Canadian on a TN, can I do corp to corp ?

Hello,

I moved to the U.S. from Canada last year and worked most of 2007 under w2. I was basically his employer working at a customer site.

My employer is suggesting to switch me to 1099 sometime this year.


My questions are the following:

1. 1099 means i'll be paying the full 15% FIRC, instead of the 7.5% under w2 ?

2. Also 1099 means i'll receive the pay untaxed and are responsible to paying federal and state and other taxes myself?

3. Does this mean that with 1099 u are paying more taxes, about 7.5% more in taxes, unless u really can get away with expensing a lot? but then again what can u expense on a 1099 that will drastically save you taxes ?


4. Is a better idea to go corp to corp ? Meaning should i open a consulting company in Canada, ask my u.s. employer to pay my company in canada, i end up paying only canadian corporate taxes and no u.s taxes at all ? Is this allowed under TN visa. My tn visa is a sponsored one.

Any help would be much appreciated. Thank you

Joseph Spade

If you are on a TN-1, presumably you must have residential ties to Canada, so you have to pay Canadian income taxes. Any income via a 1099 or a W-2 is thus subject to the same rate in Canada. You do a T1 for the place in Canada you have residential ties to and declare any income from your W-2 or 1099 on it.

Read this: http://www.cra-arc.gc.ca/E/pub/tg/p151/README.html

You have to file a 1040NR and a Form 8840 to claim the tax treaty exemption, so any withholding goes to Ottawa. Any additional tax you have to pay you will have to send in with your T1, or you will get a tax refund, depending on what was withheld.

Obviously a 1099 is easier because there is no withholding so you calculate your tax and remit it to the CRA with your tax return.

The CRA may make you subject to installment payments, but you have to check the regs for that one.

If you are on a TN-1 then that is intended for visiting workers, so I can't see any problem in setting up a Canadian corp as you are still a resident of Canada for tax purposes, so you can claim the CCPC exemption. Then you simply invoice them and avoid the whole US tax thing altogether, which I'm pretty sure is how most people do it (it's how I do it).

The real problem is getting them to pay in Canadian dollars. I've never managed it. Exchange rates cause your taxes and invoicing to be a real PITA.

Remember on the invoices that the GST is zero-rated because technically it's an export.

There is a tax rule in the US where the IRS can deem you an employee of a company if they're your only client, but I wouldn't worry about that too much given that you're not even resident for tax purposes.

Hello

Thanks for the reply. Couple more questions if you may.

1. Can this employer (who will be my client if I open a corp)still sponser me for the TN visa?

2. From a tax prespective, am really better off with a corp than 1099, am i paying less tax with a corp ?

Thanks

1. Not sure. If you are their employee that means direct labour and that means a W-2. And you must be their employee to do TN-1, but you need to check the nitty gritty with one of the people who specialise in TN-1s on here.

2. Depends on how you structure your income. You probably won't pay less tax unless you receive substantially more income than you can spend in a year and use the income leveling technique to pay less tax.

Various situations here:

Your corp receives $100,000. You pay yourself a salary of $100,000. In this case the salary is fully deductible against corporation tax, you pay the same tax as you would if you had been paid directly, the advantage is that you get to route your money through Canada and avoid some tax hassles in the US. But you will have to do all the corporate paperwork in Canada so I'm not sure that helps much.

Your corp receives $100,000. You pay yourself a salary of say, $37,000. You have no other company expenses (you probably would but that makes it complicated to explain), so you have to pay corporation tax in Canada on $63,000, which will depend on the Province you are incorporated in. You pay personal tax on $37,000. However, because $37,000 puts you in the lowest tax bracket, the combination of that tax and the corporation tax liable will be substantially lower than personal income tax on $100,000. If you carry on paying yourself $37,000, then you can use the money in the corporation and invest it. The advantage is that once corporation tax is paid, you can choose as and when to pay yourself income and you can save a lot of money on tax. The snag here is that you have to artificially reduce your income obviously. Also if you ever move permanently to the US, you can also reduce your tax payments even more by drawing down the income from the corporation and paying even lower US income taxes (bear in mind though you couldn't have income coming into the Canadian corporation at that point as you would no longer benefit from the CCPC exemption, which means your corporate rates would be way higher).

Another option which is best avoided is to dump all the money into a corporation and pay yourself a dividend, this saves you all the T4 guff and setting up withholding and is far less paperwork, as you just issue yourself a T5 as and when, however dividends are not deductible against corporation tax so this is not a sensible idea unless your paperwork situation is so complex that it is cheaper to do it this way than hiring an accountant.

But generally speaking if your income is say, $70,000 a year, a corporation is no advantage. Plus they can be a major headache, have a look at a T2 return and some of the schedules you have to fill out. It takes me an hour to do a T1, it took me a week (40 hours) to do a T2.