Canada-United States Tax Treaty: Article XXIV

Article XXIV of the Canada-U.S. tax treaty is designed to avoid double taxation and provide credit for taxes paid in the other country. Residents working across the border must report their worldwide income to the tax authorities in both countries: the IRS (U.S.) and the CRA (Canada). Mechanisms such as the Foreign Tax Credit (FTC) help minimize bilateral tax liabilities.

Tips for businesses expanding cross-border

Structuring and restructuring of entities

Canadian businesses should consider structures such as LLCs (Limited Liability Companies) for their U.S. operations. The transparent taxation of LLCs can provide tax advantages under certain conditions.

Application of FIRPTA

Canadian companies selling real estate in the United States must comply with the Foreign Investment in Real Property Tax Act (FIRPTA), which imposes a 15% withholding tax on the gross amount of the sale. Exemptions apply if, for example, the buyer uses the property as a principal residence.

Specific State and Local Taxation (SALT)

Businesses must comply with local sales and use tax requirements, including economic nexus thresholds. The South Dakota v. Wayfair decision requires sellers to collect taxes even without a physical presence in the state.

Examples of thresholds in 2024:

• California: $500,000 in sales, excluding services.

• New York: $500,000 and 100 transactions over four quarters.

• Texas/Tennessee: $500,000, including taxable services.

• Michigan/Minnesota: $100,000 or 200 transactions.

• Massachusetts: $100,000, no transaction criteria.

• Illinois/Pennsylvania: $100,000 or 200 transactions.

• Nebraska/Nevada/Utah: $100,000 or 200 transactions in the current or previous year.
  

Tax optimization and asset protection

Tax optimization

• Tax Treatment of LLCs in the United States: LLCs benefit from transparent taxation, with profits taxed directly to the owners, reducing the overall tax burden through foreign tax credits and tax treaty provisions.

• Tax Treatment of LLCs in Canada: In Canada, LLCs are treated as corporations, creating planning opportunities to minimize cross-border taxation.
  

Asset Protection

Using a trust to hold interests in an LLC provides protection from creditors and litigation. This arrangement is particularly beneficial for real estate investments and other large assets in the United States, while also facilitating estate planning.

Businesses and individuals operating on both sides of the border can take advantage of these strategies to optimize their taxes, manage their assets efficiently and ensure compliance with the tax regulations of both countries.