Who does this apply to?
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.
*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 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 determine 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 considered 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
Filing to claim treaty deductions for:
Canadian Corporations – Form 1120-F (US income tax return of a Foreign corporation), to disclose corporation’s income from the US and Form 8833 (Treaty-based Return Position Disclosure), to claim deductions if there is no connected PE.
Canadian individuals – Form 1040NR (Non-resident Alien Income Tax Return), to disclose personal income from business/trade in the US and Form 8833 (Treaty-based Return Position Disclosure), to claim deductions if there is no connected PE.
Filing for US tax liability:
Canadian Corporations – Form 1120-F (US income tax return of a foreign corporation)
Canadian individuals – Form 1040NR (Non-resident Alien Income Tax Return)
Note: Although individuals and corporations with a PE have to pay a US tax, they are eligible to claim Foreign Tax Credits (FTC) on this income. Additionally, individuals also need to disclose their income and returns.
US Withholding Tax filing:
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.
Filing deadlines for:
Canadian Corporations – April 15th of following year for calendar year based business. A general deadline is 15th of the 4th month from end of established fiscal year.
Canadian individuals – 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
- According to Canada’s Income tax Act, small businesses are eligible for the “Small Business Deduction”. This cannot be availed on income earned as a result of personal services rendered by the small corporation’s majority shareholder
- 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.
Read about Canadian Employed in US by Canadian Company, Canadian residents providing self-employed personal services in the US, Online Sales Tax Law Impact on US and Canadian Retailers Selling online in U.S. and US Canada Tax Treaty.