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This is for a second opinion. Please respond if you are seeing this for the first time.I have a Canadian corporation since 2011, and we pay our Canadian federal and provincial taxes on our profits each year.90%+ of our sales are in the USA.We've had an account at a bank in the USA for several years, and they are asking us to fill in a W8BEN-E. We do not own or rent any offices or property in the USA, we don't manufacture anything in the USA, and we don't have any employees in the USA (we use contractors). However most of our sales are in the USA, and our inventory is stored in a US 3rd-party warehouse service. Does this mean that we may be liable for US Federal or State taxes?
Submitted: 2 years ago.Category: Tax
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2/18/2016
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years ago
Jason M. Tyra, CPA
Jason M. Tyra, CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 178
Experience: Principal at Jason M. Tyra, CPA, PLLC
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You could be.

The IRS requires foreign corporations to declare income for a trade or business "effectively connected" to the US on Form 1120F. The issue of nexus for taxation purposes is complex. The IRS or a state taxation agency may or may not accept your assertion that your contractors and warehouse don't create nexus.

You should probably contact a tax attorney on this. You have two issues to get clarification on- first, do you have nexus. Second, is there a tax treaty or other reason that would cancel out your obligation to file (if you do have nexus).

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Customer reply replied 2 years ago
Thank you.There is a tax treaty in effect between the US and Canada. It states that as long as a Canadian corporation doesn't have a 'permanent establishment' in the US, its business profit will only be taxable in Canada and will not be taxable in the US.I assume this is similar to the issue of 'nexus'.The definition of "permanent establishment" is defined as:Permanent Establishment
1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.
2. The term "permanent establishment" shall include especially:
(a) A place of management;
(b) A branch;
(c) An office;
(d) A factory;
(e) A workshop; and
(f) A mine, an oil or gas well, a quarry or any other place of extraction of natural resources.6. Not withstanding the provisions of paragraphs 1, 2, and 5, the term "permanent establishment" shall be deemed not to include a fixed place of business used solely for, or a person referred to in paragraph 5 engaged solely in, one or more of the following activities:
(a) The use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the resident;
(b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display or delivery;
(c) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;
(d) The purchase of goods or merchandise, or the collection of information, for the resident; and
(e) Advertising, the supply of information, scientific research or similar activities which have a preparatory or auxiliary character, for the resident.So would using a 3rd-party warehouse in the USA constitute a permanent establishment?
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years ago

Based on 6.(a), looks like the answer is no.

Also, this treaty would override any state considerations.

Looks like you had the answer all along... :-)

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