US Informational Reporting Requirements for Canadian Corporations with US Business Activities
In addition to filing a U.S. federal income tax return, Canadian corporations engaged in a US trade or business or 25% Canadian-owned U.S. corporations may have a requirement to file IRS Form 5472, Information return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a US Trade or Business. This form is required to be attached to the corporation’s U.S. federal income tax return and is due on or before the due date of the income tax return with extensions. The penalty for failure to file this form on a timely basis is $10,000.
In general, IRS Form 5472 requires a Canadian corporation engaged in a US trade or business or its US subsidiary to report transactions with related parties such as inter-company sales of inventory, loans, compensation and other payments. The IRS is seeking this information to determine whether transactions between the reporting corporation and related parties are at arm’s length to ensure that the US is not losing its tax base. The US is principally concerned with profits properly allocable to the US being shifted to non-U.S. persons that do not have U.S. federal income tax filing requirement. Among other exceptions, a Canadian corporation that timely notifies the IRS that it does not have a permanent establishment in the U.S. does not have an IRS Form 5472 filing requirement.
Starting in 2013, the IRS changed its assessing practices and began automatically assessing a $10,000 penalty where either IRS Form 5472 is filed with a delinquent U.S. federal income tax return or the IRS believes, sometimes erroneously, that the form was filed late. Our firm has been successful at challenging these penalty assessments and having them abated in full. Often this requires substantiating that IRS Form 5472 was filed timely, that a requirement to file never existed or in certain circumstances advocating that the IRS use its discretion to waive the penalty entirely.
A careful review of a corporation’s business activities and related party transactions is critical to evaluating its IRS Form 5472 reporting obligation so as to avoid the uncertainty of challenging an IRS penalty assessment.