US Incorporation for Canadian Startups

http://blog.carlmercier.com/2011/08/29/us-incorporation-for-canadian-startups/

by cmer • 15 years ago

85 16 15 years ago

blog.carlmercier.com

The dual ownership trick by an individual is great. Lots of awesome details and tips. Thanks!

I am confused about the Franchise Tax. If I'm a internet business, with no office in Delaware, do I need to pay franchise tax?

lrm242• 15 years ago

Yes.

cmer6• 15 years ago

Yes, but it's minimal if you do things right using the Assumed Par Value method. See http://startuplawyer.com/incorporation/the-delaware-freak-ou...

rav124• 15 years ago

I was curious how the Quebec based consulting company qualified for SR&ED expenditures since all of the IP was owned by a US based corporation. I didn't realize that a Canadian consulting company working on a US R&D project could quality for SR&ED.

cmer6• 15 years ago

See my response to rreiner.

belbo2• 15 years ago

I also replied to rreiner, see below. In a nutshell, you can as long as you're Canadian-controlled. Of course the work has to be eligible too...

rreiner2• 15 years ago

Carl, thanks, great article.

One question: you say "Because QC-inc is just like any other Canadian entity, it was eligible for SR&ED."

But if QC-Inc was doing consulting work, i.e. developing products & technology on contract for another entity (Karabunga), then that work would not be eligible for SR&ED -- an entity isn't eligible unless it retains the IP rights.

How did you work around that?

cmer6• 15 years ago

My understanding of it is that as long as jobs are created, the success or failure of the project, and the ownership of IP doesn't matter. If a Canadian company was to contract out their R&D to another Canadian company, only one can claim SR&ED. Generally, the contractor would claim the SR&ED, but in this case, the contractee did.

belbo2• 15 years ago

We did the tax credit work for Carl (thanks for the shoutout man!).

Between 2 CDN entities, only 1 can claim SRED. So if QC Inc did all of its work on behalf of another CDN company, usually the person paying claims the tax credits.

If a US company sub-contracts to you, there's no way the US Co. can claim SRED, so you can. You have to be CDN-controlled to get the biggest tax credit, i.e. the US Co cannot own more than 50% of you. What the CDN Co does with its IP is irrelevant. You can always choose to sell/license your IP to any other company for $1.

If you have any questions, just shoot me an email: rluk[at]flowventures.com

BTW is this Richard? If so, hey.

rreiner2• 15 years ago

Hey, Raymond.

This is of some immediate interest to me, so I've been digging into it a bit this morning -- I've been reading CRA's internal guide for SR&ED reviewers, and other fun things. Seems like a nice structure, if it works, i.e. if it stands up to audit scrutiny. It seems to me counterintuitive that a CDN consulting firm taking no financial risk when doing SR&ED for a US customer would be eligible.

Many of the CRA guidance docs cite IP ownership as an eligibility condition. They also point to forms T1145 and T1146 as the mechanism to transfer SR&ED costs & credits between non-arms-length parties, but these apply when both parties are Canadian. In your case you've got non-arms-length parties, one US and one CDN. I can't find any specific CRA statement that applies.

But ultimately all those CRA docs are just guidance,and the ITA prevails. Can you point to the section of the ITA that blesses what you're doing here?

seanmccann• 15 years ago

Anybody know why to avoid the "sandwich"?

cmer6• 15 years ago

My tax accountant never gave me details about it, but I remember him clearly saying that there were serious tax consequences in doing so and that generally, this kind of setup should be avoided.

If your structure looks like this: YOU-CA -> US -> CA (sandwich) and you sell your US company, the acquirer is stuck buying the CA as well, which is a pain for everybody. A US acquirer won't want to deal with a Canadian company. This is not the main reason not to do it, but it's something to consider.

cmer6• 15 years ago

Also, if your Canadian company is US-controlled, it is not eligible for SR&ED and such credits.

3pt14159• 15 years ago

One thing you need to mention:

The right accountant and the right family situation means that you don't pay taxes on the first N * $750k, where N is the number of family members you have.

It gets really complicated but essentially you can set up a family trust in Canada that owns a certain class of shares, or even a holding company that holds the shares and then when you sell the company every person in the family trust uses up their one time $750k credit. You can do this with friends you really trust as well, so it isn't always a case of Delware company. This is a brief introduction, that makes sweeping generalizations.

My very good friend is a CA that focuses on technology companies with PWC in Toronto. If you need introductions he is phenomenally good and gets it. He took 3 years of Comp Sci at Waterloo before getting bored of it and switched to accounting.

cmer6• 15 years ago

The exemption only applies for Canadian companies, never to American ones.

While it is true that you can use your family members' exemption, anybody who just gives away their exemption for free is a fool in my opinion. That is unless they know for a fact that they will never use it. Usually, such a practice warrants a little reward to the people using up their exemption to your benefit.

US Incorporation for Canadian Startups

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