Question

Myers Publishing is a Canadian corporation with its principal offices in Calgary. It sells a line of teenage romance novels that has become quite popular with high school students around the world. The books were sold to U.S. residents via online purchase. So as to increase sales in the U.S., Myers wants to establish relationships with booksellers such as Barnes and Nobel, and Books A Million. It also wants a reliable source of books available in the U.S. so it wants to establish sales offices and warehouses throughout the U.S. You are a U.S. tax advisor to Myers and Myers asks that you explain the following:

Will Myers have a trade or business in the U.S. based on what it intends to do?

Answer 1

Solution:

Under the benefit of the Canada – U. S. tax treaty. Canadians, both individuals and corporations can end up with U.S tax liability if they carry on a trade or business in the U.S. Even if there is no tax liability associated with carrying on a trade or business, there may be U.S. filing requirement on a timely basis. And if these requirements are not met, penalties may apply. Under U.S. domestic law, a non- resident – whether an individual or corporation is subject to U.S. federal tax if they have income that is “ effectively connected with the conduct of a trade or business within the United States. You are subject to U. S. tax if you make sale into U.S. market. You may have a U.S. trade or business if, however you are just accepting unsolicited purchase orders from U.S. customers you probably will not be considered to be carrying on business in the U.S. So in case of Myers Publishing online business from Canada will not attract U.S tax but will be taxable in Canada. Going further need to consider the benefit of Canada – U.S. tax treaty. Under the treaty, Canandian residents are only taxable in the U.S. on their U.S. business profits if they carry on their business in the U.S through U.S permanent establishment (PE) as defined in the treaty. A PE is basically a fixed place of business through which a non- resident carries on a business. So in the above case of Myers Publishing the income through offices established in U.S like sales office and warehouses would be liable to tax in U.S.