ARTICLE | April 02, 2025

In Light of Tariffs, Should Canadian Companies Establish a U.S. Subsidiary?

With the re-emergence of trade tensions and the increased tariffs between Canada and the United States, many Canadian companies that do business across the border are reassessing their long-term strategies. One question that’s come up more frequently: Should we set up a U.S. subsidiary?

This isn’t just a tax question—it’s a business strategy conversation. For Canadian companies that manufacture goods, distribute products, or provide services into the U.S., tariffs can add significant cost pressures and unpredictability. Establishing a U.S. subsidiary may offer a more stable operational base, reduce exposure to cross-border duties, and improve access to local customers and supply chains.

From a tax perspective, a U.S. subsidiary can provide a clearer structure for managing profits, liabilities, and compliance. Operating through a U.S. entity may help companies avoid the complexities and risks that come with triggering “effectively connected income” or U.S. permanent establishment status under the Canada-U.S. Tax Treaty. It can also streamline employment matters, contract negotiations, and state-level tax filings, especially when business is conducted across multiple jurisdictions.  Finally, the presence of an actual US entity can facilitate cross-border shifting of profits within reason, fit into a plan to get immigration visas for management and key employees, and fit better into “buy-America” sentiment in the US.  US corporations that have extensive revenue earned from customers outside the US may also qualify for beneficial lower tax rates on net income generated from this revenue.

However, forming a subsidiary isn’t a one-size-fits-all solution. It introduces its own set of obligations, including U.S. federal and state tax filings, potential double taxation issues (though often mitigated by foreign tax credits), transfer pricing considerations, and ongoing administrative upkeep. There’s also the need for well-structured intercompany agreements and clear capital flows between the Canadian parent and U.S. subsidiary.

Companies should evaluate their current U.S. activity and assess how much of it could be more efficiently managed through a local entity. If tariffs or trade policy shifts are beginning to chip away at margins—or if growth plans are being held back by structural limitations—a U.S. subsidiary may be worth considering. But it should be part of a broader strategic review that includes tax, legal, operational, and financial considerations.

We recommend working closely with cross-border advisors who understand both the Canadian and U.S. sides of the equation. With the right planning, a U.S. subsidiary can help support your business goals, reduce friction, and bring greater clarity to your North American operations.