New rules, new tax pitfalls on selling grain in the U.S.

Grading standards


This is part one of a five-part series on avoiding unnecessary U.S. taxes.

The United States has be-come an attractive outlet for direct grain sales by many Canadian producers since the dissolution of the Canadian Wheat Board’s single desk trading monopoly.

U.S.-based grain traders are soliciting new business in Canada, and some are also investing in infrastructure and offices. The trend is expected to continue as Canadian producers seek wider markets and more attractive prices for their grain.

However, farmers must be cautious as they explore opportunities with U.S. buyers

Grading standards in the United States are perceived as being less onerous than those in Canada, but the penalties for not meeting them are usually much harsher.

Producers need to be as sure as possible of the grade of grain they have before exporting directly to the U.S. Caution should also be exercised if forward contracting ahead of harvest, when quality will still be an unknown factor.

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Farmers selling into the U.S. run the risk of incurring liability for both federal and state taxes. The bigger concern is with federal taxation.

The Internal Revenue Service’s rules are more grey than black and white. The more you do to comply with requirements, the fewer chances of tripping into a tax hole.

Canadian sellers will encounter a lot of paperwork that must be filed accurately and on time or face potentially harsh penalties.

The recent changes in Canadian marketing practices have coincided with much more aggressive behaviour by and on behalf of the IRS in pursuit of taxes and penalties for non-compliance against foreign nationals, including Canadians.

For example, you can face penalties of US$10,000 as a company and $1,000 as an individual for not filing the required paperwork on a timely basis, even if no tax is due.

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These penalties can continue to be imposed and back dated on an annual basis until all filing requirements are met.

There is a tax treaty between Canada and the United States to prevent double taxation, but tax treaty rights may be denied in cases where filing isn’t completed on time. This means tax could be levied on the gross value of any sale at up to 35 percent of the total (or 39.6 percent for a sole proprietor), with no provision for allowing any offsetting expenses.

The key words above are “may” and “can.” The IRS might nab you, or it might not, but completing all the appropriate forms and filing them on time will provide peace of mind and security against needless financial penalties.

Part two of this series next week will discuss contracts and the intricacies of what constitutes a U.S.-sourced sale. Hint: It’s pretty much whatever the IRS says it is.

See all the columns in this series:

• New rules, new tax pitfalls on selling grain in the U.S.
• Definition of a U.S.-sourced grain sale might surprise you
• Ensure contract states when title passes to U.S. buyer
• Permanent establishment designation may spark taxes
• U.S. grain sales could trigger state tax, immigration issue

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Paul Hammerton, BSc, CAFA and David Turchen, CPA, CA, CPA(USA) are with MNP. Contact www.mnp.ca for more information.