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If companies seek to expand their operations into the U.S., the ability to transfer key personnel, including senior staff and existing employees who are knowledgeable of the company's operations, is essential for successfully establishing your presence. Companies can leverage various visa categories to develop their U.S. operations and facilitate the transfer of critical personnel.

L-1 intracompany transfer
The L-1 visa category allows employees of organizations based outside the U.S. to transfer senior-level managers, executives and employees with specialized knowledge to affiliated offices in the U.S. To be eligible for the L-1 visa, the employee must have a minimum of one year of full-time employment with the organization outside the U.S., and the U.S. office must be classified as a branch, affiliate, parent or subsidiary of the foreign entity.

For organizations that are in the initial stages of establishing their U.S. operations, the L-1 New Office visa category may be suitable. This category enables senior staff to work in the U.S. to set up initial business operations, including establishing office space, sourcing vendors and hiring local U.S. resources.

E-1 investor / E-2 treaty trader
The E visa category encompasses treaty traders and treaty investors who are entering the U.S. under a treaty of commerce and navigation established between the U.S. and their country of nationality. The U.S. is a signatory to numerous international treaties with various nations worldwide, which include provisions that facilitate such E visa arrangements.

In instances where a company has made significant financial investment to establish U.S. operations, or where more than 50 per cent of the company's international sales are with U.S. customers, the E visa may be utilized. This visa category is beneficial to facilitate the transfer or hiring of executives, managers or essential employees to the U.S., provided that these individuals share the same nationality as the treaty country.

Other treaty-based visa categories
In accordance with the United States-Mexico-Canada Agreement (USMCA), formerly known as NAFTA, professional-level employees who are citizens of Canada or Mexico may be eligible for work permits to engage in employment in the U.S., thereby contributing to the expansion of U.S. business operations. Likewise, citizens of Australia, Singapore and Chile may also qualify for work permits in professional roles to facilitate the operational growth of U.S. enterprises.

As organizations seek to expand operations into the U.S., the ability to transfer or recruit key personnel who possess institutional knowledge about the company is crucial. ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Law is well-positioned to assist businesses in evaluating the visa options available for essential employees, help develop comprehensive international assignment policies, and support the necessary work permitting processes to drive growth of U.S. operations.

When establishing a U.S. business, there will likely be a mix of U.S. local employees being hired and Canadian employees being transferred, assigned or sent on business travel into the U.S. Each of these scenarios has different tax implications.

Local hires
For local hires, it will be necessary for the business entity to be registered for payroll both federally and, typically, in the specific state where employees are located. Some jurisdictions will also collect municipal tax. Some states do not levy personal tax/payroll tax, but there may still be unemployment tax or workers� compensation requirements to consider. Federally, unemployment tax will also apply. It will also be necessary to determine what types of retirement income and ongoing benefits will be provided to employees in the U.S., to determine what types of plans should be set up in the U.S. company, if any.

Relocations to the U.S.
Employees being transferred from Canada to the U.S. will likely require cross-border tax support. This would include assistance not only with tax return preparation but also with determining where they will be considered residents for tax purposes, and in understanding how they will be taxed on both their employment income and any personal income. There may also be planning needs around any investments they may or may not wish to hold, depending on their tax residency, as well as to minimize potential double taxation.

For individuals who are sent on an extended assignment, there may be social security considerations. From the company’s perspective, there may also be issues to address related to taxation of relocation benefits, incentive compensation, and even retirement/pension plans that may straddle both countries.

Travel to the U.S.
Finally, there may be issues to address for Canadian employees travelling into the U.S. for meetings or to provide support as the U.S. operations are established. Depending on the frequency of travel, activities performed, and how the arrangement is structured, the employment may be exempt from U.S. tax; however, even if an exemption from tax applies, it is likely that a U.S. personal tax return should be filed by the employee, as well as forms filed by the company. If U.S. income tax does apply, there will be payroll requirements on the company.

There may also be state income tax and payroll implications, depending on the location of travel. In many of these cases, companies will consider tax-equalizing their employees so they are not impacted from a tax perspective, with the company bearing the cost of any incremental tax arising from the business activities. For travel into the U.S., this tax cost is often minimal, due to the lower U.S. tax rates relative to Canada.

Canadian tax impact
Of course, Canadian tax requirements may also be impacted by these scenarios. Local U.S. hires may travel to Canada, causing potential Canadian personal tax and payroll requirements. Canadian employees paying U.S. tax due to their travel will need to have their Canadian tax returns adjusted to claim a foreign tax credit; there may be Canadian payroll adjustments/filings, as well. And companies that offer incentive compensation and similar plans may have to revise those plans to account for U.S. participants.

Across all these scenarios, ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø can help with understanding and complying with all of the necessary personal tax and payroll requirements in Canada and the U.S. We can also assist organizations with federal and state-specific registrations, as required. Employees are often provided with tax return preparation support for any years impacted by cross-border travel/relocations, which we can also provide. Finally, we can assist with considerations related to structuring various cross-border arrangements, considering the personal tax, payroll, corporate tax and transfer pricing issues, which are often interconnected.

Expanding in, or relocating to, the U.S. requires consideration of many significant U.S. and Canadian tax and transfer pricing implications and opportunities, including the following.

Transfer pricing
Under both Canadian and U.S. transfer pricing rules, the pricing of transactions between related parties should be consistent with terms and conditions that would be agreed upon between third parties. Transfer pricing is often the starting point for establishing a customs value, but an appropriate customs value may not always mirror the transfer price. Therefore, it is critical for companies to consider both their transfer pricing structure and customs valuation methods to appropriately manage risks associated with tariffs. Furthermore, any changes in cross-border operations or arrangements between parties in a multinational group may justify or require changes in transfer pricing. Thus, planning may be available to help companies manage the impact of tariffs and the aggregate Canadian and U.S. income tax realized.

U.S. income tax
A Canadian resident corporation may choose to operate in the U.S. through a U.S. business entity. At a high level, the entity choices are as follows: corporation, partnership, or limited liability company (LLC).  In other words, for U.S. federal income tax purposes, an inbound corporation generally chooses between entities that are taxable and entities that are not (referred to as “pass-throughsâ€� or “fiscally transparentâ€�).

Factors considered in choosing the appropriate business entity include but are not limited to: the suitability of the entity for expanding operations; the flexibility of management, capital and ownership structure; commercial liability of the owners for the activities of the entity; tax treatment of the entity and distributions to its owners; and the ease and cost of selling or terminating the entity.

Generally, U.S. corporations are taxable on profits earned at the entity level at a flat 21 per cent rate. U.S. corporations are also subject to the base erosion and anti-abuse tax (BEAT) minimum tax that targets deductible payments made from a U.S. entity to foreign related entities, and/or a 15 per cent corporate minimum tax enacted in 2022 based on financial statement income if certain thresholds are exceeded. In addition, shareholders of a U.S. corporation are subject to tax on dividend distributions at 30 per cent U.S. withholding tax (which may be reduced under treaty).

At the U.S. state and local level, “nexus� needs to be carefully analyzed for both income tax and non-income tax purposes (i.e., sales and use taxes). Nexus can be established by having property (real or personal, owned or leased) or personnel, employees or independent agents located in the state. Furthermore, many states assert that a taxpayer has nexus based on economic connections with the state, such as having customers in the state, or deriving income from in-state sources.

Because laws vary significantly from jurisdiction to jurisdiction, a company should review the laws in each of the states in which it does business to determine its specific tax obligations.

Canadian tax
A Canadian resident corporation is subject to tax on its worldwide income. As such, a Canadian resident corporation that increases its U.S. activities will continue to be subject to Canadian income tax on those activities. However, careful planning may allow for access to foreign tax credits to offset any double taxation.

If a Canadian resident corporation changes its domicile (i.e., emigrates) to the U.S., it will be subject to Canadian exit tax considerations, including a deemed disposition of all its assets (with the realization of any accrued gains that may be subject to Canadian tax) and additional emigration tax rules. However, in some circumstances, a corporate emigration may be able to occur with no or minimal Canadian tax cost.

A Canadian resident corporation that transfers assets to a U.S. subsidiary will be considered to dispose of those assets for Canadian tax purposes with any resulting gain potentially being subject to Canadian tax. However, again, planning may be available to mitigate adverse Canadian tax consequences of such transfers.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Law has the deep tax and transfer pricing expertise necessary to assist taxpayers in navigating the complex issues inherent in  diversifying operations into the US. ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Law also works closely with its international member and affiliated firms to provide integrated Canadian, US and potentially other international advice. ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Law’s large global network of top-tier tax professionals is key to minimizing risk and increasing efficiency in undertaking transformative transactions.

Moving employees of a Canadian entity to the U.S. can implicate their employment entitlements under contract and at common or civil law. The implications can be convoluted, as Canadian provincial employment laws—and the extent to which they extraterritorially apply to Canadians working abroad—can vary by province. Similarly, U.S. employment laws vary by state.

A Canadian employee on temporary assignment to the U.S. will often still be subject to the employment laws of their home province in Canada. This may restrict the U.S. entity’s management of the Canadian employee, as Canadian employee protections and entitlements are generally (and often, significantly) more generous than their U.S. counterparts. If the employer does wish to manage the assignment employee in accordance with U.S. law exclusively, the terms and structure of the assignment must be carefully considered. In some instances, the potential for Canadian law’s extraterritorial application can be minimized.

The disparities between Canadian and U.S. employee protections also underscore the treatment of Canadian employees who are permanently transferring to the U.S. Typically, the Canadian employer will wish to take the proper steps to fully, and finally, terminate the Canadian employment contract so its obligations do not flow through to the U.S. employer. However, this can trigger negotiations with the impacted employees, so both the Canadian and the U.S. entity will want to be prepared.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø Law Canada’s Employment and Labour Law group regularly advises on cross-border employment issues. This includes determining the most favourable structure for the employment relationship, with regard to applicable employment laws the company’s tax and immigration position. Our lawyers can also assist with drafting and negotiating employment contracts and preparing workplace policies that ensure compliance—and minimize litigation risk—on both sides of the border.