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One remote hire can create a taxable presence.
Selling, hiring or contracting across the border pulls a business into a second tax system, often without anyone deciding to do it. The structure you choose at the start determines how expensive that becomes.
The three that cost the most
We are leading with these because they are structural. Each one is cheap to avoid at the start and expensive to unwind later.
Using a US LLC from Canada
This is the single most common structural mismatch across the border. The two systems can treat the same entity differently, which in the wrong configuration produces income taxed in both places with no credit available to relieve it. It is usually avoidable if raised before the entity is formed.
Calling an employee a contractor
Each country applies its own tests and neither is bound by what the contract says. If the relationship looks like employment, the liability for unremitted payroll falls on the business along with interest and penalties.
Ignoring sales tax until it is large
Nexus and registration thresholds are met by remote sales. Unregistered periods accumulate quietly, and because sales tax is collected on behalf of the authority rather than earned, arrears are rarely negotiable.
Permanent establishment is created by what people actually do, not by where the company is registered. It is manageable when it is spotted at the point the move is proposed.
Contractor or employee, by whose definition?
Neither authority is bound by what your contract says. Both apply their own test to what actually happens.
What the paperwork says
What the authorities look at
What this means in practice
Three exposures that most growing cross border businesses meet in roughly this order.
Permanent establishment risk
A dependent agent, a fixed place of business, or in some cases an employee working from home in the other country can create a taxable presence there. That brings filing obligations for the business, not just the individual.
Payroll in two systems
Paying someone across the border generally means registering, withholding and remitting under that country's rules. Treating them as a contractor to avoid it is the assumption that most often unravels under review.
Nexus, GST and HST
US state sales tax nexus and Canadian GST or HST registration are separate regimes with separate thresholds, and both can be triggered by remote sales without any physical presence at all.
The forms that usually apply
Structure drives most of this, which is why the structure conversation comes first.
US business filings
- 1120-F foreign corporation US return
- 5471 information return on foreign corporations
- 8833 treaty based return positions
- W-8BEN-E for entity payees
- 1042 and 1042-S withholding
- State registrations and returns
Canadian business filings
- T2 corporation income tax return
- T1134 information return on foreign affiliates
- T106 non arm's length transactions
- GST/HST registration and returns
- T4 and T4A payroll reporting
- Provincial corporate filings
Structure and people
- Entity choice and treaty eligibility
- Permanent establishment reviews
- Transfer pricing documentation
- Cross border payroll registration
- Contractor versus employee analysis
- Owner compensation planning
Why a US LLC so often goes wrong from Canada
This is the mismatch we are asked about more than any other, and it is worth understanding before you form anything.
The difficulty is that the two systems can characterise the same entity differently. Where that happens, income can be attributed to one person in one country and to a different one in the other, and the credit that is supposed to relieve the double charge has nothing to attach to. The result is tax paid twice on the same profit with no mechanism to fix it.
It is usually avoidable, and almost always cheaper to avoid than to restructure afterwards.
None of this means an LLC is always wrong. It means the entity choice should follow the advice rather than precede it, which is the opposite of how most cross border businesses get set up.
The same logic applies to where profit is genuinely earned, how you intend to take money out, and whether anyone will be working from the other country. Those three answers usually determine the structure between them.
Questions cross border businesses ask
This is general guidance rather than advice on your situation.
One of my employees moved across the border. Is that a problem?
It can be. Depending on their role and the extent of their authority, an employee working from the other country may create a taxable presence for the business there, and it almost always creates a payroll obligation. Most of it is manageable once identified, which is why it is worth raising when the move is proposed rather than at year end.
Should I set up an entity in the other country?
Sometimes, and sometimes it makes things worse. It depends on where the profit is genuinely earned, how you want to take money out, and whether the entity type is recognised the same way by both systems. This is the decision worth getting advice on before rather than after.
I invoice US clients from Canada. Do I owe US tax?
Generally not, on those facts alone. For a non-US person performing all the services from Canada, US customers by themselves do not create US source services income or a federal return obligation. US workdays, agents, an office or other US activities can change that. A Canadian corporation with a US trade or business but no treaty permanent establishment has a different position again: where domestic rules require a filing but the treaty exempts the profits, a return and treaty disclosure may still be necessary. State and sales tax obligations are separate.
What about transfer pricing between my two companies?
If related entities transact across the border, both authorities expect the pricing to reflect what unrelated parties would agree, with documentation to support it. The documentation requirement starts at a lower level of activity than most owners expect.
Other situations we handle
Owners usually have a personal position running alongside the company one.
Get the structure right before it gets expensive.
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