Love First But Business Priorities Too

Steven
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Joined: 28 Sep 2007
Posts: 1662
Location: Calgary

Posted: Wed Jul 02, 2008 10:20 am

 

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Actually let me give you a few scenarios and you can see which one fits you best so you can understand the situation, because I don't really think I'm understanding yours:

1. You work in Canada full-time for a corporation. The corporation has clients in the US. There is no contact other than occasional meetings. In this case the individual is paid in Canada so their tax situation is purely Canadian. The corporation however has to file Form 1120-F and claim a tax treaty exemption on Form 8833 because it has trade in the US. This is the case even if there is no actual income from the US and even if the tax treaty exemption means you have no tax to pay in the US. The client can file Form 1042 to report the income to the IRS (there are situations where they may want to and it can be to your advantage for immigration reasons if they do) but there is no withholding.

2. You work for a Canadian corporation. That corporation has a "fixed base" in the US where work is performed. That can mean an office, house and is pretty broad. You perform some of the work in the US (under a non-immigrant work permit) and some in Canada. In that situation the Canadian corporation has to file Form 1120-F and an 8833 and is liable to US tax on income from US sources (generally). The US clients have to do withholding on Form 1042-S and 1042 listing the corporation as the payee. The individual working for the corporation probably also has to file a Form 1040NR to cover US source income and an 8840 or maybe an 8833 depending on whether he meets the "substantial presence" test. Both the corporation and the individual independently claim foreign tax credits in Canada when they file their Canadian returns.

3. You are a Canadian working for a Canadian private corporation which you own 100%. You marry an American and become a tax resident of the US (this happens automatically with that type of visa upon entry), or for some other reason the owner moves his tax home to the US.

In this situation the Canadian corporation automatically ceases to have CCPC status and is subject to standard corporation tax rates, and the owner becomes liable to departure tax. The Canadian corporation still has to file as outlined in (2) above, however the individual has to file a standard 1040 or a dual-status 1040/1040NR if they moved during the year rather than on January 1st. The individual is then taxed on worldwide income in the US, not just US source income and has to sever residential ties to Canada to avoid dual-taxation.

You have to do it this way because a CCPC corporation is a "residential tie" if it depends upon your residency to have CCPC status. Note IRS publication 519 gives poor advice (and on the phone) because they don't consider foreign tax laws, they always assume you want to move your tax home to the US, but that is not going to be the case in this situation (and many others). They casually mention that you can claim a "closer connection" to Canada and that is what Form 8833 is for.

And that, failing a brain fart, is how it works. But obviously your situation may be slightly different than those scenarios.
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Steve.

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seekersharer
New Member



Joined: 29 Jun 2008
Posts: 8
Location: Kitchener

Posted: Mon Jul 28, 2008 9:42 am

 

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These responses may seem somewhat scattered, but my attempt to form a logical direction for this process feels that way. scattered.

I think the fact is, eventually I will obtain my permanent status via marraige. But that might not occur for 18-24 months as our marraige decision has a number of other factors involved. spousal support issues, ages of my kids in Canada and more.

Thus the priority to me of the business visa process.

My attempt at a L1 might be hard to pull off as I am the only employee of the company. Just a few questions in an interview at POE, they'd likely figure out my company in Canada is pretty much non-existent without me there if I am starting a new (sister/affiliate/subsidiary) company in the US. So a L1 seems like a bit of a stretch. Correct me if I am wrong. It might be more favorable if I were to have an employee/partner in Canada who was working to grow the business there. That might be the way to potentially make the L1 work.

In the ongoing research I have been doing, I was encouraged to think about obtaining a TN visa, requested by my own Canadian company for work I perform in the US on behalf of multiple clients. This is an interim step only. I chatted briefly with a immigration lawyer who suggested that might be a viable alternative. He's worked on a few and had success he claimed. Any thots on that? Any success you've heard of?

That allows for at least a year ( potentially 3 soon) to have frequent access to the US. If I got married while my TN is in place, I could change status?

These are issues related to my ability to "work" in the US.

These to me a somewhat separate issues to the who taxation issue. As I dig even further, I realize that I need to get my act together corporately and file all the necessary paperwork. That is underway.

But that led to talking to a CPA in California (not willing to comment about immigration/ cross border issues) and learned that I can start an LLC taxed as an S-Corp without being a resident or having papers. But I couldn't pay myself without them. ( I could do dividends)

So starting to wonder if I should set up an independent US company, it pays a management fee to the Canadian company. the Canadian company pays me a salary. This plus a partner in my business in Canada might facilitate the L1 process more effectively.

Any thots?

T
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Cheers!
Tom

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Steven
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Joined: 28 Sep 2007
Posts: 1662
Location: Calgary

Posted: Tue Jul 29, 2008 11:31 am

 

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You can't start an S-corp without being a resident of the US for tax purposes, i.e. move your tax home there, and that creates all the consequences with departure tax, your corporation becoming a regular Canadian corp. etc. So yes you can do your plan, but at one end or the other you're going to get hit with the full whack of corporation tax, because either you need a C-corp in the US or a regular corporation in Canada, you can't do both simultaneously.

I suppose you could do a C-corp in the US, but all the invoicing and so on is done via the Canadian corporation and the C-corp is basically a paper entity that you're using to make your L-1 application look more convincing. Problem with that is you're supposed to pay US corporation tax using Form 1120-F on your US-source income, so in reality there is no tax advantage unless you lie (and of course you can always evade taxes by lying). But you might want to check into what the rates actually are (usually 36% I think).

If there were no departure tax, it would probably be better to move your tax home to the US as you will have to if you get LPR status, and then the Canadian corporation essentially becomes defunct but is a paper entity for the purposes of the L-1. The problem is of course it has to be largely valueless to avoid the departure tax. So you would have to pay out all the cash in the company first to do it that way - which may or may not be a problem depending on how much cash there is (because of income tax, obviously).

But that would work, because all of your income would probably be US source anyway, so there would be no corporation tax to pay in Canada (so it doesn't matter that it's no longer a CCPC) and you can use an S-corp to lower the rates (if you haven't figured it out yet, US corporation rates are higher than in Canada - the benefits of using an S-corp are not as good as using a CCPC in Canada, especially if you are a high-income earner).

Once you've got LPR status if you do it that way you just dissolve the Canadian corporation.

The only thing I'm a bit unsure about is the ownership, there may be some catch in the tax laws I'm unaware of, i.e. one corp has to own the other corp in order for the L-1 to work so there may be implications there because one corp is earning all the money and there is nothing in the other. I don't think there is, but you may want to check with an accountant who specialises with corporations. Certainly you don't want to put any money into the other one, because not only is there income tax but the corp would be subject to CGT when the other was dissolved.

The new tax treaty (just coming into force) requires proportional payment of tax, i.e. as an individual you have to pay tax based on where you are when the work is performed, plus it also eliminates the "fixed base" provision and re-defines it as a "permanent establishment", i.e. more than 50% of the work is performed there or you physically present for 183 days or more where the work is performed.

This makes it harder to fudge the tax situation.

Isn't it great that the law has actually changed since I posted above.

The other thing to bear in mind is that if you do set up an S-corp (plus all the payroll stuff), pay out all that money, remove CCPC status etc. and then at some point USCIS decide they don't want to let you in, your tax situation is going to be one for the ages, really. I think my head would explode.

TN-1 isn't an option because it has be an arm's length situation according to the regs. I've heard of people who've done it, i.e. set up a corporation, get their friend to write the letter on company letterhead and that gets you TN-1 but it's illegal. And you still have to set up a US corporation anyway and so the situation from a tax standpoint is pretty much the same as you have a CCPC already. The only difference would be that one doesn't have to own the other.

Doesn't matter what visa you use really, E-2 would probably be the best way but you've still got to figure out some way of moving the business to the US without getting hit by lots of taxes.
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Steve.

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Steven
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Joined: 28 Sep 2007
Posts: 1662
Location: Calgary

Posted: Wed Jul 30, 2008 10:46 am

 

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Oh yeah, bear in mind non-resident aliens cannot set up S-corporations. However I'm not sure that applies to people who have moved their tax homes to the US. Even if it does, I can't see how the IRS would ever figure that out.
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Steve.

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seekersharer
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Joined: 29 Jun 2008
Posts: 8
Location: Kitchener

Posted: Fri Aug 22, 2008 7:43 pm

 

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I can however own an LLC as a foreigner. A California accountant I talked to suggested that the LLC be taxed as a S-Corp, not be an s-corp. (Still figuring that one out)and once I get Visa I could be paid.

I was intrigued by your post to someone else on the boards when you suggested they start a US affiliate or subsidiary that owns their Canadian Corp. I like the idea but want to know if it has legs.

What it might allow me to do is start a US LLC and have it sponsor my L1A. Or get an L1A for 1 year to start-up a US affilate/sub.

i realize I need to then get staff in Canada. somewhere I read I should have at least 3 full time staff in Canada.

I can rent office space, get the company growing down there. slowly transition the big income to the US and go from there.

At that point, if I get married, change my status and then dismantle the canadian company, or sell it.

Thots?
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Cheers!
Tom

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Steven
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Joined: 28 Sep 2007
Posts: 1662
Location: Calgary

Posted: Sun Aug 24, 2008 10:18 pm

 

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I think what he means is that the full amount of corporate income is paid out as salary, thus it would be subject to personal income tax rates like an S-corporation. However the tax forms would be the same as a C-corporation. The reason S-corporations were invented by the IRS was to save on all that paperwork, but there's no reason you couldn't still do it that way.

A foreign corporation cannot own a CCPC under Canadian law, if it did it would cease to be a CCPC and be taxed at the full corporate rate. However I think a CCPC can own a US corporation, provided the total income remains under the CCPC limit.

I think what you really need to do in your situation is to kill the CCPC, i.e. have it have no income and remove the money that's already in it so you don't get hit by departure tax. That will depend on how much money you have in it obviously, because if it's a lot you will have to pay a lot of income tax. Then simply change the status of the corporation to a regular provincial corporation.

You can have $50,000 of capital gain and not get hit by departure tax, so assuming your only asset subject to departure tax is your CCPC, reduce the value of it to less than $50,000, cease any income to it (or at least pay it all out as salary every year after you've moved your tax home to the US) and that's it basically. Then the US corporation can take ownership of it to establish the link, and you pay yourself through the US corporation and you can move your tax home to the US.

I'm not sure what the implications of an S-corporation owning a Canadian corporation are or even if it's allowed, you'll have to check. It will be a lot of paperwork if you use a C-corp because of the EIN, all the withholding taxes, etc. but I assume you already do that with your Canadian corporation.

Visa-wise you've got a fair number of options, E-1, E-2, maybe L-1 which would be the best because it's the simplest, if you can meet the requirements for it.

I wonder if USCIS accept an S-corporation as valid for intra-company transfer for an L-1A. Hmm. Wonder if they're even bright enough to catch on.
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Steve.

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seekersharer
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Joined: 29 Jun 2008
Posts: 8
Location: Kitchener

Posted: Mon Aug 25, 2008 7:00 am

 

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Bright enough to catch on?

That makes me think it might be a bit of a stretch to pull it off. Or at least suspect.

Maybe I should just get married first.

Seems that might be the easier way.
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Cheers!
Tom

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Steven
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Joined: 28 Sep 2007
Posts: 1662
Location: Calgary

Posted: Mon Aug 25, 2008 4:10 pm

 

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Well to enter the US for immigration purposes it will be easier, yes, but you need to make sure you've got the tax situation straight before you do that, i.e. the implications for your CCPC and the departure tax.
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Steve.

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