Four myths to understand when thinking of expanding outside of Canada
Thinking of expanding outside Canada? Be sure you understand these four common tax myths
Most business owners view taxes as a necessary evil, fraught with complexity. As soon as your business starts expanding outside of Canada, the complexity increases. Not only do cross-border businesses face the pressure of being profitable in another market, but also the burden of navigating multiple tax systems.
I’ve seen countless small and medium-sized business owners try to bury their heads in the sand and avoid dealing with taxes. But tax can be one of the single largest line-items that a company has and should be part of the business plan from the very start, not an after-thought. This is especially important when we consider that Canadian SMBs export over $100 billion worth of goods each year.[1] The potential is enticing, but when considering expansion the old adage “an ounce of prevention is worth a pound of cure,” could not be truer.
Understanding these four common myths about tax can simplify your foray into another market:
1- I won’t be liable for another jurisdiction’s tax if I remain in Canada and just hire contractors elsewhere.
Often times, companies will hire agents or contractors as they first enter a new market.
One client, a small, but rapidly-growing manufacturing business in Ontario originally hired agents to sell its products across the United States. Unfortunately, this move resulted in several of the states involved seeking tax filings and payroll withholdings — a very costly consequence. We recommended segmenting the company to contain and limit the U.S. state requirements, preserving eligibility for Canadian tax incentives, and we assisted in retooling his accounting software to reduce administrative headaches. Moreover, he fully benefited from lower Canadian corporate tax rates, which are still about 5% lower than those in the U.S. after profits are repatriated to Canadian shareholders.
A proper tax set-up directly impacts your bottom line, and can be even more valuable than acquiring a new customer. No matter what your profit, 5% is no small number.
2- Small businesses aren’t on the radar of tax authorities.
When some Canadian SMBs go global, they assume their exports will go unnoticed. But the idea of being “off the radar” simply isn’t possible in today’s age of electronic records and instant access. Many jurisdictions reference import records or the receiving records of your customers just to put you on the radar. It’s a cheap and easy way for tax authorities to increase their tax base.
Consider the example of a Canadian company exporting goods to California. If you ship more than $500,000 worth of goods to the Golden State, you may be required to collect California sales taxes. You may go unnoticed at first, but imagine the financial and administrative headache that comes once you’re audited. This can happen at anytime, and you’ll be asked to defend activity that happened several years before. This means collecting all of your transactions, producing records, and paying penalties that may even exceed the amount of tax owed in the first place.
Ignorance is not bliss. If you do it right the first time, you’ll save yourself a lot of grief.
“Think of the long-term value. The price you pay to do it right the first time is negligible when compared to fixing things years later.”
3- Canada’s tax treaties will make everything alright.
Double-taxation agreements are designed to protect against cases where the same income is taxable in two markets. Should you find yourself in a situation where you’re being doubly taxed, there are indeed treaties to protect your business. But avoid seeing them as a “get out of jail free” card.
Enforcing your treaty rights after an assessment can be a decade-long process, with considerable compliance costs involved in making your case. Justice is not cheap. You’re entitled to it, but the cost is much higher than if you had followed the rules from the get-go.
4- As a new entrepreneur, it’s not worth investing in professional counsel until I have the profit to justify it.
Tax obligations go hand-in-hand with running a business. Make a mistake, and your tax bill not only grows, but sometimes balloons. Many jurisdictions levy penalties first and ask questions later — they make Revenue Canada look gentle.
There is no question, SMBs lack the resources of large multinationals to hire professional services. But avoiding professional counsel because of an intimidating hourly rate from an accountant or lawyer is an emotional decision, not a logical one.
Think of the long-term value. The price you pay to do it right the first time is negligible when compared to fixing things years later.
[1] http://www.ic.gc.ca/eic/site/061.nsf/eng/h_03018.html#point6-1