Illustrations by Don Sparrow
Meet the Dilby family and Dilby & Sons Construction, founded in 1957.
Five family members own shares in the business:
Of all the Dilby children, Annette has always been the most resourceful. Five years ago, she noticed a home that used a hinged gable vent that not only increased circulation in the attic, but also allowed easy access from the outside. She decided to incorporate the feature into her own home designs, but found the supplier unreliable and his product quality inconsistent. She decided to manufacture the vents herself.
At an international homebuilders’ conference in Las Vegas, Annette met three American developers who were interested in her attic vents, and soon after, she began shipping to buyers in Montana, Nebraska and Wisconsin. In her words, “That’s when I realized that although we might like to think Canada and the United States are alike, there are some real differences when it comes to doing business south of the border.”
Kim Bass, a US corporate tax partner at KPMG overseeing the prairie region, works closely with clients like Annette. “If you’re thinking of entering the US market, even before you make your first dollar, you should talk to a specialist in US tax laws,” she advises. “It’s not a matter of how much business you do down there, although in some cases there can be thresholds. What’s more important for someone like Annette is her business needs and goals.”
Since Annette is determined to expand her American market, Bass recommends establishing a US subsidiary. That subsidiary would legally be incorporated in the US but would not necessarily need a physical office or address in the States. Its main purpose would be to sell to US customers and can also be used as a vehicle to expand into the US by easily hiring US employees. A subsidiary is also cleaner and may help facilitate the resulting compliance requirements.
Even after Annette has established the subsidiary, she should consult regularly with experts in US taxation because of the complexities. For example, in addition to the federal tax regulations, tax laws vary from state to state. The subsidiary would need to comply with each state’s regulations to ensure that it stays onside in each jurisdiction it operates in.
Annette isn’t the only Dilby who has American customers. So does her brother Julian. About 80% of his fly-in fishing camp clients came from the United States, and he lost all of them this season because of the covid-19 pandemic. One of his American friends, however, urged Julian to produce a series of 10 weekly instructional webinars on fishing in northern Saskatchewan. Fifteen American fishing enthusiasts signed up, at a cost of US$300 each. Again, Bass emphasizes the importance of consulting with US tax advisors. They can advise on the proper sourcing and taxation of Julian’s earned revenue and, if necessary, the ideal structure for his US operations.
But what about the patriarch of the family, John, and his wife, Mary Dilby? Now in semi-retirement, John and Mary have been spending four months every winter at their condo in Palm Springs. But this winter, because of their health and insurance issues, as well as the uncertainty of US-Canada border restrictions in the coming months, they decided to stay home in Saskatoon. Mary posted their decision on Facebook, and soon after that their winter resort neighbour from Idaho asked if the Dilbys would be willing to rent their unit to a retired couple from Boise. Mary and John were happy to do so. Surely, they don’t have to worry about the IRS!
“I’m afraid that they, too, will have to file with the IRS and pay income tax on their US income,” says Bass. “When you rent a property in the United States, the activity is considered a trade or business and would be subject to taxation. It doesn’t matter if you’re American or Canadian.”
Even if you have the best of intentions, federal and state tax laws can be complicated – and very punitive. It could be that in some years Annette’s subsidiary wouldn’t owe any tax, but failure to file certain forms that may accompany the tax return could still result in a fine of up to US$25,000. The IRS can also seize any assets you own in the US. “That’s why it’s just good business to have a US tax advisor on your side, to make sure you and your business keep up with tax laws that are constantly changing,” concludes Bass. “As Annette says, we might like to think that the US and Canada are very much alike, but that’s a misconception when it comes to taxation. Making assumptions can be very costly.”
All names, characters, and incidents portrayed in this article are fictitious. No identification with actual persons (living or deceased), businesses, places, buildings, and products is intended or should be inferred.
First published in the December 2020 edition of The Business Advisor.