

US Incorporation for Canadian Startups - cmer
http://blog.carlmercier.com/2011/08/29/us-incorporation-for-canadian-startups/

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3pt14159
One thing you need to mention:

The right accountant and the right family situation means that you don't pay
taxes on the first N * $750k, where N is the number of family members you
have.

It gets _really_ complicated but essentially you can set up a family trust in
Canada that owns a certain class of shares, or even a holding company that
holds the shares and then when you sell the company every person in the family
trust uses up their one time $750k credit. You can do this with friends you
really trust as well, so it isn't _always_ a case of Delware company. This is
a brief introduction, that makes sweeping generalizations.

My very good friend is a CA that focuses on technology companies with PWC in
Toronto. If you need introductions he is phenomenally good and gets it. He
took 3 years of Comp Sci at Waterloo before getting bored of it and switched
to accounting.

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cmer
The exemption only applies for Canadian companies, never to American ones.

While it is true that you can use your family members' exemption, anybody who
just gives away their exemption for free is a fool in my opinion. That is
unless they know for a fact that they will never use it. Usually, such a
practice warrants a little reward to the people using up their exemption to
your benefit.

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rreiner
Carl, thanks, great article.

One question: you say "Because QC-inc is just like any other Canadian entity,
it was eligible for SR&ED."

But if QC-Inc was doing consulting work, i.e. developing products & technology
on contract for another entity (Karabunga), then that work would not be
eligible for SR&ED -- an entity isn't eligible unless it retains the IP
rights.

How did you work around that?

~~~
belbo
We did the tax credit work for Carl (thanks for the shoutout man!).

Between 2 CDN entities, only 1 can claim SRED. So if QC Inc did all of its
work on behalf of another CDN company, usually the person paying claims the
tax credits.

If a US company sub-contracts to you, there's no way the US Co. can claim
SRED, so you can. You have to be CDN-controlled to get the biggest tax credit,
i.e. the US Co cannot own more than 50% of you. What the CDN Co does with its
IP is irrelevant. You can always choose to sell/license your IP to any other
company for $1.

If you have any questions, just shoot me an email: rluk[at]flowventures.com

BTW is this Richard? If so, hey.

~~~
rreiner
Hey, Raymond.

This is of some immediate interest to me, so I've been digging into it a bit
this morning -- I've been reading CRA's internal guide for SR&ED reviewers,
and other fun things. Seems like a nice structure, if it works, i.e. if it
stands up to audit scrutiny. It seems to me counterintuitive that a CDN
consulting firm taking no financial risk when doing SR&ED for a US customer
would be eligible.

Many of the CRA guidance docs cite IP ownership as an eligibility condition.
They also point to forms T1145 and T1146 as the mechanism to transfer SR&ED
costs & credits between non-arms-length parties, but these apply when both
parties are Canadian. In your case you've got non-arms-length parties, one US
and one CDN. I can't find any specific CRA statement that applies.

But ultimately all those CRA docs are just guidance,and the ITA prevails. Can
you point to the section of the ITA that blesses what you're doing here?

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rav124
I was curious how the Quebec based consulting company qualified for SR&ED
expenditures since all of the IP was owned by a US based corporation. I didn't
realize that a Canadian consulting company working on a US R&D project could
quality for SR&ED.

~~~
belbo
I also replied to rreiner, see below. In a nutshell, you can as long as you're
Canadian-controlled. Of course the work has to be eligible too...

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jeromeparadis
The dual ownership trick by an individual is great. Lots of awesome details
and tips. Thanks!

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braindead_in
I am confused about the Franchise Tax. If I'm a internet business, with no
office in Delaware, do I need to pay franchise tax?

~~~
cmer
Yes, but it's minimal if you do things right using the Assumed Par Value
method. See [http://startuplawyer.com/incorporation/the-delaware-freak-
ou...](http://startuplawyer.com/incorporation/the-delaware-freak-out)

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seanmccann
Anybody know why to avoid the "sandwich"?

~~~
cmer
My tax accountant never gave me details about it, but I remember him clearly
saying that there were serious tax consequences in doing so and that
generally, this kind of setup should be avoided.

If your structure looks like this: YOU-CA -> US -> CA (sandwich) and you sell
your US company, the acquirer is stuck buying the CA as well, which is a pain
for everybody. A US acquirer won't want to deal with a Canadian company. This
is not the main reason not to do it, but it's something to consider.

