Defusing the cross-border tax-time bomb.

• Author: Bissonette, Laurie
• Position: BUSINESS SENSE

Entrepreneurs like to think big. It's in their nature. For some, that means setting up related companies in the U.S. and abroad to grow their business. But in doing so, many entrepreneurs unwittingly expose themselves to tax-time bombs that can explode unexpectedly unless they defuse them by taking action ahead of time.

You may think of your group of companies as members of a tight-knit family, but once you cross international borders, it's a new ball game. For example, "transfer pricing" laws require that your group of companies operate at arm's length when doing business with each other. All transactions must be based on the fair market value of all property, goods and services. If not, you could potentially face surprise tax assessments and penalties that could deal a serious blow to your company's financial well-being.

These transfer pricing laws are designed to ensure that each jurisdiction gets its fair share of the tax pie. Essentially, they're intended to prevent a corporate group from moving its income from one jurisdiction to another by having a company in one jurisdiction pay prices for goods or services to a related company in another jurisdiction that are higher than a company dealing at arm's length would be willing to pay. From the taxpayer's point of view, there's often a bias towards shifting income to a lower tax jurisdiction.

While the Canada Revenue Agency (CRA) will routinely scrutinize large multinational corporations, the agency will also do transfer pricing audits on small to medium-sized businesses, including those with less than $10 million in revenue. In fact, if your Canadian company has transactions with related non-resident companies that total at least $1 million per year, you have to file an annual form disclosing these transactions.

Even if your inter-company transactions are less than $1 million per year, you still need to establish that you're using arm's length prices. This principle applies not only to goods but to services as well...