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Selling grain in the U.S.? Know the tax rules

  • 4 min read

Many producers are selling their grain to buyers in the northern states whenever potential returns warrant. Companies like Columbia Grain, based in Portland, Ore., have gone out of their way to make the process as simple as possible for their Canadian customers.

While it’s become simpler to sell grain to U.S. buyers, Canadian farmers should be aware they likely need to file a U.S. federal income tax return with the American Internal Revenue Service (IRS) even if there is no tax owing, or they could face major penalties.

Filing a treaty return

“Most farmers in Canada who sell to the United States will, at minimum, need to file a treaty-based return,” says David Turchen, an international tax partner with MNP in Abbotsford, B.C.

Most farmers in Canada who sell to the United States will, at minimum, need to file a treaty-based return.

A treaty return is an information filing with the IRS that claims U.S. federal income tax relief due to the Canada-U.S. income tax treaty rules. The treaty requires a certain level of activity in the U.S. be achieved, known as creating a “permanent establishment,” before actual U.S. federal income tax is owed.

“The IRS wants to know about any sales that they consider to be sourced in their country, whether any taxes are owed on that sale or not,” Turchen says. “They have stiff penalties in place, US$1,000 per tax year for individuals and US$10,000 per tax year for corporations, to force farmers to file. This is a big deal and most farmers selling to the U.S. have no idea they should be doing this.”

U.S. sourced sale

The key consideration hinges on whether your grain is classified as a U.S.-sourced sale.

“If you take your grain samples across the line to an American buyer to solicit a sale, then go back home, load it in your truck and drive it across the border to drop it off, you quite clearly have a U.S.-sourced sale,” Turchen says. “A U.S.-sourced sale occurs when the title of the product, risk of loss or economic transfer occurs in the United States.”

Filing an informational treaty return isn’t difficult, but you have to stay on top of it and be aware of the rules.

“Further, if you regularly conclude sales within the United States, you may trigger the permanent establishment rule – which means you owe U.S. federal income tax on the related sales.”

Work with a sales agent

It is possible to sell your production to U.S.-based buyers without filing a U.S. federal income tax return, but all major aspects of the transaction must occur in Canada. Ideally, the U.S. buyer will reach out and assume ownership of the product before it crosses the border.

One potential solution is to engage Canadian-based sales agents who can arrange for these transactions to be based in Canada.

“A sales agent is different than a customs broker,” Turchen says. “Sales agents are independent contractors who you hire to make the rounds there and drum up deals; they don’t help you to get your product through customs. Just having one of your friends or neighbours do this isn’t good enough. You want to find someone who does this for a living and has a bunch of different customers to be able to demonstrate you’ve arranged your sales through an independent agent.”

Outsource your shipping

Outsourcing your shipping to either an American or Canadian trucking company will further reduce your chances of having to file a tax return. The shipping terms should clearly identify the U.S. customer as solely responsible for the product after it leaves the farm. Ideally, by the time their grain crosses the border the only outstanding activity a farmer will have to do is to deposit the cheque.

Be aware but don’t panic

American companies are interested in buying Canadian grain. According to Danny Moore, manager of Columbia Grain’s elevator in Plentywood, Mont., they will even handle the majority of the paperwork producers need to bring their grains through customs.

However, producers have to jump through a lot of hoops to avoid having their grain classified as a U.S.-sourced grain sale and thereby avoid filing a U.S. federal income tax return. “Typically some element of the transactions I see indicate a U.S.-sourced sale,” Turchen says. “Fortunately, most farmers just have to file a treaty-based return, which is relatively simple to deal with.”

“It’s important not to just ignore the need to file them though. Border controls and ongoing audits of U.S. elevators make it increasingly likely that anyone trying to avoid their filing obligations will be caught,” Turchen says. “If you feel you might not be in compliance with U.S. tax regulations, talk to your tax professional. Odds are good they can work something out. However, if you wait until the IRS calls, far fewer options will be available.”

Turchen also advises producers to consult their tax professional about any state tax implications.