Individual contractors from Canada providing services in the U.S. in the capacity of self-employed individuals or utilizing their Canco should be aware that depending on the number of days present and percentage of U.S. gross business income, Article V, paragraph 9 of the Canada/U.S. Tax Treaty may deem them or Canco to have a permanent establishment in the United States. This stems from the 2007 Protocol that in this respect was effective commencing in 2010.
Since 2010, this means that income will be subject to U.S. taxation requiring the filing of U.S. federal and possibly State returns, however foreign tax credit is available on the Canadian tax return.
Previously, independents had to demonstrate that they were not carrying on business in the U.S. through a permanent establishment situated therein. This was generally arguable based on the facts, however there were many court cases in which the source country would attempt to invoke taxation.
U.S. payors are, in certain situations required to withhold tax at source as an amount for federal tax that is taken as a credit or installment of filing of the U.S. tax return unless a treaty based waiver is provided to them that is complete, accurate and truthful.
For those who are employees of a U.S. payor, you will be taxed as an employee and receive a W-2 information slip that is like a T4. If Article XV protection is available here then a waiver form should be supplied to the employer. You should also be looking at waivers to exempt the employer from withholding FICA or U.S. social security tax if you are covered under the CPP and if you do not intend to move to the U.S., to claim benefits. Depending on your profile, review of the Canada/U.S. social security agreement may be in order.
WATCH OUT FOR:
What is commonly missed is that days present for the individual providing the services is also important in determining if you are considered a resident of the U.S. for U.S. income tax purposes under the physical presence rules under the IRS Code. Should this be the case, your world income is subject to U.S. taxation unless one can claim Treaty protection under Article IV by filling the 8833. It should be noted the even if Article IV protection is available, international foreign information returns such as the 5471, 3520,3520-A and the FBARs are not exempt from filing because their criteria for filing does follow the treaty, as individual STATES DO NOT AS WELL. This will create additional compliance costs for those that are affected. At this date, only the 8938 incorporates a treaty-based position. Some practitioners do not agree with the filing of such forms where taxation is limited under Article IV, however confirmation of the foregoing filing requirements was confirmed at the NYSSCPA international tax conference in January 2015.
Page 5 of the U.S. 1040NR return requests information on your presence in the U.S. for the current year and in the preceding 2 years, as well as Visa information. This is how they may determine that your filing is deficient.
Those providing services in the U.S. as employees of a Canadian employer are also potentially subject to U.S. taxation because wages allocated to business days in the United States is considered U.S. source income and is generally not below the minimum threshold per the IRS Code. Article XV may provide relief here.
Those utilizing Canco as the provider of the services where paragraph 9 of Article V is applicable should be taking a second look at weather it makes sense from a Canadian perspective as one could be considered carrying on business in the U.S. by Canada and not be eligible for the small business deduction on the US source income in additional to the more complex federal and state U.S. corporate filings.
Where paragraph 9 is not an issue, U.S. protective return filing may be considered to ensure one can deduct allowable expenses in arriving at U.S. business profits should the IRS take a contrary view that you or your corporation are carrying on business in the U.S. through a permanent establishment situated therein.
You should consult with your professional advisor on all related matters.
Original Post By: Larry Stolberg
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