Retaining ownership of livestock finished in the United States is a growing trend as producers try to dodge higher costs at home.
But are they really better off, especially when the practice could expose them to U.S. federal and state tax liabilities, in addition to Canadian taxes?
Bruce Ball, a tax partner with BDO Dunwoody, said there has been a growing trend to retain ownership instead of selling feeders to U.S. buyers because of that country’s cheaper feed, labour and the high Canadian dollar.
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Doing it on a casual basis is probably risk-free, he said. But making it an established part of a business operation without formalizing it by setting up a corporate entity on U.S. soil, or filing a U.S. personal or corporate tax return, could lead to a nasty shock.
“You could ship livestock into the U.S. and they may not find you for some time. You may not file forms and you might think that everything is fine, but then suddenly they might realize what you are doing,” said Ball.
If the U.S. Internal Revenue Service or a state counterpart audits a U.S. feedlot, and its records show that a high number of animals passing through were Canadian-owned, the paper trail may result in a tax bill from Uncle Sam, he said.
Whether or not taxes are due depends on the animals’ length of stay in the U.S. feedlot or feeder barn. If it is short, the feeders would commonly be seen by the taxman as non-taxable inventory.
But feeding out for longer periods could be compared to a non-farming business that partially manufactures a product in Canada and then sends it south for further processing.
Custom feeding, typically a fee-for-service arrangement, could be considered under this aspect because the value of the animals increases with the length of time in the feedlot.
The U.S. authorities there may argue that the feeder cattle or hogs are not being stored as inventory but represent a permanent business establishment in the country.
With regard to state taxes, the waters are even muddier, said Ball, because each state is free to make up its own rules.
Potential exposure to state tax depends on the nature and frequency of business contacts undertaken within a state by a foreign vendor.
This is more difficult to define, said Ball, and state tax officials are not bound by the Canada-U.S. tax treaty.
“The states have in the past been very aggressive in assessing taxpayers who have a very slight connection with the state,” said Ball.
The good news is that tax paid in the U.S. can be claimed as a foreign tax credit in Canada to reduce tax payable at home. If no tax is due in a certain year, it may be possible to claim it as a credit in a future year.
“If you lose money, there might not be a huge issue other than the fact that you still have to file a return. But if you do make money, you would have to apportion that money between the two countries in some sort of logical fashion.”
