Article written on February 2, 2024

Operating across borders can present unique challenges, particularly for Canadian public companies with US subsidiaries. In this post, we will address some of the specific reporting issues these companies face, focusing on the importance of keeping separate books for US entities and understanding the implications of failing to do so. Additionally, we will explore the potential benefits, such as US R&D tax credits, that can be missed when inter-company transactions and spending are not properly documented.

The Need for Separation

Canadian exploration companies acquiring US properties are often required to incorporate US entities to own these properties. However, many of these US entities are treated as inactive and their financial records are not kept separate from the Canadian parent company. This approach may seem simpler for bookkeepers keeping those records and accountants who prepare the consolidated financial statements. However, it can lead to significant reporting complications.

Reporting Requirements and Penalties

Failure to file certain forms, such as disclosing inter-company transactions between the US entity and the non-US parent, can result in penalties of US$10,000 per year. These penalties can quickly accumulate and negatively impact the company's finances. Understanding the reporting requirements is crucial to avoid such penalties and maintain compliance.

Potential Benefits Missed

By not keeping separate records for US spending, companies are not only risking penalties but also forfeiting potential benefits, such as US research and development (R&D) tax credits. These credits can provide significant financial incentives for companies engaged in qualifying R&D activities, but proper documentation and separate accounting are necessary to claim them.

Importance of Proper Bookkeeping

Maintaining separate books for US entities is essential for accurate financial reporting, compliance with US tax laws, and optimising potential benefits. By having distinct records for US subsidiaries, companies gain visibility into the financial performance of each entity, identify key expenses and profits, and fulfil their obligations to both Canadian and US regulatory authorities.

Conclusion

Canadian public companies with US subsidiaries must pay close attention to the unique reporting issues they face. Keeping separate books for US entities and ensuring compliance with US tax laws is not only a legal requirement but also a way to access potential benefits, such as US R&D tax credits. By understanding and addressing these reporting challenges, companies can navigate the complexities of operating across borders and position themselves for success in the global marketplace.

Is your US subsidiary set up properly? Do you know, if records are kept appropriately? Are Taxes filed correctly and on time? Are you taking advantage of the R&D tax credits? To find out how I can help you, schedule a time for a Virtual Coffee today or reach out.