It usually starts innocently enough.
You send someone down to a trade show in Chicago. Maybe they meet with a few customers while they're there. No big deal, right? A few months later, someone else flies to New York to close a deal. Then you're visiting prospects in California. Before you know it, you're shipping inventory to a warehouse in Texas and taking orders from a temporary office in Florida.
This is the slippery slope that catches Canadian businesses by surprise every single year. What starts as casual business trips gradually becomes a full US operation, and by the time you realize you need a proper US entity, you've created an expensive tax mess that's hard (and costly) to fix.
Let me show you how this happens, and more importantly, how to avoid it.
The Five Stages of US Business (And Where the Tax Trouble Starts)
Most Canadian businesses follow a predictable pattern when expanding to the US. Here's how it typically unfolds:
Stage 1: The Employee Visit
This is where it all begins. You send an employee to the US to meet customers, attend conferences, or do market research. They're flying in and out, maybe spending a few days at a time.
The tax reality: In most cases, you're fine. Under the Canada-US tax treaty, employment income is exempt from US tax if either:
- The amount is under $10,000 US, or
- The person is in the US for less than 183 days in any 12-month period AND their salary isn't deducted against US income
Most casual visits fall under this exemption. The key word here is "casual."
Stage 2: The Representative
Now you've got someone (often an owner or senior person) making regular trips to the US. They're building relationships, visiting customers, gathering market intelligence. Still no office, still flying back to Canada regularly.
The tax reality: You're still likely okay. Casual visits don't usually create what's called a "permanent establishment" for federal tax purposes or "nexus" for state tax purposes.
But here's where it gets tricky. If your representative starts taking orders or signing contracts in the US, you might be crossing a line. You're moving from casual visits to actual business activity.
Stage 3: The Nexus Problem
This is where many businesses first run into trouble without realizing it. You've now got some real activity in the US. Maybe it's:
- Inventory sitting in a warehouse
- Someone regularly taking orders from US customers
- Regular meetings at a co-working space
The tax reality: You may now have "nexus" with one or more US states. And here's the kicker: each state sets its own rules about what creates nexus. Some states are aggressive, others are more lenient.
State nexus can trigger state-level taxes even when you don't owe federal taxes. This is where businesses often have a liability they don't know about, which means penalties and interest are piling up in the background.
Stage 4: The Branch (Point of No Return)
Now you've got a real presence. An office. A factory. A warehouse you own and operate. Employees working there full-time. You've crossed the line from nexus into what's called a "permanent establishment."
The tax reality: You're now paying both federal and state taxes on the profit from this US activity. Plus, there's a 5% "branch profits tax" which is basically a substitute for the dividend tax you'd pay if this were a corporation.
And here's the problem: you're running a US branch of your Canadian corporation, which is complex and messy from a compliance standpoint.
Stage 5: The Entity (Too Late to Do It Right)
At this point, someone (maybe your accountant, maybe a US advisor) finally tells you that you need to set up a proper US corporation or LLC.
The tax reality: This is where the trap snaps shut.
There is no tax-free rollover from Canada into a US corporation. If you've built up value in your US operations (and you probably have if you've gotten this far), transferring those assets into a US entity can trigger Canadian tax. It's like selling the assets, even though you're just reorganizing.
You thought you were being smart by "testing the market" before making it official. But what you've actually done is back yourself into an expensive corner.
Why This Matters More Than You Think
The Canada-US tax treaty is sophisticated and generally works well, but it can't save you from poor planning. Here's what I see happen:
Scenario 1: The Accidental Branch
A manufacturing company starts visiting US trade shows (Stage 1). They hire a sales rep who works from home in Michigan (Stage 2). They open a small office in Detroit (Stage 4). Three years later, they want to incorporate in the US, but the business is now worth $2 million. Moving those assets into a US corporation could trigger hundreds of thousands in Canadian tax.
Scenario 2: The State Tax Surprise
An e-commerce company uses a third-party warehouse in California (Stage 3). They don't realize California's "unitary tax" system has created a tax liability. Five years later, they get a letter from California demanding back taxes plus penalties and interest.
Scenario 3: The Growth Trap
A tech company starts with a few client meetings in the US (Stage 2), then hires US contractors (Stage 3), then opens an office (Stage 4). By the time they want to raise US venture capital and need a Delaware corporation, restructuring costs them more than they raised.
The common thread? Everyone thought they'd "deal with the structure later." But later is expensive.
What To Do Instead
The solution is surprisingly simple: plan ahead.
If you have any indication that your US presence will grow beyond casual visits, set up the proper entity from the start. Yes, even before you're sure it's going to work. Here's why:
Setting up a US corporation or LLC early is cheap. The filing fees are typically under $1,000. Basic legal work might run $2,000 to $5,000. Annual compliance (tax returns, registered agent fees) might be $3,000 to $5,000 per year.
Fixing a mess later is expensive. We're talking about potential tax on transferring appreciated assets, professional fees to untangle cross-border issues, penalties and interest on taxes you didn't know you owed, and the opportunity cost of deals you can't do because your structure is wrong.
A Simple Decision Tree
If you're just exploring (Stage 1-2): Keep it casual, stay under the thresholds, document everything. You're probably fine.
If you're getting serious (Stage 3): This is decision time. Are you committed to the US market? If yes, set up an entity now. If no, scale back your activity to stay under the nexus thresholds.
If you've already built something (Stage 4-5): Get professional advice immediately. You may have already triggered tax issues, and you need to clean this up before it gets worse. The longer you wait, the more expensive the fix.
The Bottom Line
The biggest mistake Canadian businesses make with US expansion isn't about tax rates or choosing between a corporation and an LLC. It's waiting too long to get the structure right.
You can always dissolve a US entity if things don't work out. The cost is minimal. But you can't easily undo years of operating as a branch when you should have had a corporation.
I've seen businesses lose six figures because they thought they were being prudent by waiting. They weren't being prudent. They were sliding down the slope.
If you're doing any real business in the US, have the structure conversation now. Not next year. Not when you're "sure it's working." Now.
Because once you're on the slippery slope, it's a lot harder (and more expensive) to climb back up than it is to just start on solid ground in the first place.
