Table of Contents
Most Canadian business owners think that business across the border automatically equals US tax ID. Still others have the opposite view, reasoning that a Canadian company doesn’t need one unless it establishes its own full-fledged US office. Both assumptions are problematic. The truth is that if your corporation is doing something in the United States, and not simply having customers in the United States, then you will need to engage a US firm to handle it.
What Is a US Tax ID?
A US tax ID is the number that the Internal Revenue Service (IRS) assigns to a taxpayer, whether a person or a business entity. The IRS uses several tax ID formats, depending on the entity or person being identified. The two that frequently pop up for Canadian corporations are the EIN and the ITIN. They are not interchangeable, and we see a lot of people mixing them up.
EIN vs ITIN: What Is the Difference?
An Employer Identification Number (EIN) is a 9-digit number assigned by the IRS to businesses. It works much like a Canadian Business Number. A business is required to have an EIN to file tax returns in the United States, open a bank account in the United States, access the US financial system and platforms, payroll, etc.
An Individual Taxpayer Identification Number (ITIN) is for individuals who must file a US tax return but are not eligible to get a Social Security Number. Imagine it as a personal tax number, NOT a business tax number.
Can a Canadian Corporation Obtain an ITIN?
No. An ITIN is a personal number associated with an individual taxpayer, and a corporation is not allowed to have an ITIN. This is a common mistake, as owners often mix up their own tax filing with their corporation’s tax filing. If your corporation requires a US tax ID, it will almost always be an EIN.
One related myth: that you do not require an ITIN or a Social Security Number before receiving an EIN. This is not necessarily the case. A foreign responsible party who does not have, and is not eligible to obtain, an SSN or ITIN can apply for an EIN by following the IRS procedures for foreign applicants.
When Does a Canadian Corporation Actually Need an EIN?
An EIN is required when your corporation is engaged in activities that generate a true US filing, banking, or reporting requirement after having customers in the US. Common triggers include:
- Opening an account in USD at a US bank for the corporation
- Establishing US payroll or employee accounts with US-based employees or contractors
- Establishing a US branch, subsidiary or single-member LLC.
- Taking a partnership interest in a US partnership
- Filing a US federal tax return, including Form 1120-F (Foreign Corporation Tax Return)
- Settlement of withholding taxes on payments from the United States of America
- Many payment processors and marketplaces, such as Amazon, require a valid tax ID to register with them.
- Complying with the Canada-US Tax Treaty (withholding reductions)
- Obtaining a federal tax ID when registering to do business in a US state (which can be a requirement for this process)
A quick example. A Winnipeg manufacturer starts shipping product to a US distributor and gets paid in US dollars into its existing Canadian account. Typically, this is not enough to make an EIN necessary. An EIN enters the equation, however, when a US dollar account is opened at a branch of a US bank, or when they hire a sales representative who works in Ohio.
When a Canadian Corporation Does Not Need a US Tax ID
Many Canadian companies sell to US customers without ever getting an EIN. You still don’t have a US filing requirement because none of the above apply if your corporation bills US customers, ships goods to US addresses or provides services remotely.
It is here where the concept of permanent establishment comes into play. In general, a Canadian corporation is not subject to US federal income taxes unless it has a fixed place of business or a dependent agent or otherwise has a substantial presence in the US under the Canada-US Tax Treaty. It’s not a simple matter of selling into the US; it’s a matter of operating in the US.
Getting an EIN Does Not Mean You Owe US Tax
This is one of the most enduring misconceptions we encounter. The EIN is an identification number, rather than a tax bill. Many companies sign up for one for the sole purpose of creating a bank account or an account for their payment processor, but it comes with no US tax liability whatsoever.
Whether the corporation actually has US tax liability will depend on other questions: Does it have US-source income, a permanent establishment, and does the Canada-US Tax Treaty reduce or eliminate withholding? Having an EIN doesn’t affect the answers to those questions.
Common Mistakes Canadian Businesses Make
- Assuming an ITIN is an EIN or that a corporation can use an ITIN
- Many applicants submit an online application for an EIN, but are bogged down, stumble, and lose time in the process
- Treatment of EIN as a filing and identification document, instead of proof of tax liability in the US.
- Not taking state-level registration rules into account and only using federal rules
- Not applying for an EIN until a bank or payment processor requires it, not while expanding or growing a business
- Watching out for withholding tax issues for payments to US contractors or landlords
How Faber LLP Can Help
There is no one-size-fits-all answer to the question of filling out forms across the border, and the repercussions of the mistake are only felt down the road when it comes to the penalties, the lost treaty benefits, or the bank form that takes months to process. Our team assists Canadian corporations, exporters and entrepreneurs throughout their stage of expansion to the United States, from the initial sale to the United States to the establishment of a complete United States subsidiary.
We advise clients on whether an EIN is needed, ensure proper application preparation and filing the first time, evaluate permanent establishment and treaty positions, and advise on federal and state filing requirements.
Whether your corporation is growing into the United States or simply not sure if your activities have already resulted in a filing requirement, discuss it with Faber LLP before, not after, the next transaction.