or a C-Corp? LLCs often create
tax complications for Canadians unless carefully structured.
These questions highlight why cross-border tax planning is essential for Canadian
corporations expanding to the U.S.
Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps
Canadian businesses expand into the U.S. with confidence. Whether you are selling

online, opening a U.S. location, hiring American staff, or forming a subsidiary, our cross-
border experts ensure precision, compliance, and protection from both CRA and IRS
risk.