Some surprises can be fun—birthday parties (for some people), winning the lottery, your kids cleaning their rooms. But then there are just some surprises that you’d rather avoid. If you’re looking to sell your grain south of the border, rules and regulations can give you the bad kind of surprise if you’re not aware. To help you avoid run-ins with the IRS and hefty tax bills, we asked Paul Hammerton, a Farm Management Consultant with MNP, for guidance.
The first thing you need to know: what’s a US–sourced sale?
If the first purchaser is a US firm, it’s delivering it into the US and the cheque’s coming from them, or through a broker, it’s a US–sourced sale.
So make sure you understand:
- Who’s buying your grain? Is it a Canadian company, or a US company with a Canadian office?
- Where’s the delivery point?
- Where’s your cheque coming from? It can be a US-sourced sale, even if you’re paid in Canadian dollars.
- Where’s the ownership transfer? On which side of the border do you, the farmer, stop owning the grain? If it’s on the south side of the border, it’s a US-sourced sale.
- If you pitch your grain in the US to a buyer, the sale’s considered US-sourced. Even if you send your grain for testing to a US facility resulting in a sale, it can be deemed US-sourced.
- If you or an agent representing you conducts any process or transaction in the US, the grain may be deemed a US-sourced sale—even if a broker trades your grain.
- Be careful where you get your information. Brokers don’t always know all the rules and regulations.
Any time you sell or buy out of Canada, you’re open to foreign exchange risk. Once you’ve established your deal is US sourced and have your legal and tax items in place, you can reach out an expert to help you manage your foreign exchange risk, including:
- Selling to the US and getting paid in US dollars (conversion back to Canadian dollars).
- Buying from the US and paying in US dollars (conversion back to Canadian dollars).
- Assessing market foreign exchange rates, if you’re getting paid or paying in Canadian dollars with a US company.
Why does it matter? (Spoiler: The IRS)
If you’ve made a US-sourced sale, you can be subject to US federal taxation. This means the Internal Revenue Service is going to want to have a chat with you. If you don’t file a return with them and they find out, they can charge you penalties, deny you trade treaty rights and refuse to allow you any offsetting expenses.
For example, say 10 years ago you made a $100,000 sale and didn’t know that it was a US-sourced sale—because you were paid in Canadian dollars and the broker didn’t tell you the company was American. If the IRS found out, you’d owe them 35% of the sale plus $10,000 in penalties per year for 10 years. That’s $135,000!
Could potential changes to NAFTA affect these rules?
NAFTA is the major trading treaty between the US and Canada that makes selling grain to the US possible. Any changes in the treaty could change how these transactions are done. Keep up with current events and don’t make deals based only on the details of your last transaction.
What else do farmers need to know about selling into the US?
It’s not all about tax. Here are some other things to think about:
- Avoid forwarding a contract to the US before a crop is harvested—at that point, you don’t know whether you’ll have the specification of grain promised in that contract. Trading across borders means being subject to different legal jurisdictions. Even if the specifications are more lenient where you’re trading, the penalties for not delivering on them can still be severe.
- Know what you’re selling and make sure the buyer knows what they’re getting. Bring them samples, allow them to test them, and make sure they’re comfortable with what they’re buying and you’re comfortable with what you’re selling.
- Don’t dump product on grain terminals or merchants. It could end badly, especially if you get into a legal dispute across international boundaries.
If you’re careful to do your homework before you sell to the US, you’re in a great place to avoid those unwanted surprises.