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KSM Blog | Katz, Sapper & Miller CPA

Are U.S. Trucking Companies Subject to Canadian Taxes?

Posted 1:06 PM by

Trucking companies that deliver to, and/or pick up from, locations outside of the U.S. must consider whether such activity results in tax obligations to the foreign jurisdiction. This article focuses on trucking operations to, and from points within, Canada. The two primary Canadian tax considerations for U.S. trucking companies operating within Canada are the Canadian income tax and the Canadian goods and services tax (GST).

The Canadian income tax consequences will be governed by the Income Tax Treaty between the U.S. and Canada. The general income tax rule provided by the treaty is that U.S. companies will only be subject to Canadian income tax to the extent they have business profits attributable to a “permanent establishment” within Canada.

The term permanent establishment generally means that business activities are carried on through a fixed place of business such as a place of management, an office or, a branch. The term permanent establishment also includes agents located within Canada that have the authority to conclude contracts in the name of a U.S. company. Furthermore, a U.S. company can be deemed to have a permanent establishment within Canada where they provide services within Canada for more than 183 days in any 12-month period for the same or connected projects for Canadian customers. 

The income tax treaty also provides two exemptions from Canadian income taxes that are specific to trucking companies. First, the transportation of passengers or property between a point outside of Canada and any other point will be exempt from Canadian income taxes. The second exemption applies similarly to the rental of motor vehicles (including trailers) used between a point outside of Canada and any other point. Thus, trucking operations that begin or end outside of Canada will be exempt from Canadian income taxes.

However, operations between two points within Canada may also be exempt from Canadian income taxes, but the income from such operations will be governed by the general business profits and permanent establishment provisions of the income tax treaty.

In addition to income tax considerations, U.S. trucking companies with Canadian operations must consider the application of Canadian GST. The GST is a Canadian tax that applies to most supplies of goods and services made in Canada. While the GST is a federal tax, most provinces have harmonized their provincial sales tax with the federal GST to implement the harmonized sales tax (HST) in those provinces. The Canadian GST/HST is similar to sales taxes within the U.S. but is more broadly applicable to the provision of services. There is not a treaty between the U.S. and Canada that provides U.S. companies with broad exemptions from GST/HST. 

There are two aspects of the Canadian GST/HST that must be considered. First, goods imported into Canada are generally subject to GST/HST. When goods are imported via a common carrier, the carrier has to report its arrival to the Canada Border Services Agency and the identity of the “importer of record” will be critical in determining the carrier’s GST/HST obligation at the border. If the carrier is the importer of record, there will be a strong incentive for the carrier to become a GST/HST registrant and begin collecting and reporting Canadian GST/HST. 

The second aspect to consider is whether the freight service itself is subject to Canadian GST/HST. Generally, freight services that begin or end outside of Canada will be “zero-rated” services such that the service provider will not be required to collect GST/HST from its customers. However, freight services that begin and end within Canada will generally be subject to GST/HST, unless it is part of a “continuous freight movement” in or out of Canada. 

The proper application of GST/HST is a facts-and-circumstances determination that must be discussed with a Canadian tax advisor practicing in this area. Furthermore, there are circumstances whereby carriers operating within Canada may want to voluntarily register for GST/HST when such carriers are being charged GST/HST.

Needless to say, there are many nuances in the application of the GST/HST, as well as the Canadian income tax, that must be discussed with appropriate tax professionals and cannot be fully addressed in this article.

This article appeared in Kentucky Trucking Assocation's Kentucky Trucker 2015, Second Quarter publication. 

About the Author
Ryan Miller is a partner in Katz, Sapper & Miller’s Tax Services Group. Ryan provides consulting services on a variety of technical tax matters, with an emphasis on international tax, oversees tax compliance and handles tax controversies. His experience includes entity taxation, among other areas.

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