With an increasingly global farm commodity market and a lower
Canadian dollar, Canadian farmers are finding it much easier to
sell their products in the United States. However, it is important
that producers are aware of potential U.S. tax issues and filing
requirements, particularly if this is common practice on their farm
When/what to file
If you are selling your farm products in the U.S., consider
these strategies to avoid penalties imposed by the Internal Revenue
If you have a permanent establishment in the U.S., you must
file a U.S. federal income tax return. You are considered to have a
permanent establishment when a physical location is present (either
owned or rented), or potentially if there are regular sales
occurring in the U.S. For example, if you rent a U.S. warehouse
facility and ship product from your operation in Canada to that
location, in order to store that product and sell it at a later
date in the U.S., that facility would qualify as a permanent
establishment and there would be filing requirements.
Since few farmers in Canada will be considered to have a permanent
establishment in the U.S., most farmers need only file a protective
filing or treaty-based return in the U.S. These returns are
information filings with the IRS that claim U.S. federal income tax
relief due to the Canada-U.S. Income Tax Treaty rules. Canadian
farmers pay income tax in Canada on the sale of these products and
are not subject to withholding tax in the U.S. These information
returns inform the IRS of any sales that are considered to be
sourced in the U.S., regardless of whether income tax is owed on
There are several ways Canadian farmers can reduce the
likelihood of having to file a U.S. return. These strategies help
to suggest that the sale of product was initiated in Canada and was
not a U.S.-sourced sale, as the title of the product, the risk of
loss, or the economic transfer occurred in Canada:
Include shipping terms on invoices that clearly identify that
the U.S. customer is solely responsible for the product after it
leaves the farm in Canada.
Ensure the invoice indicates that the point of sale is in
Use an independent trucking company to ship the product across
the border (either Canadian or American).
Consider the use of a sales agent who can arrange for the
transaction to occur in Canada. The agent should do this work full
time and have multiple customers to ensure that they are actually
Canadian farmers should consider completing several different
forms to address any potential U.S. filing requirements that may
exist based on their individual circumstances:
W-8BEN – If you are a member of a
U.S.-based co-op and are receiving payments that are subject to
withholding tax (e.g. patronage dividends), consider filling out a
W-8BEN form to reduce the withholding tax.
SS-4 – This form secures a business
number in the U.S. for the farmer. The business number will help
when filing a treaty return and/or a protective filing that claims
revenue in the U.S., but where the farmer has no permanent
establishment in the U.S.
1120F/1040NR & 8833 – The 1120F is
the actual tax return that a farmer must file for a corporation.
The 1040NR is for an individual farmer. The 8833 is the treaty
exemption form mentioned above, which must be filed with either the
1120F or the 1040NR.
Canadian farmers should also consider that each individual U.S.
state has its own filing requirements, and they may need to file a
state return in addition to a federal return. Generally, however,
if the only activity is the sale of product into the state via an
independent carrier, there is no Nexus filing requirement. The
Nexus filing, if applicable, does not necessarily follow the
Canada-U.S. Income Tax Treaty rules.
As each farmer will have unique circumstances surrounding their
operation, it is important to get professional guidance before
making a final decision on whether you have filing requirements in
the U.S. Most importantly, do not just ignore any filing
requirements that may exist in your specific situation. Penalties
can be significant if you are found not to be in compliance,
including the IRS denying expenses related to sales in the U.S.,
thus increasing income tax owing. Contact your Collins Barrow
advisor for help and more information.
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