January 1997 CEN-TAPEDE - Canadian Company Expanding to US, Unincorporated Businesses, B-1 Visas, T-N Visas, L-1 Visas, E-2 Visa

January 1997  

CEN-TA PEDE
Page 207-214

US / CANADIAN Newsletter of the CEN-TA Group

 

EXPANDING INTO THE UNITED STATES

The question is a loaded one because one person's definition of expansion in to the U.S. may be completely different from the next person's definition. It also changes base upon the size of the organization.

Whether you are large or small, be prepared for a $5,000 extra accounting bill per year as a rough minimum. You might get it for $3,000 extra but a rough rule of thumb is that you can triple whatever you are paying now. So if you are paying an accountant $5,000 now, expect a $15,000 bill after your expansion, no matter how small. The reason is simple. Either you find one of the few organizations (like ours) who can handle both sides of the border internally, or you pay a U.S. accountant for their basic services and a Canadian accountant for their basic services and then pay a small fortune to have them try and convert the information back and forth for the purposes of foreign tax credits and dividend stripping and flow through shares, and ---- well, you get the idea.

The following is an anecdotal discourse. For a look at all the visas available, you need my 25 page treatise on entering the U.S. for any reason. This is available by local Vancouver area fax for $10.70 or mail at $16.05 (inc GST). Fax your request to (604) 913-9133

UNINCORPORATED ONE OR TWO PERSON BUSINESS

INCOME TAX CONSIDERATIONS

A one or two person computer programming business doing 100 % of its business in Canada could get one U.S. contract and find itself doing 90% or even 100% of its business in the U.S. without ever leaving Canada. In this case, there would be no tax liability and no filing requirements for U.S. tax if all the work was performed in Canada.

Even, if some of the work was performed in the U.S., there would be no tax liability if no permanent establishment was opened in the U.S. because ARTICLE XIV of the U.S. / CANADA Income Tax Treaty would exempt the U.S. source money from U.S. tax if there is no permanent establishment in the U.S. Please note that there may be a State Tax liability though if the state does not recognize TREATY DEDUCTIONS. In any case, if any of the work is performed in the U.S. (including the trip to sell the service or product) the individuals involved MUST file a return to claim the exemption from U.S. tax and U.S. social security.

The mistake that businesses make is that they were told back in 1985 that they didn't have to pay U.S. tax under the circumstances without realizing that they still had to file a U.S. tax return and the minimum penalty for failure to file with a "TREATY BASED" exemption from tax is $1,000 U.S. per year.

IMMIGRATION CONSIDERATIONS

A B-1 Visa would qualify the individuals above to:

1. Negotiate the contract for price and expectations.

2. Install the software or hardware and provide initial training on site.

3. Re-install and upgrade and troubleshoot as long as the work was done under an original contract. If the product had been warranted for one year for instance, it could be looked after for that year. After that period, the Canadian could not work on or support the product within the U.S.A. with a B-1 visa.

Selling a new product would allow for the Canadian to work on the site on the new product as in 1, 2 & 3 above, but if the Canadian sort of slipped over and worked on the original product, he or she could be deported from the U.S. Please note that the service aspect has to apply to the original contract and warranty period and cannot be extended, once sold.

Please also note that a B-1 does NOT qualify you to collect money. You can take the order but have the U.S. client mail their cheque (check) to Canada.

Note that you do not usually get a piece of paper with a B-1 visa. It is a paperless visa for Canadians. You also cannot move to the U.S., although you could certainly rent an apartment in an area where you spend a lot of time AS LONG AS YOU KEEP YOUR RESIDENCE IN CANADA.

A T-N visa would be more appropriate in the above situation if there was to be ongoing work and part of the actual production of the product or software was to take place on the U.S. clients premises. In this case, the individuals involved would qualify to work in the U.S. under the North American Free Trade Agreement if they had an appropriate University degree (or a diploma with related experience - or 5 years or more of specific technical experience in a field which does not usually have a recognized University degree such as management consulting).

For instance, a U.S. political party might want a Canadian advertising agency to provide them with a specialist to run a fund raising campaign. A Canadian with 5 provable years of management consulting in political fundraising would likely qualify to work on that campaign in the U.S. with a T-N visa.

Please note that a T-N is only issued for periods of one year or less although it may be renewed annually. You may also move to the United States with a T-N, put your kids in school, etc. However, your spouse and children cannot work themselves in the U.S. unless they qualify for a working visa of their own.

If the persons who have to go to the U.S. do not qualify as professionals (Bill Gates would have trouble qualifying under this set of rules), it might be necessary to open a "branch" in the U.S. Please note that as soon as you open a branch in the U.S. whether it is incorporated or not, you have absolute U.S. tax liability and must file all relevant tax returns. However, this might be a small price, if it allows a principal to work in the states after an executive transfer under an L-1 Visa.

An L-1 visa allows the holder to work and live in the U.S. as does the T-N above. It is much harder to get unless the enterprise is large. If you are opening a new branch, financial statements have to be provided showing that the operation has a financial chance of success. (If the U.S. branch is more than a year old this requirement is waived). In addition, it does not work easily for one or two person businesses because the Canadian business MUST remain in business essentially as it was.

To qualify, the person transferred must have been in a management or supervisory or extremely technical position with the Canadian operation for one year or more before the transfer. Originally, he or she had to working for the year before the transfer but INS will now allow a year's employment in the past (officially last three years).

So, if the idea is that the Canadian wants to close down his or her business and MOVE to the U.S., another solution would be the purchase of a U.S. visa. For this, you need many tens of thousand of dollars, but as Dennis Olsen (an ex U.S. Consul in Vancouver) explained in the January 1, 1995 CEN-TAPEDE, there is more than one way to get an E-2 visa. For instance, if all you have is $75,000 U.S., you have to buy a business worth $100,000 or less because they like you to have paid 70 to 75% of the purchase price. This leaves the peculiar situation that a person paying $100,000 cash for a $100,000 printing business in Bellingham would qualify but a person with $400,000 would not qualify to get a E-2 visa if they were buying a $1,000,000 trailer court. (Dennis does give some creative methods to conform to the rules and spirit of the legislation and still make it possible for the Government officer to approve your visa. See the last page for more information on getting back issues and making a donation to CRIME STOPPERS.

The disadvantage of the E-2 visa is that if the business dies, so does the E-2. You go back to Canada. One client with a million dollar house in Los Angeles and a major business had to uproot his family and move back to Vancouver when they were outbid for their concession location during the rebuilding of LAX (Los Angeles Airport).

100 TIMES ACROSS THE BORDER

Of course, the small businessman can ignore this advice and just get across the border by "saying" he or she is going to visit their sister, going to Disneyland, going shopping in Bellingham, or looking to buy a car in Portland. The problem is that he or she has now likely committed a criminal offence and if they are found out can have their car seized, be fined, and banned from the U.S. As I was writing this part a 70 or so year old father came in to pick up some material I mentioned on the ROGERS program. His son has been working in the U.S. for years by using the above mentioned reasons as an explanation to the INS officer at the border when he was going south to work.

I told him that the situation is like AIDS or fatal motor vehicle accidents. The majority of people dying of AIDS today are likely dying ten years after the situation which caused them to contract the HIV virus. With the exception of the blood transfusion cases, most persons with AIDS have it because of unsafe sexual practices. Lying at the border is just like unsafe sex. With fatal motor vehicle accidents, it is the same thing. Most people are killed within 10 miles of their house. They have driven through the same intersection or driven home after too many drinks 100 or more times before the fatal accident.

My statement is that most people who have a problem at the U.S. border have likely been across 100 times or more. This creates two situation:

1. The person gets "cocky" and brazen about the situation and doesn't keep their ducks in order. They used to make sure that nothing in their luggage would indicate that they are working in the U.S. This trip their luggage contains an engineering report, business cards with a U.S. address, copies of their U.S. Visa Bill with 99% of their expenses in the U.S., an Arizona driver's licence and their birth certificate showing that they were born in Manitoba.

2. INS is keeping a computer record of your entries. When there are more than 100 entries, the law of averages catches up. One Realtor who was just banned from the U.S. (and her summer / winter place) told me that INS printed out four full pages detailing her crossings. Something did not click and she has been banned permanently from the U.S. She was lucky that her car was not seized. (I still remember answering a negative question honestly at the Osooyos / Oroville crossing and having the INS officer say that he was glad I had answered truthfully because he would have seized our motorhome otherwise. - He still banned me from the U.S. at the time though and I had to go through the Waiver process to regain entry.) Yep - I speak here from personal experience.

LARGER BUSINESSES WITH MANY EMPLOYEES

TAX IMPLICATIONS

This business will likely open a branch. They will have to file a U.S. corporate tax return. The big question is whether they will open incorporate a new U.S. company or just have their Canadian company have a branch office. It is likely easier and cheaper to just open up as a branch of the Canadian Company. The Accounting is so much cheaper that you would have to be making a fortune before having a U.S. incorporation makes any real tax sense.

If so, the business will have to file either a Corporate 1120F (if a Canadian company) or a 1120 if a U.S. company. In addition, the company has to be prepared for sales tax in any states that they operate in. For an example of what is required, see the last page of the November, 1996 CEN-TAPEDE.

IMMIGRATION IMPLICATIONS

In this case, we have a real problem because the business has a branch. With rare exceptions a B-1 visa is not valid. This is because the Canadian executive cannot represent the U.S. branch without a working visa. That's correct. There is a beautiful office and legally, the Canadian executive visiting the U.S. branch cannot attend a Director's meeting, cannot answer the phone (for the office - he can of course, take a call from Canada unless it is something to do with the U.S. branch), cannot sit down and make up an order for the U.S. branch although he can make up an order for the Canadian Head Office. You see, he or she cannot work in the U.S. for a U.S. entity.

He or she needs an L-1, T-N or maybe one of the H visas if a person of exceptional knowledge.

Again, having a business card on your person with the U.S. and Canadian business addresses on it will get you turned back for sure.

WATCH OUT FOR SHAREHOLDER TRANSFERS

There is more information on this in the Sept 1994 and the Oct 95 newsletters. Suffice it to say, that if you get into major business in the U.S. and you transfer money back and forth between yourself and a US corporation, you must file a 5472 form. Penalties for failure to file this form go up to $10,000 every thirty days. The sad part here is that I have never seen a Canadian bring in their U.S. prepared return with this form filled in by the U.S. accountant.

On the next page is a reply to a question from a reader. (I have numbered the paragraphs)

By E-Mail

Thursday, Jan 2, 1997

David

You can use my situation, but not my name for your newsletter.

1. I have just made some changes in my business (incorporated in B.C.) so that most of my income is going to come from sale of an information product that will be sold in the United States. I am advertising in U.S. trade magazines and the product will be mailed from Canada (for now). The majority of payments will be charge card although I will receive some U.S. cheques by mail. I have all these things set up and I am just waiting for results from my test before rolling this program out nationally.

2. Initially, I want to live in Canada but if this takes off, I will want to be aware of the tax benefits of how I set it up. Since it is an information product, I could live anywhere in the U.S. or Canada although I would clearly prefer to live in the Vancouver area. All I need is a 1-800 # and a box address. I read your newsletter and see how complicated everything is when you live in one country and your income comes from another.

3. Perhaps you could make me aware of the potential "watchouts" for things I could encounter. Also, at what point does it become worthwhile to consider moving to the U.S. for tax purposes? What are the complications and how easy is it? Since the product I am selling is information, it doesn't really matter to me where t is shipped from, other than the fact that I want to make sure it is being shipped correctly. Is how I set it up now on a temporary basis, crucial to what I do long term?

At some point I know I will need to book an appointment with you, but for now, I want to wait and see the results from my test.

My reply.

Without talking to you and knowing what the product is, where it is made, who owns the copyright, whether you are the actual developer, and how much money is actually involved, it is impossible to answer this question with any real degree of accuracy. You should have talked to us first BEFORE the test market.

However, in general terms, I will make an effort to guide you.

1. It doesn't matter how you are paid. What matters is where you are conducting the business, and where it "seems" you are conducting your business. If you are using a Canadian Box Number and the clients or potential clients clearly understand that they are dealing with a company in Canada, you are simply a mail order B.C. business.

In this situation, you are only required to file a Canadian Federal and B.C. T2 Corporate Income Tax Return.

However, I am willing to bet that you have gone down to Blaine, or Custer or Bellingham and have set up a P.O. Box there so that it "looks" like you are a U.S. based business. In this case, even a post office box can be considered to be a "permanent establishment" in the United States and you have to file a U.S. 1120F Federal Tax return.

In addition, you are responsible for collecting sales taxes in some states. Washington State will be very interested of course and you can look at page 202 of the November 96 CEN-TAPEDE for an example of a letter from the Washington Department of Revenue to a Canadian business selling into the U.S. from a Washington State address.

What this means is that as a Washington based business, you have to collect and remit Washington State sales tax for any sales made to Washington State residents.

If you were to have an address in Colorado, Ohio, California and another thirty states, you would also have to collect sales tax for those states.

And if your product was a "licenced business" which could be considered a franchise, advertising it in a publication which goes into Wisconsin, could result in a "criminal" charge for trying to a sell a franchise without being registered within the state.

The first few pages of this will also give you more things to consider.

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