Dodging a One-Two Tax Punch

How federal and state tax changes south of the border can impact Atlantic Canadian companies and business travelers into the U.S.

Dodging a one-two tax punch

Atlantic Business Magazine, September/October 2017

Around the world, borders are tightening as governments grapple with the hyper-demands of a securityconscious world. These changes can have an impact on cross-border business.

Here in Atlantic Canada we need look no farther than our neighbour to the south. There the promise of sweeping immigration and taxation reforms during Donald Trump’s campaign are being translated into policies and procedures under the Trump administration. If you do business in the United States, these have the potential to strike close to home.

Canadian businesses based in Atlantic Canada with customers in the U.S. need to be aware that the American tax landscape is changing, and that proper tax advice is critical before entering the
U.S.,
” says U.S. tax professional Julia Klann.

Limiting business exposure to maximize profit

With the IRS focussing on crossborder business and increased scrutiny at the border, the risk of penalties for noncompliance with U.S. tax law is higher than ever before,” says Klann. With more than a decade of experience in guiding private business safely through the maze of cross-border tax, she says the demands for compliance and the need to manage exposure have never been greater at both the federal and state levels.

In her role as the U.S. tax leader for KPMG in Canada’s eastern region, Klann has built a local U.S. and cross-border tax team with senior managers based in New Brunswick, Nova Scotia and Newfoundland and Labrador. She says this local base provides their clients with effective resolutions for Canadian and American cross-border issues and a local contact for U.S. tax questions and guidance. “Regardless of the size of the business, if a Canadian company depends on the U.S. market for revenue or talent, we have a local team of professionals who can work with local businesses to help keep them informed of U.S. tax law changes, advise on how to structure U.S. business expansion, address mobile workforce issues and stay on top of their U.S. filing requirements,” says Klann.

Although many of the continually evolving regulations and policies are at the federal level, the impact of state income and sales tax laws, should not be underestimated either, says Klann. Nor should companies underestimate the reach of state laws which differ significantly from federal tax laws. “Many states will tax Canadian companies simply for having a customer base in the state, even if all of the services to generate the revenue are performed in Canada,” she says, pointing out that this is an exposure that can be overlooked, with severe consequences. “This is where we see significant exposures in both income tax and sales tax which can be a huge issue…especially on due diligence.

"With the IRS focussing on crossborder business and increased scrutiny at the border, the risk of penalties for noncompliance with U.S. tax law is higher than ever before".

As an added service, she says KPMG’s local team in Atlantic Canada can assist businesses in determining their exposure and filing obligations, as well as helping businesses become compliant with state filing requirements. She says that for Atlantic Canadian companies that are exposed, KPMG’s local team can help negotiate a voluntary disclosure agreement to minimize penalties
associated with not filing and help minimize the look back period for getting compliant with state income, franchise and sales taxes.

KPMG’s local U.S. tax specialists in Atlantic Canada include Janice Connors, Dawn Haley, and Candace Sears. “Each is a senior manager with an extensive background in cross-border business
issues and are part of a core team of people providing local professional guidance.
” Klann says they can help identify issues and provide solutions specific to privately held Canadian businesses, “helping you to anticipate issues and provide seamless compliance as those issues emerge.

As a business based in Atlantic Canada, when you engage with your KPMG team you have access to local U.S. tax professionals who will strive to ensure that you are in compliance with the evolving regulations in the U.S. and will keep you updated on changes south of the border,” she says.

As many businesses dependent on cross-border trade know, some of the new policies are simply tougher enforcement of long-standing regulations. An example is the requirement for companies
selling to U.S. customers to file an annual return to disclose this sales activity with the IRS. “That requirement is not new, but typically a lot of Canadian businesses chose to ignore this filing requirement as no taxes would actually be payable to the IRS,” she says. “The chance that they would be identified, audited and penalties imposed for failure to file by the IRS were very slim.

But as of the spring of 2017, the IRS reorganized the way they look at taxpayers and their audit process. Among the IRS priority areas is an examination of non-U.S. corporations and whether
or not they file returns in compliance with U.S. law. The IRS is looking for noncompliance in this area and sending information requests to those companies identified as noncompliant. “The reason
any business in the Atlantic provinces should care about this IRS initiative is that they could be facing a US$10,000 penalty per year for not filing,
” says Klann.

Keeping the border open for business travel

The liabilities and demands for compliance are not limited to corporate entities says Klann. “If you are someone who travels across the border for work or if you are an employer who sends employees across the border for work, you need to be clear about your crossborder filing requirements and exposure,” she says. “A decade ago, immigration and tax compliance for cross-border travelers were often further down many businesses’ to-do lists than would be advisable today. In light of the Trump administration’s focus on who can get a visa – and increased border scrutiny – immigration and tax compliance have now become super critical,” cautions Klann.

What many Canadian businesses do not realize is that almost any U.S.- based activity – attending trade shows, visiting customer locations, holding sales meetings or sourcing product – could be considered U.S.-based services for the purpose of determining if employees are earning employment income from U.S. sources,” reveals Klann. These activities can create tax obligations for employees and their Canadian employers. Although employees are not typically subject to U.S. federal income tax for these types of activities, penalties can be imposed by the IRS for non-disclosure of U.S.-based workdays.

"If you (send) employees across the border... there’s a good chance that both your company and your employees could get dinged with penalties or even denied access at the border".

Employees and employers also need to be proactive in protecting themselves. Employees who cross the border for business should be concerned if their employer has not discussed the tax implications with them. Klann also recommends employees have a consultation with an immigration lawyer. “We work really well with our internal immigration team to provide tax and immigration services seamlessly to our clients.

If you are an employer who sends employees across the border, and you haven’t thought about immigration or tax, there’s a good chance that both your company and your employees could get
dinged with penalties or even denied access at the border,
” says Klann. “If you were travelling for a trade show or for a key customer meeting, getting denied access or being held up at the border for
tax or immigration issues is a problem that can significantly impact your business.

Klann says the main point employers and employees need to understand is that “if you represent a Canadian business based in Atlantic Canada, and you are doing business with customers in the
United States, your world is changing. There are things you need to know because you are probably going to have U.S. tax issues and filing requirements.

"Many states will tax Canadian companies simply for having a customer base in the state, even if all of the services to generate the revenue are performed in Canada".

Klann says businesses should not underestimate the impact of the huge changes on the horizon from the Trump administration. She expects broadreaching changes that will continue to affect the way Atlantic Canadian companies do business in the U.S. “Some of the changes are known but we are expecting a great many more changes in the next year,” she says. Klann believes this is an ideal time to develop a relationship with an informed, locally-based advisor. “KPMG can help you put your business on a firm foot in the United States. We can help you and your employees to quickly adapt to change on a timely basis. And we are committed to providing solutions regionally that are tailored to your business model.

About the Authors

 

KPMG’s Atlantic Canada team of U.S. tax specialists can help regional businesses navigate the rapidly changing American regulatory environment—and avoid costly fines and penalties.

Dawn Haley, Senior Manager, is based out of Halifax, Nova Scotia and is a CPA, CGA. Dawn has taken the In-Depth Tax Course through the Canadian Institute of Chartered Accountants and focusses on the taxation of U.S. citizens in Canada and business travelers into the U.S.

Candace Sears, Senior Manager is based out of Fredericton, New Brunswick. She is a Canadian CPA, CA, and U.S. CPA. Candace’s focus is on U.S. corporate tax and assisting businesses with U.S. expansion and managing their U.S. tax compliance.

Janice Connors, Senior Manager based out of St. John’s, Newfoundland. She is an Enrolled Agent with the IRS and has over a decade of U.S. and international tax experience, working with both corporations and individuals to manage U.S. exposure and filing requirements.

Julia Klann, U.S. Tax Partner and U.S. Tax Lead for Eastern Canada, holds advanced Canadian and American accounting certifications, including a Master of Science in Taxation from Golden Gate University. Her focus is on U.S. international taxation for both corporate and individual clients.

Please click HERE to read the original article in the September/October 2017 issue of Atlantic Business Magazine.