Your Canadian business has a USA EIN (Employer Identification Number)
Congratulations, you are now on the USA tax authorities radar screen. With an EIN you are now traceable and transactions with USA businesses will have this number on them.
Having an EIN can lead to tax filing obligations.
The most common use of a non-resident of their EIN is to identify the business on the 1120F form. This form is usually used to declare that there are treaty benefits and that the business filing the form does not owe USA federal taxes. However, the purpose of the 1120F is not to pay no tax because of a treaty. Its purpose is to identify businesses that are “effectively connected” to the USA and thus have tax responsibilities.
Completing a form 1120F because you have an EIN can be a tricky affair because you may not understand the correct way to report that you do not have USA effectively connected source income and might be triggering taxes by using this form. After all, it is a tax form and it asks for numbers. If you provide numbers then you are calculating tax due. If you are calculating tax due then it follows that you would pay that tax.
One cash flow positive use of an EIN and the form 1120F is to trigger refunds of taxes that were incorrectly withheld. Let’s say for example, you did business with a USA customer and that customer withheld 30% of your payment as a withholding tax. Having an EIN and correctly completing a 1120F is how you get that money refunded.
Contact Gilmour Group to learn more about EIN’s and how you can be caught offside and how you can properly use an EIN to maintain your treaty benefits and trigger tax refunds if you incorrectly paid withholding taxes.
Grant Gilmour B.SC. MBA, CPA, CA is the International Tax Partner of Gilmour Knotts Chartered Accountant. To connect with Grant visit: www.gilmour.ca
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