A new IRS compliance program is afoot.
It will affect Canadian corporations that receive payments from U.S. sources but do not file a U.S. tax return. The IRS has announced that, as part of this program, it will send letters to non-filing foreign corporations to explain their compliance obligation, and those corporations that do not respond appropriately will be audited. Depending on the number of years a Canadian company has been selling into the United States, these penalties can be significant.
This program is part of a new IRS approach to initiating corporate audits for 2017. Rather than performing comprehensive audits of a small number of taxpayers, the IRS now intends to audit only specific issues or transactions on a large number of clients, including non-filing foreign corporations.
Foreign corporations, including Canadian corporations, are generally required to file a U.S. tax return if they have a "trade or business" in the United States. Although "trade or business" is not explicitly defined, it may apply to a corporation with a low level of activity. Therefore, Canadian companies with U.S. customers that attend U.S. meetings or trade shows or with any U.S. connection could likely be considered to be have a U.S. trade or business.
Many Canadian corporations that have a U.S. trade or business are not actually subject to U.S. tax, as they do not have a permanent establishment. The Canada-U.S. treaty usually limits the United States' right to tax the profits from a Canadian company's U.S. trade or business to the profits generated from a U.S. permanent establishment of the Canadian company. However, these corporations are still required to file U.S. form 1120-F "U.S. Income Tax Return of a Foreign Corporation" to assert the treaty claim and failure to file can result in penalties.
The IRS can impose a $10,000 per year penalty for failing to disclose a treaty-based position on a timely filed return. Therefore, a Canadian company with U.S.-based sales could be assessed a $10,000 penalty for each year that it was doing business in the United States and did not file a return. Since no returns were filed, the IRS can assess penalties for all open tax years in which the Canadian company had U.S. sales, which could result in a significant penalty.
For more information, contact your KPMG adviser.
Information is current to May 09, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500