Tax differences could make or break your cross-border expansion

So you’re thinking of setting up shop south of the border.

If you’re like most small- to medium-sized Canadian manufacturers out there (read: busy), the decision to wade into a new market was probably made in reaction to opportunity.

Planning an American expansion—like most ideas that take your business to the next level—often come as the result of a revelation, and generally aren’t accompanied by the luxury of a whole lot of lead time.

Get in or get beat; it’s that simple.

But don’t make the decision in haste, experts warn.

Canada and the United States may be similar in many regards, but the nations are different in ways that count, and often in ways that count toward your bottom line.

Get caught flat-footed, and it could spell headaches—or worse—for your business.

“I think what (companies often) don’t get is the complexities that are involved,” said Cary Heller, tax partner with accounting practice Collins Barrow in Toronto.

“The moment you cross the border you are running in a different world with different rules, and those complexities and failing to plan for that in advance (is) what causes the most headaches.”

Speaking at the inaugural Cross Border Huddle and Business Symposium in Toronto, Heller and Leslie Kellogg, international and business tax partner with legal firm Hodgson Russ, spoke on a variety of topics pertinent to making the move stateside, but all of them shared a common thread: Preparation is key.

Taxes exist on both sides of the border, but differences in tax rates and taxation, federal taxes versus state and local taxes, and whether Nexus exists where business is being conducted need to be considered before making the move.

“I don’t think taxes in and of themselves are a hindrance—Canadians are very familiar with income taxes, be it at the corporate or the personal level,” Heller said. “If they go into the U.S. (they know) there’s going to be some level of corporate tax (and) there’s going to be some level of sales tax.”

What that all amounts to is a glaring reminder to be as prepared as possible to make the move across the border, whether through expansion or acquisition.

Time may not always be on your side, but giving yourself enough time to understand the waters you are wading into can be the difference between success and failure.

One of the first bits of advice Heller offers to Canadian firms looking to expand into the U.S. is simple: Avoid limited liability company (LLC) status.

“Canada does not like LLCs,” Heller said bluntly. “So whether it’s an LLC coming into Canada or even more particularly Canadians going into LLCs, (they) are a disaster.”

In Canada, LLCs are viewed with skepticism based on their blurred lines between corporation and partnership.

As an unincorporated organization, LLCs in the U.S. are not taxed as corporations.

Flow-through taxation leaves the holder or holders to foot the bill from the Internal Revenue Service (IRS), yet the entity has some of the perks afforded to a corporation (think limited liability, separate legal entities, etc.).

For Canadian taxation purposes, however, a clear distinction between corporation and partnership must be made for taxes to be collected from the appropriate party.

The waters get murkier still, as holders of an LLC need not be declared to register in the U.S., meaning as a Canadian you or your company could go untaxed for years, until one day the tax man catches up to you and asks you to cut a hefty cheque.

“(You) may be there for two or three years before (you) realize (you’re not) doing things properly, and (then) you’re scrambling,” Heller said.

He said this is where situations like voluntary disclosure comes up, where foreign entities approach the IRS to square up on unpaid taxes and avoid potentially substantial civil—and even criminal—penalties.

“You’re going to the IRS and putting your hands up and saying, ‘I’ve been bad’,” Heller said. “That’s a lot more difficult than when someone comes to me (first) and says, ‘I’m thinking of going to the U.S.’.”

Buffalo-based Kellog echoed that message and said that while LLCs are common in the U.S. and may be tempting as a status of choice for Canadian firms entering the market, she would strongly encourage firms to go a different route when registering south of the border to avoid potentially costly headaches.

Sole proprietorship, corporation and a variety of partnerships are options that are available and can best be determined after sitting down with an expert to decide what’s best for you and your company.

Time may not always be on your side, and the decision to expand business stateside is often one made in response to opportunity.

But planning ahead to mitigate risk can be the difference between success and failure.