Canadian farmers can sometimes find American buyers who are willing to pay more for their grain than Canadian companies.
However, cross border sales could attract the unwelcome interest of the U.S. Internal Revenue Service if producers don’t have the proper contracts and paperwork.
A key point that must be spelled out in the contract is the location where the title of the grain passes from the Canadian producer to the American buyer.
You want to make sure that the transaction cannot be interpreted as a U.S.-sourced sale subject to U.S. taxation.
Title can pass anywhere you specify in a contract, regardless of payment type. If the seller ships the grain through a funds-on-delivery agreement that specifies a designated departure or shipping point, title generally passes to the buyer at that departure or shipping point.
The contract must be worded to specify that the title passes when the grain crosses the border. If the contract is not specific, the IRS could make its own interpretation, and it may be difficult to prove what actually happened, which has implications for the sale and your tax liability.
If title to the grain does not pass until it, or certain documents such as a bill of landing, have been de-livered to the buyer, then the title is deemed to have been passed in the United States, which makes the transaction U.S.-sourced and therefore taxable.
In the absence of a clearly defined contract, title does not pass until the grain is delivered to the U.S. buyer, making it taxable.
Most farmers are entering into contracts where final grading and settlement of payment happen at the U.S. grain elevator, which establishes the title passage determination. There is a risk the sale will not go through if the right grading is not obtained.
The IRS can argue those deals are U.S.-sourced sales because they are completed in the U.S., even if there is a clear title passage in Canada.
This would apply to transactions where 80 to 85 percent of the contract value is paid on account once the grain has been shipped, with final settlement occurring only after the grain has reached the elevator in the U.S. and final quantities and grade have been determined at that destination.
Canadian farmers have to be careful when shopping their grain around.
If a solicitation of goods is made in the U.S., then the sale is generally deemed to be U.S.-sourced.
The rule seems clear at first glance: if you pitch your grain in the U.S. to a buyer, the sale is considered U.S.-sourced.
This could be the case even if you simply ask for your grain to be tested at a U.S. grain elevator with a view to selling it to a U.S. buyer.
The bottom line is that if a farmer or an agent who represents the farmer is conducting any process or transaction in the U.S., they are at risk of having the grain deemed U.S.-sourced.
If a transaction is deemed a U.S.-sourced sale, then in the words of U.S. tax law, the proceeds are deemed “effectively connected income” with the U.S.
The income is taxable at graduated U.S. federal corporate rates under U.S. domestic law.
The IRS does not always calculate the same way that the Canada Revenue Agency does, and U.S. federal income tax rates can be much higher than in Canada.
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
Paul Hammerton, BSc, CAFA and David Turchen, CPA, CA, CPA(USA) are with MNP.
Contact www.mnp.ca for more information.
