The U.S. is ranked by the World Bank as the seventh-best country in the world for ease of doing business. Its economy is recovering and corporate profitability is at an all-time high. Consumers are spending more now that the housing market is gaining strength and confidence is rising. The U.S. is considered to have excellent potential for Canadian exporters and investors.
The United States is the world’s largest economy, accounting for over 16% of global GDP.
Canada and the U.S. have the largest trading relationship in the world, with over 75% of Canada’s total exports going to the U.S. in 2014.
Merchandise imports from Canada to the U.S. are worth $403 billion.
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“It can be fairly easy and safe for Canadian companies to move into the U.S. and that step can potentially help them break into the supply chain of multinationals operating in the U.S., which could serve as a stepping stone for going international.”
Where can Canadian businesses find opportunities in the U.S.?
EDC supports many businesses in oil and gas, forestry, the auto sector and aerospace, for example. While Canada is sometimes seen as a resource-based economy, that’s only part of what we have to offer. There are opportunities in virtually all industry sectors. Opportunities can be found by connecting with provincial trade groups and industry associations and by attending trade shows as a way of learning about your prospective market. It can be fairly easy and safe for Canadian companies to move into the U.S. and that step can potentially help them break into the supply chain of multinationals operating in the U.S., which could serve as a stepping stone for going international.
What are the key considerations for Canadian companies expanding into the U.S.?
Establishing a local presence is important. A typical question from prospective U.S. clients would focus on how their accounts would be serviced, whether there is a local office and how warranties on goods and services would be managed. Canadian companies can gain an advantage by having a U.S. address; their customers might not even be aware that they’re dealing with a Canadian entity.
What challenges can Canadian companies face in the U.S.?
Conditions and regulations may differ from state to state. I recommend reaching out to the Canadian Trade Commissioner Service, which has knowledge in the specific geographic areas the Consulate covers. Trade commissioners can provide businesses with information on a local market, from local regulations, partners or trade shows to information about finding space. They would also know whether there are any incentives to relocating or opening an office in a certain area, such as a city with an economic development strategy that includes encouraging foreign investments.
“Although doing business in the U.S. can be a complex undertaking, the U.S. market offers some of the greatest opportunities in the world, including access to global value chains.”
What’s the biggest potential obstacle Canadian businesses face in the U.S.?
Canadians often treat the U.S. market as an extension of their domestic market, and as such do not dedicate sufficient planning and resources into their market strategy. Canadian exporters need to ensure they understand the import/export regulations and the necessary product approvals from organizations such as EAP, FDA, USDA, etc., as well as NAFTA implications. In addition, given the hyper-competitive nature of the U.S. market, Canadian companies need to identify a specific market (such as a state or region) as their first foray into the U.S. and work on expansion efforts once they are successful in that region/state.
What should they do ahead of time?
Although doing business in the U.S. can be a complex undertaking, the U.S. market offers some of the greatest opportunities in the world, including access to global value chains. In addition to understanding the regulations, Canadian companies need to invest time and resources by visiting the market, perhaps multiple times, to network and attend events in order to understand the nuances of the U.S. business environment and meet potential customers well in advance of penetrating the market.
What about establishing joint ventures with U.S. counterparts?
Joint ventures in the U.S. fall under the government of commercial transaction law and as such the joint venture must comply with the rules in the jurisdiction where the home market is located. Since joint ventures are legal agreements it is imperative to set clear terms, which can be flexible but need to be explicit and easily understood or defended in a court of law. Relative to other foreign markets, the U.S. market is rated high in terms of the ease of establishing joint ventures.
“Canadian citizens can obtain work permits very quickly. The NAFTA treaty allows Canadian citizens who possess a U.S. job offer in a specified occupation to obtain a TN work permit at the border.”
Can a Canadian business opening a new office in the U.S. staff it with employees transferred from Canada?
Yes. The L-1 category is available to individuals who have worked on a full-time basis for at least one year of the past three years for a foreign corporation with a parent, subsidiary, branch or affiliate in the U.S. The individual must have been employed in either an executive or managerial (L-1A) or specialized knowledge capacity (L-1B). If the Canadian employee has been employed on a full-time basis for at least one year, he/she can transfer to the U.S. to work at the affiliated company. Canadian citizens can obtain an L-1 work permit on-the-spot at a Class A port of entry.
What’s the best way for Canadian citizens doing business in the U.S. to avoid border delays?
The NEXUS pass is the perfect way to avoid delays into the U.S. NEXUS is a joint effort program by U.S. Customs and Border Protection and the Canada Border Services Agency. Applicants must submit a detailed application to each agency and appear for an interview. If approved, the NEXUS pass is valid for a five-year period.
How long does it usually take for a work visa to be issued to a Canadian who qualifies?
Canadian citizens can obtain work permits very quickly. The NAFTA treaty allows Canadian citizens who possess a U.S. job offer in a specified occupation to obtain a TN work permit at the border. In addition, the L-1 work category also allows the same on-the-spot processing. In general, it will take a week or so to draft the application before it is presented to Customs and Border Protection. Our firm is at the border at least twice a week, every week, presenting TN and L-1 petitions on behalf of Canadian citizens.
“Keep in mind that there are provisions under the Canada-U.S. income tax treaty that permit operations in the U.S. without necessarily creating a taxable presence at the federal level.”
What’s the most important piece of U.S. tax information Canadian companies need to know?
Seek tax advice from a cross-border professional to find out what works best for your particular circumstances. There’s no one-size-fits-all approach. Factors such as a client’s risk tolerance, the overall effective tax rate, the nature of the business, the state(s) where the business will be conducted and the size of the business all need to be considered. Keep in mind that there are provisions under the Canada-U.S. income tax treaty that permit operations in the U.S. without necessarily creating a taxable presence at the federal level.
What are some potential U.S. tax pitfalls facing Canadian companies?
- Double taxation if not structured properly, especially those involving hybrid entities such as flow-through or partnership in the U.S. and a corporation in Canada and vice-versa;
- A different tax base and tax rates in Canada and the U.S., which affect the timing and nature of income inclusion and foreign tax credits;
- Complex inter-company cross-border provisions such as transfer pricing standards that are different in Canada and the U.S.;
- Exposure to U.S. estate tax if U.S. domestic entities are held personally; and
- Significant compliance costs due to cross-border complexities and multi-jurisdictional taxation.
What’s the most tax-efficient corporate structure for a Canadian company operating in the U.S.?
Generally, a U.S. subsidiary or U.S. branch of a Canadian corporate entity may be the least tax efficient after the profits are received in the hands of the individual shareholder. A partnership is typically the most tax efficient if partners are trusts or individuals, but may not necessarily provide liability protection or protection from U.S. estate tax.
“Setting up a business in the U.S. is a relatively straightforward process and shouldn’t include additional red tape for a Canadian-owned company.”
When considering a U.S. location, what key factors should Canadian businesses bear in mind?
Key factors such as where your customers are located, transportation costs, workforce availability, the tax structure and wages are all important factors in determining the best location for your U.S.-based operation.
Any reason for caution if a business is offered incentives to locate in a specific region?
Don’t let incentives drive location decisions! Working with a site selector or Certified Professional Accountant, evaluate the true impact the incentives offered will have on your bottom line. While it can be enticing to see a high-dollar package, in reality, the cost of doing business in that location may make a smaller incentive offering the better option.
How much red tape is involved in setting up a new location for a Canadian business in the U.S.?
Setting up a business in the U.S. is a relatively straightforward process and shouldn’t include additional red tape for a Canadian-owned company. Most U.S. states offer assistance to incoming companies through their departments of commerce or economic development. Similar assistance can often be found at your local chamber of commerce. Engage this local expertise to make the process run smoothly.