The rules requiring a taxpayer to have a taxpayer identification number (TIN) were tightened. A Canco whose US customer asks it to supply a TIN may simply say that it does not have one and hope that the customer will not press the issue, but such a reply might be viewed with suspicion and could result in damage to the business relationship. However, if Canco does apply for a TIN, it places itself on the IRS's radar with respect to tax filings. Alternatively, Canco may view the TIN requirement as the impetus to incorporate a US sub or affiliate to transact its US business activities.

Transacting US business through a USco eiminates the need for Canco to file a US tax return, which it is required to do even if the Canco is treaty-exempt from US taxation, as discussed below. A separate US sub may also help isolate the US activities from the Canadian with more precision by requiring two sets of books and records. It may also help with immigration issues, because a US affiliated corporation often allows access to a broader range of visas for Canadian employees who want to work in the United States. A separate sub may allow for less disclosure and even for a better tax result in the states in which the business is operated, and it may provide greater liability protection for the business operations. From the US customers' viewpoint, a separate US company that enters into contracts in the United States may appeal to post-9/11 patriotism.

The IRS's increased emphasis on compliance issues may have been the result of (as recently disclosed by an IRS official) the agency's intention to more closely examine the form 8833 ("Treaty-Based Return Position Disclosure") for foreign corporations that take treaty-based positions, with a view to highlighting permanent establishment (PE) and withholding tax issues. Form 8833 must be filed by a non-US corporation engaged in business activity if it claims an exemption from US taxation on the grounds that it has no US PE, typically because it has no US office or other physical presence. If the IRS successfully determines that there is a PE and the relevant return is then filed, the Canco may lose the ability to claim deductions--because the return was filed late--and thus may be subject to US tax on its gross revenues. One common matter of concern is whether a person who works in the United States solely for the Canco constitutes a PE of the Canco merely by working out of his or her home. As more businesses begin to use employees who work out of their homes, this issue is likely to eventually come to the IRS's attention; but the IRS has not yet issued any authority on the topic.

A Canco engaged in a US business will be confronted with increasing challenges from US tax authorities as computer systems improve, recordkeeping requirements become more detailed, and US customers become more aware of additional compliance issues for non-US companies. A Canco that does business in the United States should seek counsel from its advisers on both sides of the border to ensure that it is operating in the most protective manner.