Maroof HS CPA Professional Corporation, Toronto

Your Tax Questions Answered!

We often answer the questions sent by the readers, and post answers if that can help other readers.

Question asked by Sarah

I am a U.S. citizen living in Canada. I do have a U.S. Amazon Store, that uses Amazon FBA services. The corporation is owned equally by me and my Canadian friend. I understand that I need to file 1120-F and 8833. Do I need to file form 5472 and also pay branch profit taxes to IRS?

Disclaimer: This is not tax advice. The answer below is for general purposes. Please exercise caution while making any decision based on this post or any other post on this website. This question may have been rephrased to correct some of the technical terms. The rephrased questions are often more helpful to a wider range of readers. The name of the person asking the question may have been changed at his/her request for privacy reasons.

Direct Taxation of ECI of CFC in the U.S.

IRC §882 (a) imposes a tax on the ECI of a foreign corporation. Effectively connected income (ECI) of a Controlled Foreign Corporation (CFC) is excluded from Subpart F income pursuant to IRC §952 (b). 

It appears that the ECI of a CFC causes direct taxation in the U.S. and consequently payment of branch taxes. 

No Direct Taxation if no PE in the U.S. due to a treaty

IRC §952 (b) specifically refers to the treaty obligation of the United States. 

As per, Canada U.S. Tax Treaty’s article VII the earnings of a Canadian Corporation are only taxable in the United States if there is a Permanent Establishment (PE) in the United States. 

Permanent Establishment (PE) is further defined in Article V of the tax treaty. If you determine that the corporation does not have a PE in the U.S., the income is exempt from U.S. taxes. However, in order to claim this exemption a treaty-based position must be filed on a timely basis. 

With specific reference to U.S. citizens and resident aliens, there should be a detailed analysis of the facts to ensure that these U.S. persons are not causing PE there, unintentionally. The treaty article of Limitations of Benefits must also be consulted if there are shareholders who are not U.S. or Canadian residents. 

A Canadian Corporation must file 1120-F and 8833 with IRS on time. Late filing of 8833 brings a penalty. 

Read: What tax forms to file?

IRS form 5472 for Canadian Corporations 

If a Canadian Corporation has income effectively connected to U.S. trade or business but timely files 8833, such a corporation is excepted from the requirement of 5472 filings. 

IRS form 5472 must be filed by a Canadian corporation if it has a Permanent Establishment in the United States. Failing to file this form, or a substantially incomplete form can attract a penalty of $25,000. 

Note: Like every other blog post on this website, please always check the date of publishing of the post. The post may not be updated after it was published. The U.S.-Canada Cross border taxes can get complex with the potential of substantial penalties that can quickly add up to tens of thousands of dollars. Please always ensure to get formal tax advice from a cross-border tax accountant whenever needed. 

Leave a Comment

Your email address will not be published. Required fields are marked *

Do you have a Tax Question?

Write to us and if there are more similar requests, we may post an answer for you.

Subscribe Now!

Please subscribe to our mailing lists for occasional informational notifications.

Looking for Tax Help?

If you are looking for specific tax advice, please write to us.

Some more questions:

IT Contractors – Employee Vs Incorporation

Question: I Am An IT Professional. I Just Received An Offer From My Employer. My Employer Wants Me To Incorporate And They Have Agreed To Offer A Better Hourly Rate. I Am Confused Should I Set Up A Corporation Or Become An Employee?

Read More »

Tax on Inheritance in Canada

Question: My mother passed away in India last month. I am receiving my share of the family house. The home is located in India. I am a resident of Canada. Do I need to pay taxes in Canada when this property is transferred to me?

Read More »

Incidental Rental income of CCPC

Question: My corporation, a CCPC, has a catering business and holds a building as an asset. I rent a portion of the building but use the rest in my operations. Is my corporation now Specified Investment Business?

Read More »

Some of Our Featured Posts:

Scroll to Top