Definition of a U.S.-sourced grain sale might surprise you

More Canadian farmers are investigating cross border grain sales in the post-CWB monopoly environment as they search for stronger prices.

However, it is important that farmers know how taxation authorities look at cross border sales so they can avoid situations where the U.S. Internal Revenue Service thinks it has a claim on some of the revenue.

The IRS does not always calculate net taxable income the same way as the Canada Revenue Agency, which can be a problem.

The current U.S. federal income tax rates can be much higher than in Canada, which means farmers could owe more money.

Shipping grain across the border may seem straightforward, but there are many situations where the transaction could constitute what is known as a U.S.-sourced sale, which can be taxed by the IRS.

One common misconception is farmers won’t be hit with a U.S. tax levy if they are paid in Canadian dollars. This is incorrect.

The currency used in the transaction has no bearing on it is subject to U.S. federal tax.

A U.S.-sourced sale can be generated either by the shipping terms of the product or from the solicitation to make the sale.

The solicitation could be as simple as crossing the border to get a grain sample graded and make the initial sales pitch. Grain sold on the basis of that seemingly innocent transaction can be counted as U.S. sourced, even if the farmer returns home, strikes a deal with an agent in Canada and is paid in Canadian dollars.

Determining what constitutes a U.S.-sourced transaction is not straightforward. A clear, defined contract is key to enabling a successful transaction, and it doesn’t matter to the IRS where the contract is signed.

Farmers can sign a contract in a Canadian office of a U.S. buyer, but if the title to the grain is passed to the buyer in the U.S., it is considered U.S.-sourced and therefore taxable by the IRS.

The good news is the IRS will abide by what is specified in a contract regarding passing title, or ownership, of the grain.

In other words, if a farmer has a contract clearly stating when and where the sale is to be considered completed, the IRS will accept it.

However, farmers need a well-documented contract as evidence of intentions or face complex legal and regulatory scrutiny.

This scrutiny includes determining the parties’ intent concerning where title passes and resorting to local commercial law and analysis of the parties’ conduct, the underlying documents, common usage of the traded goods and all the other surrounding facts and circumstances.

  • Risk of loss passes in the U.S.: The grain faces possible downgrade once in U.S.
  • Title passes in the U.S.: The grain ceases to be yours and becomes the buyer’s in the U.S.

Economic transfer passes in the U.S.: The balance of payment or final payment occurs when the grain enters the U.S.

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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