With the dynamic Canadian market forcing oil and gas companies to explore new avenues, many see a bright future in the United States. It’s a sound strategy, but without the proper planning, that optimism can quickly fade.
Jim McEvoy, a Partner with MNP’s U.S. Tax Services team, works with companies to help them transition operations to the States and sees the issues firsthand. In his experience, the key pitfalls are company structuring, understanding sales tax and managing employee payroll.
“Working in the United States is often viewed as the solution to an oil and gas company’s problems, but moving down there creates new issues,” McEvoy explains. “Companies need to address these areas head-on or risk profitability.”
Company structuring is an important starting point. There are two main options: operating as a branch of a Canadian company or setting up a U.S. entity. In both cases, a business needs to file taxes in Canada and the U.S. McEvoy explains that there are unique advantages to each option.
“Maintaining operations as a Canadian company works for organizations exploring the U.S. market and learning about the number of opportunities available to their organization,” McEvoy says. “If they determine there’s enough work and start to scale, that’s when setting up a U.S. entity makes sense, because U.S. customers tend to prefer doing business with U.S. companies.”
The next area to consider is sales tax. This is a difficult area for companies to manage as different states have different definitions for their sales tax, and misunderstandings can lead to significant tax bills for the unprepared.
McEvoy’s experience provides cautionary tales.
“One state could consider a business as performing a service. Another state may say the same business is renting equipment and they expect sales tax to be collected,” McEvoy explains.
If a business doesn’t collect that tax, the state can come after them, leaving the business to write a cheque that should have been someone else’s responsibility.
McEvoy also identifies employee payroll as a key issue. Businesses moving their operations to the States need to consider how they are staffing the operations: are they bringing their Canadian crew down to work in the U.S., or are they hiring Americans?
If Canadian employees are deployed to the U.S., they may have both U.S. and Canadian personal tax filing obligation. U.S. visa requirements will also need to be considered to ensure that those Canadian employees are legally entitled to work in the U.S. Regardless of the citizenship of the employees working in the U.S., the business will need to determine its U.S. federal and state payroll tax remittance obligations.
Companies looking to explore the U.S. market can get the full financial picture of what the move looks by seeking advice from industry experts.
To learn more about operating in the U.S. and the range of tax considerations for your business, contact Jim McEvoy at 403.648.4205 or jim.mcevoy@mnp.ca