Transportation to the United States: What Are Your Tax Obligations?

Canadian businesses that carry people or goods to the United States are subject to various tax obligations.

Carriers are subject to both U.S. federal and state tax rules. Note that tax obligations vary greatly from state to state, and in some states, simply transiting through a state may trigger a state tax obligation.

Federal requirements

Under the Canada-U.S. tax treaty, a Canadian carrier is not subject to U.S. federal tax provided it does not have a permanent establishment in the U.S. and is only involved in international transportation (Canada to the U.S. and U.S. to Canada).

However, the carrier must file the required form to invoke the tax treaty and a non-resident tax return with the U.S. tax authorities. These documents must be submitted within five and a half months of the fiscal year-end. In the absence of this return, the Canadian carrier would be taxable at the U.S. federal level.

Generally, carriers must also file an information return with the federal government and pay the annual highway use tax. This tax is based on the number and weight of heavy vehicles on U.S. highways. The required return covers the period from July 1^st to June 30^th. The return and payment must be submitted by August 31^st of the year to which they apply.

Each state has its own rules

To be subject to U.S. state taxes, a business must have a sufficient presence or Nexus in a state. For example, having an office or inventory on consignment in a state will generally trigger Nexus.

Each state has its own definition of Nexus. For a Canadian carrier, Nexus could be triggered by one or more of the following criteria:

Several states are party to the Canada-U.S. tax treaty. In these states, a Canadian carrier does not have to pay state income tax (if it does not maintain a permanent establishment there). On the other hand, it could be subject to another form of taxation, such as a minimum tax based on sales or a capital tax.

It should be noted that major states such as New York, Pennsylvania and California are not party to the tax treaty.

The company must file an annual tax return in each state where it has Nexus (whether or not the state is party to the tax treaty), within three and a half months of the fiscal year-end (two and a half months if the year-end is June 30^th).

To determine its state tax obligations, a Quebec carrier usually relies on its internal pick-up and delivery reports, as well as on its quarterly fuel tax returns submitted to the Quebec government. These returns determine the kilometrage travelled in each territory: Canadian provinces/territories and U.S. states.

U.S. taxation is complex, and there are several tax implications that must be considered in the case of cross-border transportation activities with that country. Do you have questions or need advice? Contact our international tax experts.