For Canadian Developers - Selling in US without NAFTA tax exemption

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Level 1

10 points

For Canadian Developers - Selling in US without NAFTA tax exemption

Since it's seeming possible that the North American Free Trade agreement may be getting cancelled fairly soon, I am just wondering how this will affect my small app business if it happens.

Currently, I am creating apps based on boardgame designs. I split the proceeds with the copyright holders of the boardgames. I am claiming a NAFTA exemption to avoid the 30% income tax hit on US sales and am transferring that income to Canada. Most (80%) of my sales are from the US, so avoiding that tax hit is pretty much what is making my app business worthwhile. Without it, I would be making a measly 5% profit on each US sale, rather than the 35% I have now.

If NAFTA were not in effect, what would the options be to ideally transfer that income to Canada or if it must go through the IRS, to minimize it?

So far it looks, like the only "real" way to go about it is to set up a small US based business, but to be honest, that is not very palatable due to all of the paperwork and additional up front costs.

Is anyone out there a web-savy accountant? There's a real lack of good info on the web for tax Q&A for app developers. I honestly spend as much time researching sales and income tax laws than I do programming.

Posted on May 1, 2017 8:18 AM

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Answer 1

etresoft

Level 9

56,698 points

May 1, 2017 1:53 PM in response to peterk1

Maybe ask again over on the "other" developer forums: https://forums.developer.apple.com/welcome

I don't know if you will get any better response over there.

I can tell you that your best bet would be to look for people in Vancouver, Toronto, or maybe Waterloo - anyplace where there might be a good chance of encountering people who are familiar with this industry. In many cases, I think people just make it up as they go along, with their Chartered Accountant invoices and fees as their best defence. Essentially, your claim is that you've spent a lot of money and due diligence to do it correctly. If you're lucky, they don't pick you to destroy that day. But you have to find people in Canada who are familiar with Canadians doing business in the US, especially via Apple. Step one foot across the border and they have no clue about Canadian tax law. You need someone who can do both sides.

PS: When I did that little research on your question, the issue that put me over the deep end was cryptography. Did you know that Canada also has a cryptography board that you need to get an approval from? Peachy. Does your app use encryption? Well, it is 2017, the answer is always yes. I guess I better get on that myself...

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Answer 2

etresoft

Level 9

56,698 points

May 1, 2017 8:52 AM in response to peterk1

Hello peterk1,

Can you explain the 30% income tax hit? Is there some new tax I've been missing out on? It sure wouldn't be the first time. What do you mean about "transferring that income to Canada"? When you are doing international business, you have to be explicit about everything. Who is the entity making the sales? In what territory?

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Answer 3

peterk1 Author

Level 1

10 points

May 1, 2017 9:05 AM in response to etresoft

My understanding is that any sales originating from the US app store is normally taxable as US income. If you do nothing, then 30% of that will be taken off at source by Apple and submitted to the IRS.

If you claim a NAFTA exemption as a resident of Canada, that 30% is not removed at source and you are expected to declare it on either your personal income tax or small business income tax.

You can also obtain a US business number and declare yourself with the IRS, and in that case the 30% is also not removed at source, but then you are expected to make an annual IRS tax return - even if you sold nothing and had no US income for a given year.

A similar system is used for sales originating in Europe, since we also have a free trade agreement with the European Union.

As you correctly stated, things like this should be explicit and clearly stated in plain language to inform prospective developers, however they are not really - and there is not much good info out there. If I understand the language of the developer agreement correctly, the Apple store is the entity making the sales in the territory in which they are located. There are 20-30 app stores located all over the world. To make things more complex, "the other big app store" appears to do things differently, and there it is the app creator who is considered the "point of sale".

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Answer 4

etresoft

Level 9

56,698 points

May 1, 2017 10:03 AM in response to peterk1

Hello again peterk1,

I was actually asking for more detail from you. Are you and individual or a corporation? Are you sure you couldn't be considered a US person?

But I think it is all a moot point. I did a little research on your question and quickly came to the correct answer. You will have to ask your accountant to get the answer. I'm going to do that myself as I was planning on getting back into the App Store soon. Now I'm not so sure. I must have gotten lucky before because I was a US citizen in Canada. Now I have a corporation which is separate (but not to the IRS).

So I'm totally being sincere when I say talk to your accountant. I have a new one who seems to be pretty good. Email me and I'll give your their information.

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Answer 5

peterk1 Author

Level 1

10 points

May 1, 2017 10:19 AM in response to etresoft

At the moment, I am not an corporation. I definitely could not be considered a US entity/person.

I've found that "ask your accountant" is not guaranteed to get a good answer either. One of my best friends is a chartered accountant who has been working at medium sized companies for over 20 years as a controller. She's pretty mystified by some of this. Investment advisor has also come up pretty empty and he has no other clients who are in a similar situation to draw upon. This is not a "normal" business. You need to find the right accountant with specific experience in this stuff - I don't think just any typical CA off the street will do too well.

Good luck yourself and thanks for joining the conversation. Questions about this stuff tend to draw 0 responses.

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