Incorporated. 6-12mo contract in US. Taxes? TN1? Help.

Hello,

I searched for half an hour, but they only partially answer my questions. Most posts are about jobs, but I am an incorporated consultant that work as a software developer/engineer. I get a lot of conflicting information.

Here is my situation:
- I'm incorporated, 1 person consulting business.
- I got a 6 to 12 month high tech contract offer in the U.S. that I am going to accept.
- It probably will just be a contract but might someday be permanent, if I like the work a lot. (This won't be till a min of 12 months later.)
- I'll keep renting my apartment at home and still have several bills paying all year long in Canada.
- The company will pay me through my Canadian corporation
- I'll be renting a pre-furnished room at a friend.
- I will be frequently visiting Canada on a roughly monthly basis.
- I plan to return to Canada after the end of the contract (likely in early 2010, if it is a 12 month contract)
- I have a common law spouse in Canada which will stay and live in Canada (for now), as a home maker.

I need quick answers:
1. The recruiting agency is asking for a TN1 form for them to fill out. Do I apply for a TN1 even if it's a company to company contract?
2. If I have to get a TN1, is it safer to make the first trip by flight or by car? I've gotten more hassles crossing the border on the ground than in the air.
3. I plan to bring a friend's vehcile down. It is a loaned vehicle for two months until I earn enough to buy my own vehicle. (Worth less than $3000) I am as a supplemental driver on the insurance. The border has strip searched this vehicle twice the last two times I drove it past the border, and before letting me go. I have no idea why this vehicle seems redflagged. I am concerned, does this past strip searching affect my TN1 approval? I have no criminal record in either country.
4. I keep hearing it is best that I keep my tax home in Canada. Is this true and legal even if potentially I work past 6 months?
5. If I must switch my personal tax home to US, can I legally split my income taxes between US and Canada? First 6 months in Canada, last six months in US?
6. Will my Canadian driver license (expires late 2010) stay valid even if I am out of Canada for almost all year?
7. Can my rent be 100% tax deductible, paid for by my Canadian corporation?

I will have more questions, but this will get me started, as I need to learn everything I can before I start working in early February. I'm mighty confused about whether I need to fill out a TN1 even if it's contract-to-contract.

More info towards #2,4,5: A friend of mine suggests that because I'm at the start of a tax year, I might not need to worry about where to put my personal tax home, until I am close to 6 months through the contract. Just in case I come back home before 6 months. The question is... Should I fill out a TN1, even if keep my tax home in Canada? Does TN1 imply my personal tax home should be the U.S.?

From the sounds of it, basically all you need is the job offer letter from them and you can get TN-1. But they couldn't easily pay you through your corporation. I think you can legally can do it, but you would end up having to file an 1120-F every year and paying US corporation tax on your US-source income (minus your costs of course, like your US salary) and US corporation tax is fantastically higher than CCPC tax in Canada. If all of your income is paid out as salary then there is no corporation tax of course, but if you're going to do that then it's far simpler just to go on their payroll directly and get a W-2 and file a 1040NR, which is a much easier form to fill out than 1120-F.

Bear in mind also if you wanted to pay yourself from your Canadian corporation in the US, you would have to get an EIN and do US payroll withholding and issue yourself a W-2 which is just an enormous hassle. If it were me I'd just go on their payroll and let them worry about it.

You cannot move your tax home to the US for two reasons - the first is that it sounds as though you own a CCPC, and to maintain CCPC status the shareholder(s) who control it must be residents of Canada, which obviously means their tax home is Canada.

The less sticky problem but still a problem is that TN-1 requires "non-immigrant intent" which means you must maintain residential ties to Canada which once again means you have to keep your tax home as Canada, although that one is a bit iffy because once you're in there's no easy way to stop you.

Read this. This gives you a brief overview of how to do taxes in a personal situation. IRS publication 519 contains more information. Also read pages 24-25 of IRS publication 515 which explains how non-resident alien withholding works.

1. you need a job offer letter off them as required by the rules for TN-1;
2. Doesn't really matter;
3. Hard to say, but if you're in the US over a year you need to formally import the vehicle which is impossible because you don't hold the title;
4. Yes as explained above. You can either file Form 8840 with your 1040NR to claim a closer connection to Canada or file a Form 8833 to claim a tax treaty provision that you live in Canada with your 1040NR or 1120-F at tax time;
5. I think you're talking about filing dual-status which you do when you move your tax home and this is explained in IRS publication 519 - but you can't do it because your corporation is a CCPC;
6. Yes it will, and you're claiming all kinds of things to say you're still resident in Canada so there's no problem there. The real question is what State law says in the State you'll be working in as most States require you to get a DL if you have a job there;
7. If you want to go that route, it would be a deduction against your US corporation tax (if you had any, because your salary in the US would also be a deduction) because it's an expense of doing business in the US, not Canada. But likely your rent would be more than the tax so there's no way you could claim the full amount or anywhere near it. And to even file for it you would have to engage in a lot of paperwork to register your corporation in the US.

Bear in mind Canadian personal income tax rates are higher than in the US and once you claim a foreign tax credit in Canada you effectively end up paying the Canadian rate, because you would have to claim you still lived in Canada.

I knew it could potentially get this complicated. Your information is very helpful, but makes my decision a bit difficult.

I contacted them and they want to pay me directly corporation-to-corporation. They asked me for my Canadian corporation liability insurance and articles of incorporation (Which I already sent fax copies of) so my corporation is already involved. It looks like my paperwork may become 'that much' more complicated.

- It is very likely I will be living more than 6 months total in the US even though I will be keeping strong relationship to Canada.

- What if I convince them to let me do some of my work in Canada? Would this allow me to keep my personal tax home in Canada and pay me a Canadian salary instead of a U.S. salary? This would seem to appear fine for a short trip down ("business trip"), but a 6 to 12 month contract is a whole different ballpark.

- Should I try to convince them to put me on their payroll, even if it lowers my gross hourly rate, just to simplify things massively?

- Any special considerations for TN1 when I'm working a corporation-to-corporation contracts?

I would try very hard to get on their payroll frankly, otherwise it will be a nightmare with your taxes. Essentially you will end up in a situation that say, GM would be in, but you're doing it all for only one person. In fact it's even more complicated than that because your CCPC depends on your resident status and GM would be a regular corporation.

You have to pay yourself based on where the work is performed, so you would issue yourself a T4 for the work done in Canada and a W-2 for the work done in the US. There is a provision in the tax treaty that says you don't have to set up a US payroll if you are in the US less than 183 days and earn less than $10,000 while you are there.

That might be of some use to you, because you control the payroll so you could pay yourself the equivalent of less than $10,000 while in the US and spend less than 183 days there and exempt yourself from an awful lot of paperwork.

However you need to be able to justify that position to the IRS, if your corporation is billing say, $50,000 to the US corporation, and you are the company's only employee in the US and you only pay yourself $9,000 then obviously it looks like tax evasion. (Because it is).

What I would do is simply explain to your client that you don't want to register your corporation in the US and set up a US payroll situation purely for yourself and would prefer to be paid through their payroll and have them issue you a W-2.

Then all you have to do is declare your US income on your T1 every year and claim a foreign tax credit, which is to put it mildly, massively simpler.

It also makes TN-1 simpler too because you have a paycheck that matches the address on the job offer letter.

I don't know about you, but the reason I have a CCPC is because you can control your payroll which in turn means you can control to some extent how much tax you pay - however the logic to doing this in the US doesn't hold up as well because US corporation taxes are much higher and US personal income taxes are much lower, so it makes more sense to be directly employed by the client.

You will however have to file as a non-resident in the US, so you will at the end of the day pay effectively the equivalent of Canadian personal income taxes on your US income once you've claimed the foreign tax credit. No way out of that one short of dissolving your CCPC, or at least changing the status to a regular corporation and simply running no money through it so you don't pay any corporation tax.

I have decided to proceed with the paperwork headache. The extra revenues is sufficient enough to pay for the extra accounting and legal costs ($4000+) as this contract is about 50% more than the equivalent I can get locally. It is a whopper of an accounting cost -- there are cross border tax accountants in Toronto and Vancouver with closely connected cross border tax attorney/lawyers -- but the value of the contract seem to outweigh this.

I really dislike the paper tiger, but I'm going to do this legally for 2009 and stay less than 183 days for now. I may also possibly be able to work at home in Canada from time to time, to stretch this for the remainder of 2009. In the unlikely event this becomes permanent for 2010, this may all change (and I'll file 2010 differently or sever connections to Canada if necessary -- but this is not feasible for 2009), but I am proceeding on the assumption that this is just a temporary contract. Which it is, just the option of a potential offer exists in the future -- and fully expect to return to Canada many times this year.

Just now need to do a little tax pre-planning...

Goal/Assumptions now for year 2009:
- Proceed with business-to-business contract.
- Keep my CCPC for 2009. (The scary 1120-F will probably come into play.)
- Stay Canadian resident, which I was already planning to do.
- Stay less than 183 days in the U.S. for year 2009.
- My spouse is staying in Canada, I pay all expenses including rent, bills, etc in my own name -- very substantial connection to Canada. This was already the plan all along, so should satisfy the CRA side of things.
- I am only renting a fully furnished room in the U.S. at a friend's house; very loose connection to U.S. Utilities, Internet, phone provided. The only bills I pay in U.S. may be a U.S. cellphone and possibly a single U.S. banking account at a U.S. institution (possibly a U.S. branch of a Canadian institution).
- We have a cottage in Canada.
- Commute almost every weekend (5 to 7 hour drive, depending on whether we go home or to our cottage). At the minimum, every other weekend. This will put a 6-month contract below the 183 day limit, keeping me a resident of Canada.
- Use tax treaty to avoid double taxation on personal income. U.S. personal income (from U.S. payroll) deducted from my Canadian income. (at least federally -- still need to research more about provincial/state tax)
- Do not plan to make a profit within my business; all will be spent on business expenses or salary. This minimizes my U.S. corporation tax. (I do need to figure out how to maximize deductions on both sides of the border -- for example, I need to figure out what expenses qualify or don't qualify)
- I'll do withholding and in addition, set aside a reserve fund for unexpected tax costs, and still have more net leftover than my other options.
- By the time the first cheque arrives, have the right accountant/legal advice in place to pre-plan my taxes for minimal tax impact, while paying myself as much salary as feasible. And of course, to make corrections to the above plan (if any of these listed bullet points turn out not to be feasible). The good news is that such accountants exist very plentifully in Vancouver (lots of cross-border workers due to Seattle/Microsoft) and Toronto (business capital of Canada) - just damn expensive. Many already have experience with single-person businesses including IT consultants going south. I may have to work with such an accountant over the Internet, with just an occasional FedEx.... Means I have to be willing to "pony up", but that's just a cost of doing business...

I am consulting with accountants/attorney to make sure I know what paperwork need to be done, and I'll pay them to do it -- I hate having to -- but just have to do my best to keep IRS and CRA happy, while not being double taxed. I do finally have a cost estimate (under $5000) for all the extra paperwork, which while a huge overhead, still is worthwhile as long as I work hard to keep it legal while minimizing taxes. And even after this cost, still earn more than my other options such as local contract in this economy state...

Now, based on this revised plan, please inform me if I made a huge mistake (considering most of the paper tiger will now be handled by me paying a few grand to a cross border accountant, I'm bracing myself for this expense already)

If you want my opinion on it I wouldn't even contemplate doing it the corp-to-corp route. You will basically end up working as an accountant rather than doing your job it will be so complex.

If you've got to do US payroll (i.e. you're over the $10,000 limit) then how long you're in the US doesn't really matter, the 183 day limit for "substantial presence" is only one of the tests, if you have a spouse in Canada and strong residential ties then it's irrelevant how long you stay in the US, all you need to do file as a non-resident.

Basically you've got to do a multitude of things in addition to what you normally do (and this is just what pops into my head, it's probably not all of it):

Register your corporation in the US and get an EIN;
Set up a US payroll so that your corporation can pay you in the US - you have to do this for two reasons (a) you're working in the US and earn over $10,000 while you're there so legally you have to and (b) you need to be able to apply your US salary against your US corporation tax and the only way to do that is via a US payroll;
Every year your corp will have to file an 1120-F and an 8833 and you will have to file a 1040NR and an 8840 from the sounds of it;
You will have to pay corporation taxes in the US on your US corporate income (unless you pay out all the earnings and reduce it to zero) and US personal income taxes on whatever you pay yourself;
You'll have to do a State corporate tax return for your corporation;
You'll have to claim a foreign tax credit on schedule 21 for your CCPC (and likely you won't get it all back if you have US corporation tax to pay because their rates are higher);
You'll have to claim personal foreign tax credit on your T1 for Federal income tax as well as a provincial credit for any State income tax;
You may end up with four sets of tax withholding payments - payroll in the US and Canada and corporate in the US and Canada. In fact it might even be six or seven sets, because you may have to do State and Provincial corporate withholding and personal withholding in the US.

And so on. Hand me a loaded gun please. Basically every month at least you'd be filing various things.

If you're on their payroll, basically you just file a 1040NR and an 8840 using the W-2 they give you and claim foreign tax credits on your T1 in Canada using the W-2. Your corp can still pay you for any work you do in Canada as per usual.

Canadian corporations also have to file an informational 1120-F and an 8833 if they have US-source income but that's a completely different ball game to having to actually pay US corporation tax, do withholding, set up US payroll, claim US deductions etc. ad nauseum, which comes into play when they have employees working in the US who are over the $10,000/183 day limit.

It also makes TN-1 easier because they're directly employing you, rather than employee X of company Y in Canada (although that's not a tremendously big deal).

Another way of doing it would be to have two corporations, i.e. set up a US corporation, that would in fact be even more complex because then you would have two employers but finding accountants who could help you with it would be easier as it's more bog standard from their perspective. The only wrinkle is that you'd have to use a C-corp because only US residents can use S-corps.

With the contract signed, I have a little more leverage now, and they are now slowly considering putting me on payroll. I'm working on it, give it time.

There are other options I may do, such as working in Canada, while visiting the U.S. from time to time, which may allow me to exempt myself from a lot of the paperwork as you say.

I have a different, more immediate issue, however... Visas. I've been down on a TN before (Systems Analyst), but I am hearing the border is more strict about this. (It has to do with me having 16 years of work experience, but not having a university diploma/degree). I'm researching options such as other visas such as B1, H1-B, etc. However, some take much longer, and others may not be suitable. My original working assumption was to use the TN because I have done this before, but now I am not too sure...

If you are actually a systems analyst then TN-1 is the way to go. H-1B is a crap shoot and it wouldn't be issued until April even if you got it and not be usable until October. B-1 doesn't allow you to work in the US except in limited situations.

Frankly I'm not clear nowadays on why systems analysts need to be physically present in the US except for planning meetings and maybe doing interviews. Just do it over a VPN. Unless you're physically going to have to put the equipment in yourself.

The only thing I've ever heard about systems analysts having a hard time getting TN-1 (assuming you've got enough experience/qualifications) is that CBP do not allow programmers in under this category, because in their field manual it says over and over again that there is no TN-1 category for programmers and systems analysts should only do a "small amount" of programming.