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Canadian Ecommerce - US Tax Issues

     
1:31 am on Jul 13, 2011 (gmt 0)

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Hi there, I am looking for any suggestions and advice:

Here is my situation:

1.I am a Canadian and currently only pay income tax to Revenue Canada

2. I am a sole proprietor and run an online only store

3. My customer are mainly in the US

4. So my US customers didn't have to pay "foreign fees" on credit card transactions, I setup a US bank account then setup US merchant accounts who deposit into the US bank account

5.I was able to use my Canadian address to setup the US bank account but used my sister's address in the US (North Carolina) to setup the US merchant accounts (I required a physical US address for the US merchant accounts)

6.My sister in NC works for me and does most shipping and handles merchandise returns, I also use a few drop shippers in other states

7. I recently received from the US card processors/merchant accounts letters saying per 1099-K I need to provide my tax id number for IRS reporting and they did not have anything on file for me

8. Here is my issue, because I used my sister's US mailing address they assume that I am an American and have a tax id - I do not (yet). I am not sure what I need to provide them in order to keep my US merchant accounts. If I am forced to open Canadian merchant accounts all my US customers will get hit with these "foreign/international/cross border fees" from the US card issuing bank.

9. I am not sure if I need to apply and obtain an EIN or ITIN and give that to them (then what does that mean for tax reporting to the IRS) - I am hoping one of these numbers is all I need to give them to keep my US merchant accounts.

10. I have also heard about people running into similar issues and then incorporating in the US to simplify things (not sure I really want to get into that and all the extra tax issues that come with that).

11. Also, with this 1099-K issue coming up I am now trying to figure IF I need to file anything/forms/ returns with IRS/federal/state level.

If anyone knows of any helpful and affordable US/Canada tax people that I could discuss these issues with - it would be much appreciated....I am feeling rather lost and overwhelmed by all of this and just want to be sure I am doing everything I am supposed to.

Thanks in advance for your help and suggestions.

Catherine
4:02 pm on July 13, 2011 (gmt 0)

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Welcome [webmasterworld.com] to Webmaster World!

used my sister's address in the US (North Carolina) to setup the US merchant accounts
My sister in NC works for me and does most shipping and handles merchandise returns,

That sounds to me very much like you have a U.S. presence and should be filing U.S. income tax returns. It also sounds like you and your sister should be paying payroll and unemployment taxes (unless you can clearly show that she is an outside consultant and not an employee).

I am not an expert in this situation, so I strongly suggest you speak with an accountant/tax preparer who is. Unless there is someone locally with this type of experience, your sister probably has a better chance of finding someone local to her who would be more knowledgeable.
4:51 pm on July 13, 2011 (gmt 0)

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Why on earth did you set up a US location?

You do not need a US presence to sell into the US, to have a US dollar bank account in Canada, or to have a US dollar merchant account. You can operate all of that seamlessly from Canada. In other words, do your banking in US dollars, but from a Canadian bank and merchant account.

You're going to need a good accountant to straighten it out - don't even think of doing anything other than that. But I think if you pay taxes in the US, you can probably use that to reduce the taxes you pay in Canada. Maybe.

If you've got a shipping location in the US, that may be an entirely different matter though. You may want to set up a full US presence (i.e. a corp) and do your stuff that way.

In any event, you've got some paperwork ahead of you, but don't worry - it's not the end of the world. Go see a good accountant, explain the situation, and set it up properly going forward.
8:39 pm on July 13, 2011 (gmt 0)

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re: wheel's comments

My sister started shipping out of her home office in NC since most customers and vendors are in the US. Just wasn't making sense to import inventory into Canada just to turn around and ship it back to customers the states...just made it easier to have someone in the US and much better for customer service delivery times etc.

Regarding having the US bank account/merchant accounts - my main customer base of US customers -were getting hit with outrageous foreign fees with my Canadian merchant account...so in my opinion that was really my only option.

I will continue to look for a good accountant that is knowledgeable in both countries.
8:47 pm on July 13, 2011 (gmt 0)

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Wow... You lost me at #5. Yeah, you're going to have to find somebody that actually knows what they're doing. Not just some guy who's a glorified form filler, but somebody who can really advise you on what to do. Which is not easy to find. Most guys couldn't care less what happens to you after the fact. They just want their fee and then... good luck. So be careful.
8:54 pm on July 13, 2011 (gmt 0)

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were getting hit with outrageous foreign fees with my Canadian merchant account

That's because you were using a Canadian dollar merchant account. If you bill US clients $100 US, every bank inbetween you and them digs $5 out of the client.

You can set up a US dollar account with a Canadian merchant account. Doing so means that you bill the client $100US, and all they see is $100US on their credit card bill. Then you need a US dollar account at a Canadian bank to deposit those funds into. You can do all this and ALSO have a Canadian dollar merchant account to charge your Canadian clients in Canadian funds.

To reiterate - you do not need to have a US based merchant account to charge your US clients in US funds. You can do all of this transparently from Canada. I charged US clients in US funds for over a decade (I'm not in the US) and never had a client mention these fees.

As for the US shipping location, I had a US shipping location without any problems (though it was pre-911). I ordered and paid for all my inventory from outside the US and had them ship to the shipping location. Then I wrote a check to the company that did the shipping. Never had to deal with the US gov't forms for any of that.

Again, you need to find a good accountant. I think you've got problems, but they're all resolvable if you sit down and step through the proper setup.
9:57 pm on July 13, 2011 (gmt 0)

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Thanks for the comments and advice - I have just been on the phone inquiring about a Canadian merchant account (US dollar) and if I remember back a couple of years...this was the issue I ran into before:

- I have a US Yahoo ecommerce site that is ONLY FDMS Nashville platform compatible to process payments online...and I am finding that ALL Canadian merchant accounts are NOT FDMS Nashville compatible hence the need for the US bank account and US based merchant accounts. (I would never want to switch ecommerce stores as I would lose years of sweat and tears put in to build my online rank)

So basically, from the looks of it the US-based merchant accounts are my only option to stay in business but now they need a US tax id which brings me to exactly where I am at now...
10:15 pm on July 13, 2011 (gmt 0)

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Yeah, well I'd say not to tie your entire business to a platform. Yeah, I know that's useless advice :).

But perhaps you should consider doing something. Being tied to Yahoo for your livelihood - not a strong plan longterm. I'm sure this is only the first problem you're going to have.
6:17 pm on July 15, 2011 (gmt 0)

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Let me jump in and clarify what is going on. The problem is that some folks are assuming that if the merchant were to setup a Canadian merchant account in US currency (to bill customers directly in USD) that their US based customer would not see any additional fees. That used to be the case, but US banks have become greedy and caused a big problem. (Also, I'll point out that I'm CEO at Merchant Accounts.ca, we've been doing multi-currency e-com in Canada for over a decade and I can answer this concern with reasonable authority.)

Unfortunately, a few years ago some US based cards issuers got greedy and started issuing a foreign transaction surcharge based on the location of the merchant. To clarify, this has nothing to do with currency, but the country of domicile of the merchant. If a US cardholder purchases something from a Canadian merchant, even if they are billed directly in USD, the cardholder can still be charged a 2% or 3% surcharge by the card issuing bank.

On top of this, the card issuer is kind enough to make it appear on the customers statement as if this fee is being charged by the merchant!

It's terrible. The card issuers make it look like the merchant or their processor is seeing this fee, when in reality 100% of that surcharge is going to the card issuer. The card gets billed in USD, there is no reason for this fee, but that won't stop them from charging it.

It is completely ridiculous, and very unfortunate. This became an issue only a few years ago after the US government cracked down on some card issuers predatory lending practices within the credit card industry. This is an issue that has caused significant frustration to our clients, and puts Canadians at a disadvantage to Americans when selling online. (Keep in mind, when a US based merchant sells into Canada in CAD, the Canadian card issuing banks are *not* charging a similar surcharge).

In fact, I plan on doing a major blog post about this on the Merchant Accounts.ca website at some point, and possibly even starting an official complaint. It has put Canadian merchants on uneven footing from US merchants, and this is the root cause of *why* the person who posted this thread had to go to the US to get their account instead of through a Canadian processor like us (even though we can support USD easily).

So solving this problem has caused another. They ended up using their relatives address in order to get a US domiciled account, to prevent customer complaints because of the US card issuer surcharge. Based on what I'm reading, the processor probably shouldn't have approved this merchant, because I don't think they are actually satisfying the requirement of having an actual business entity within the USA. It may be that when the dust settles your processor has to shut you down unless you are able to provide a proprietorship or corporate presence in the US. Then again, the actual KYC (know your customer) and account compliance issues are beyond my area of so it may be okay.

Back to the reason that you actually posted though, my thought is that you will be seeing tax issues because although you operate a Canadian company, you are operating as a US company on paper in order to secure your merchant account through a US processor, and thus are going to be creating a US tax implication. Take that last advice with a grain of salt though, because itís not professional advice. In fact, Iíll specifically point out that I'm absolutely *not* qualified to give any tax advice.

I hope this helps shed a bit of light on this thread and why you are in the current situation you find yourself in. You are trying to satisfy Visa / MasterCard and the card issuing banks (through no fault of your own, their own policies have caused this), and itís likely it has caused a problem with the IRS for you as a result.

David Goodale
6:41 pm on July 15, 2011 (gmt 0)

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Thanks for the authoritative post. I did foreign/US credit card transactions starting about 98 through until last year, and I never ran into this even once - never had a client mention it.

I thought you crazy Canadians had free trade with the US :)?
6:52 pm on July 15, 2011 (gmt 0)

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(Keep in mind, when a US based merchant sells into Canada in CAD, the Canadian card issuing banks are *not* charging a similar surcharge).

No, But it's my understanding that when a US merchant sells into Canada, they are supposed to charge Canadian VAT. You can even rat out your US competitors to the Canadian counterpart of the IRS and I think they've got the authority to enforce it into the US. True story.
7:20 pm on July 15, 2011 (gmt 0)

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Hi Wheel,

I'm not expert on it, but I think we are supposed to have free trade, which is why I feel it's such an impediment for Canadian merchants and causes an imbalance with cross border e-commerce (Canadians being at a significant disadvantage).

I'm also going to throw in my defacto statement of pointing out that I'm not a tax consultant. But to my own personal knowledge, you certainly don't need to charge HST (VAT which you referenced is European), unless you carry on a business presence within Canada.

Usually when a package clears customs it's charged HST and duty (should it be applicable). I very much doubt US based companies have to file tax returns with the CRA, and similarly, I don't think Canadian companies need to file a return with the IRS (again, unless they are maintaining some sort of business presence in the US).

I really have to avoid topics about tax though, it's just a complicated area and I can't address tax questions on a professional level.

In fact, tax questions are the worst. Quick, somoene ask me a technical/integration question. =)
7:28 pm on July 15, 2011 (gmt 0)

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I'm also going to throw in my defacto statement of pointing out that I'm not a tax consultant. But to my own personal knowledge, you certainly don't need to charge HST (VAT which you referenced is European), unless you carry on a business presence within Canada.

Usually when a package clears customs it's charged HST and duty (should it be applicable). I very much doubt US based companies have to file tax returns with the CRA, and similarly, I don't think Canadian companies need to file a return with the IRS (again, unless they are maintaining some sort of business presence in the US).

I asked an accountant once about this - and the answer as I understand it is that US/Canada have an agreement wherein US corps are required to charge Canadian VAT for shipments into Canada, and remit that to the Canadian gov't, just like a Canadian entity. Further, the Canadian gov't has permission to enforce that down into the US.

US corps generally don't collect and remit the tax - but that doesn't mean they're not supposed to, or can't get burnt if they ignore this. Selling from the US into Canada isn't the same as selling from the US into say Europe.

The reason for this is because otherwise it's cheaper for Canadians to buy from a US company instead of a Canadian. I expect the Canadian gov't doesn't want that inequity.

They have lots of other weird laws. Did you know that it's illegal for Canadians to buy books from US distributors, when that book is available from a Canadian distributor? that right there is the reason Amazon has a shipping outlet in Canada.

But, that's information on the internet for you, best to ask a local accountant :).
8:23 pm on July 15, 2011 (gmt 0)

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Unfortunately, a few years ago some US based cards issuers got greedy and started issuing a foreign transaction surcharge based on the location of the merchant.


Yep, this is now the case. We had to create and American company to get around this problem. Despite the fact we had an American merchant account with an American bank based in Chicago (which happens to be owned by a Canadian bank).

We also now have an American-based tax lawyer to help us with issues like this. If the first poster is in Southern Ontario, there are many accountants and tax lawyers in Buffalo NY to help Canadians with these kinds of issues.
8:26 pm on July 15, 2011 (gmt 0)

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Usually when a package clears customs it's charged HST and duty (should it be applicable). I very much doubt US based companies have to file tax returns with the CRA


Exactly true as I understand it. The goods are charged tax as they enter the country. So it is Canada Post/UPS/FedEx who is doing the tax collecting work.
8:42 pm on July 15, 2011 (gmt 0)

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Rugles,

I am from the West and I was just wondering if you ever needed to fill out a form W-8BEN (to certify you were foreign) and give to your merchant account?

The way my account is setup up now they only have a US address on file (even though I did include a legal Canadian address on the original merchant application) and are now asking for my tax ID (thinking I am American). So I am trying to figure out if I fill out a W-8BEN and give to them or apply and give them my ITIN? ( I have called them numerous times and NO one seems to know - very frustrating).

I need to keep this merchant account-because ONLY US-based merchant accounts are FDMS Nashville platform compatible with my ecommerce site.

So Rugles are you saying WITH a US-based merchant account AND a US Bank account your US customers were getting hit with "foreign/international fees"?

I am wondering if your merchant account was flagged as foreign based on a form you filled out etc because to my knowledge you NEED a US address on file to even get a US based merchant account.....

VERY interesting.
9:31 pm on July 15, 2011 (gmt 0)

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Usually when a package clears customs it's charged HST and duty (should it be applicable). I very much doubt US based companies have to file tax returns with the CRA

You very much doubt wrong :), according to an accountant AND the Canadian gov't that I spoke to years ago. Unless something's changed, they leave it up to the shippers as has been suggested.If you're small potatoes, you'll get away with it. If you're shipping large volumes into Canada from the US, might want to ask to confirm if you shouldn't be collecting taxes for Canada instead of leaving it to their postal service. Because otherwise you open yourself to the risk of getting reported by Canadian competitors.
7:27 pm on July 16, 2011 (gmt 0)

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Over the past several years I have tried to become fairly knowledgable on the topic of Canadians doing business in the US. We're a Canadian corporation (based out of Vancouver) and like many, 90% of our customers are US based. We fulfill all of our orders from the U.S..

1. First thing's first, where are you based out of in Canada? If in Vancouver, there's quite a few good 1-day courses available addressing these topics.

2. Don't be intimidated. What you (and us) are doing is very normal. There's a reason why Canada and the US have the biggest trading relationship in the world and it's because of the ease with which both countries facilitate bilateral trade.

3. Most accountants knowledgable on the topic will tell you that as long as you're simply 'lobbing' your products into the U.S. and then shipping them onwards to your customers you're through and through a Canadian company with no income tax obligations in the U.S. (sales tax is another issue). This doesn't mean you don't have any reporting obligations though.

However, you're dangerously approaching a very gray area by having a relative work for you and using a US bank to process most of your transactions. It is absolutely unnecessary for you to have a US based merchant account. Get a Canadian based merchant account in US dollars through a merchant account such as Moneris. As others have stated, credit card companies are starting to apply foreign trasnaction fees to some customers. However, we process thousands of transactions a year and we get less than 5 or 10 people complaining about such fees a year. In these rare instances we simply refund the customer the $2-3.

4. As I stated, you likely have no federal income tax obligations (plus, Canada and the US have extensive tax treaties protecting companies from double taxation). However, you *should* be filing a null income tax with the U.S. each year. You won't owe anything to the government. Realistically though, if you're doing under $1mil in sales, you could claim ignorance pretty easily if the government ever came after you.

5. However, you definitely DO have sales tax obligations in any state you fulfill orders from. In this case, North Carolina. Any NC based accountant can help you file to register sales tax as a foreign corporation (again, very common). Look to pay about $1000 to set this up though.

Again, if you're doing a few thousand dollars in sales each year to NC, you can probably fly under the rader until your payable tax becomes more considerable.

6. Your sister is essentially working for you. This is a huge no no and you are subjecting yourself to a lot of obligations that you could remove yourself from by simply using a third party fulfilment company.

Again, as long as your sales are relatively small you can probably fly under the radar. Long term though, it's not sustainable and you could be subjecting yourself to a lot of grief down the road. And definitely, in the mean time, if anyone asks, you never mention your sister (say you use Amazon FBA or something).


7. Again, save yourself the grief can get out of the US based merchant account and go with a Canadian bank. It might be completely fine having the US based merchant account but any time I have to start giving the IRS EINs and the such I would get nervous.
9:00 pm on July 18, 2011 (gmt 0)

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So Rugles are you saying WITH a US-based merchant account AND a US Bank account your US customers were getting hit with "foreign/international fees"?



Yes, it was a change made at the bank. They knew both of our addresses, one day they just decided to switch to using our Canadian address. We had no idea until one day a couple customers called to complain. There was no good reason to do it other than to get more money from our customers.

We freaked out on the bank and threatened to pull all our business. Eventually they listened to us and fixed it.

We have a US Federal Tax ID number as well. So maybe that is why we have never had to fill out that form you mentioned. Like I said earlier, we have lawyers/accountants on both sides of the border advising us. We want to stay on the right side of US laws. I would suggest everyone else does the same.