A Canadian crash-course in doing business in the U.S.

by Daniel Joyce

I think it is safe to assume that all motor carriers want to be profitable and that all motor carriers want to maximize efficiency.

Those are the underlying reasons behind the vexing problem of cabotage regulations. The U.S. is a big country, and international routes can take a carrier hundreds, and even thousands, of miles into the U.S. (The reverse is less true for U.S. carriers, so Canadian cabotage issues are less problematic for them.)

Many carriers, after confronting the limitations of the U.S. cabotage rules, ask the question: “If I can’t run point to point in the U.S. as a Canadian carrier, how can I establish lawful U.S. operations?”

There are many issues that go into the answer to that question.

One way to understand this is to realize that the cabotage issue and doing business in the U.S. are really the same thing. The reason cabotage is illegal is because it is outside the boundaries of international transportation. Canadian carriers can enter the U.S. and make pickups and deliveries as part of international transportation, but cannot engage in strictly domestic transportation. Even if the U.S. cabotage laws were relaxed enough to allow point-to-point activity, the Canadian carrier would have to face the realities of U.S. corporate and tax laws associated with hauling domestic U.S. freight.

Cabotage laws try to define what is permissible international business. They do not legalize domestic transportation activities. For that reason, it is highly unlikely that any relaxing of the cabotage rules would go much further than redefining activities that are considered to be a lawful part of international transport.

There is no requirement to set up a separate corporation in the U.S. in order to conduct lawful business. A Canadian trucking company has the right to establish a U.S. branch office – just as a company can have branch offices in Toronto or Winnipeg.

While the company must register to do business in the U.S. State or States where it will have physical operations (office, terminal, employees, etc.), the original corporate entity can remain the same.

On the other hand, it is also common for Canadian carriers to incorporate a new business in the U.S., using a very similar name.

Although there are issues that should be considered in determining which way to go, there is no general rule that applies to all cases. Issues for consideration include, the following:

Limitation of liability: In a branch office model, the assets of the overall corporation are subject to claims against any of the branches. Some people have commented on the litigation mentality south of the border, and choose a separate U.S. corporation to shield the Canadian company’s assets. On the other hand, adequate insurance coverage may give you all the comfort you need.

Ease of record keeping and tax reporting: Operations on each side of the border have their own banking relationships, including financial reporting and payroll, for example.

These are subject to different laws and procedures. Some have found that it is easier to allocate and account for business activity properly on either side of the border when there are two corporations. Under the U.S.-Canada tax treaty, international transportation is subject to federal taxation by the home country and is exempt from federal taxation in the foreign country.

But which is which when you have operations on both sides of the border? I have seen the branch office model work better for Canadian carriers, but as the emphasis on U.S. domestic business grows, and with it an emphasis on developing a dedicated U.S. fleet of equipment and drivers, the formation of a separate U.S. corporation seems more appropriate.

Operating Authority: In the branch office model, the Canadian fleet can continue to use the same operating authority for U.S. point-to-point operations. If a new business were incorporated, it would need a separate operating authority, DOT number and all relevant registrations. In either case, the U.S. operations would have to comply with the customs and immigration laws regarding basing of equipment and work authorization of drivers.

Intangibles: Some people just prefer to do business with a domestic company. Banks, insurance companies and other creditors may have concerns about their ability to enforce rights or seek remedies against a company that is headquartered in another country. Whether or not these are justifiable concerns, they can have practical consequences.

It really boils down to a matter of preference, because neither option offers any major feature that can’t be achieved by the other. The important points are that there are no restrictions on Canadian ownership or control of U.S. businesses, and there are numerous ways to accomplish the objective of doing business below the 49th parallel. n

– Daniel Joyce can be reached at Hirsh and Joyce, Attorneys at Law, at 716-564-2727.

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