There are a lot of opportunities for investment and for certain types of startups, and there is substantial flexibility in where the physical operation can be set up. That includes crossing the border between the United States and Canada.
But there are some key differences in US-Canadian incorporation that every investor and entrepreneur should know before making the decision regarding best for their business. And those differences are highlighted by the issue of research and development (R&D).
The advantages of Canadian incorporation
A private corporation established in Canada (CCPC) is offered substantial tax benefits for R&D. That’s no small thing for a startup in areas like technology and science, where the initial costs of research can be overwhelming and cash flow is not yet able to keep pace.
Canada’s tax code offers credits of up to 35% on qualified R&D spending for as much as $3 million in Canadian dollars (about $2.5 million in U.S. currency). Therefore, any company that has a significant R&D budget is in position to reap substantial benefits by incorporating in Canada.
The Canadian tax code offers another benefit to startups by offering lower corporate rates on the first $500,000 (Canadian dollars) of gross revenue.
But before entrepreneurs start singing “O Canada,” there are some downsides that have to be considered.
Advantages of incorporating in the United States
For investors who live in the United States, there is the challenge of recouping their money in a way that’s tax-efficient. Recent changes to the U.S. code have made that a little more difficult.
Tax reform legislation passed by the U.S. Congress in 2017 and signed into law by then-President Trump established something called the Global Intangible Low-Taxed Income (GILTI). To make a long and complex story short, the new GILTI rules were aimed at keeping investing dollars in the United States. The means for doing so was to accelerate the taxation of income-derived from investments in other countries.
Furthermore, the U.S. government offers its own research and technology programs. While these programs are to the same caliber as the generous Canadian tax credits, they do offer an incentive for U.S. investors and entrepreneurs to stay at home.
Finally, the lucrative U.S. market remains the prize for businesses, even ones that operate globally. In an era when “Buy American” is a phrase in vogue in U.S. business and politics, investors may be concerned that incorporating in Canada will carry a negative perception.
Where should you incorporate?
There are a wide range of issues at play when deciding where to incorporate. Not only is each country different, but the 50 states within the U.S. and the 10 provinces that comprise Canada all have their own unique rules. That’s why it’s important to fully understand the details of your particular investment situation before incorporating.
Wherever you’re at, the broader decision is really this:
Is the value of Canada’s R&D benefits and lower rates on early cash flow greater than the collective value of U.S. tax regulations, R&D programs and the public relations benefit that comes with being “American-made”?
The answer to that will likely make your decision for you.