Canadian Employed in US through Canadian Company or Personally
If you are a Canadian resident who derives an income effectively connected* to any business or trade in the US through your Canadian corporation, that income will be subject to US tax filing and in some cases tax liability. This holds true for both employment and personal services rendered by employees of a Canadian corporation in the US (This is as per Article XV – “Dependent Personal Services”, of the Canada US Income tax treaty).
*Effectively connected income: This income usually includes salary and business-related income connected to services provided in the US. There are other types of income that are also considered effectively connected income such as:
- Royalties received on foreign property that are connected to business or trade in the US
- Product sales made to a foreign country from the US
- Profit or loss as a result of sale of US property or its shares
Canada-US tax treaty deductions
Depending on whether your income is derived from a business/trade in the US through a Permanent Establishment (PE) or not, you will be allowed to avail deductions on your US tax liability. Canadian residents are taxable only if their business income has a PE in the US connected to it. If they are deemed to not to have a PE, Canadians still have to file their US tax return (including world income) but can claim deductions on their liability as per the Canada-US Tax Treaty.
Determining if your business/trade has a PE:
In the framework of the treaty, the following criteria determines if a Canadian service provider has a PE:
- A PE is a fixed location through which the non-resident conducts their business in the US. Factories, offices, management premises, etc are examples of locations based PE
- During any 12-month period:
- if an individual is present in the US for 183 days or longer and
- 50% of their total business revenue is comprised of revenue generated as a result of their service in the US
- During any 12-month period:
- If your business provides service for 183 days or longer
- Service has been rendered for a project or connected projects involving a client who is US resident or has a PE through which your business has been conducted
Note: According to the treaty, locations used for purposes such as storage, delivery and maintenance, purchase of inventory, advertising etc., are not considered as PE.
Tax filing requirements
Here is a list of Forms you need to file regardless of whether you are/are not exempt from taxation as a result of the treaty:
Form 1040NR (Non-resident Alien Income Tax Return), to disclose personal income from business/trade in the US
Form 8833 (Treaty-based Return Position Disclosure), to claim deductions if there is no connected PE.
Form 8840 (Closer connection Exception statements for Aliens) – To avoid US tax liability on Foreign (outside US) earned income
Form 8233 – used to claim exemption from withholding taxes on self-employment income as per the treaty
Note: For the US to determine the amount of Withholding tax to be paid for your income, your status as to whether you are a US or Foreign person must be ascertained. This can be done by your clients by them asking you to fill Form W-8 (W-8BEN, W-8BEN-E, etc). If you do not fill these forms, IRS reserves the right to deduct 30% withholding tax from your business income. While your income will be subject to US withholding tax, this may not result in increased net taxation as you can avail foreign tax credits (FTC) on this liability provided in Canada on taxes paid to the US.
US Filing deadline:
June 15th of following year for calendar year basis. General deadline is 15th of the 6th month from end of established fiscal year.
Other points to consider when filing
- Form 5471 has to be filed additionally for Canadian individuals considered US persons as a result of their residence and who operate in a Foreign corporation.
- It is important that your treaty based returns are filed on time as if you fail to do so, your income maybe subject to US taxation at a later date. This coupled with inability to avail FTC from Canada will lead to double taxation on this income.
You can also read about 2018 Expats Tax Due Dates, 2018 Tax Reform and Section 199A – Impact on Small and Pass-through business, 2018 Tax Reform – New Tax Rates for businesses, Qualified business deduction, depreciation rates and accounting methods and get the Reasonable Compensation Report for S Corporation and IRS Audit.