Love First But Business Priorities Too

Here is my situation

I operate a private corporation in Ontario. I am the only shareholder and only employee. I am pretty much a virtual company. I can work from anywhere. I have subcontractors who do most of my client work for me. 85% of my clients are in the US. 10% are international. 5% in Canada.

My company pays my salary. My clients pay my corporation, not me. But I am the one they are hiring. I provide strategic marketing advisory services, coaching and consulting. I also have an active web marketing management division that manages my clients entire web marketing function, and I have a video and audio marketing division.

I have a permanent residence in Canada. It is not owned.

Now to add to that. I spend approximately 2 weeks a month in California with my "girlfriend/fiance" We are planning to get married in 1-2 years time and I will eventually (after my youngest child here is done high school) move to California full time.

Currently, I travel frequently to the US on business and also I travel for personal reasons. I have never had a problem at the border. But reading through this forum concerns me. I might just have been getting lucky.

Sometimes I travel to meet a client or speak at a conference, then fly directly to California to spend time with my better half. Sometimes - I just go to visit a client then back to Canada. Most times, I only go to spend time with her.

But I do conduct business while I am staying with her, ie, project management, writing, client interactions, tele-coaching and my own ongoing marketing of my business.

I have no visa of any kind. I do have a well stamped passport though.

My question(s).

1. what's the best way to ensure I can continue to visit my significant other regularly while running my business?

2. Should I be looking for B1 or L1 visa options? I am planning to start a business in California as soon as it makes sense to do so. That could be immediately or in 12-24 months.

3. How should I clear US Customs in the interim? What should I be saying? What's the best approach?

4. What's the path I should be taking at this point to make it easier to get married and run my business from US in the next 12 -24 months?

Thanks for any information or guidance you might offer.

Tom

B-1 covers meetings, etc. Also covers limited amounts of company-related training.

If you start an office down there I think your best option is to use the L-1 intermittent entry category. This is a pretty rare thing and I've never encountered anyone who has it. Basically it allows you to enter the US for up to six months a year to conduct business there through your US office and you can renew it forever. Show USCIS evidence of that, application fee is $820 at the POE.

However by far your biggest problem is the tax situation.

If you get married to an American, especially if you get LPR status, then essentially your tax home immediately moves to the US. This means you will be subject to Canadian departure tax. It's basically a capital gains tax, but in this situation it sucks really badly, because you have a private corporation.

Ergo you cannot easily dispose of the asset to avoid the tax. If your corporation started from zero, you are subject to departure tax on whatever the assets of the company are now. I think it's 25% at the moment, so if your bank account has say $200,000 in it and that's the only asset the company has, you owe the CRA 25% of that, although you can exclude the first $50,000 of the capital gain, so the tax would work out to $37,500. (Check with an accountant though, I always get confused over the exact rate).

In addition the corporation would lose it's CCPC status and be subject to the full corporation tax rate.

And if that's not bad enough, the US doesn't recognise the Canadian departure tax, so they assess the cost base of the corporation as the date you took ownership of it, not the date you left Canada and paid the departure tax. However there is a foreign tax credit in Canada if you ever decide to sell the corporation once you're in the US.

Basically you become a tax prisoner of Canada.

The trick to it obviously is to pay out all the assets of the corporation as income and then dissolve the corporation before you leave, but then you might end up paying as much or more in income tax. If you've got the time, the solution is to pay down the assets of the company over the next few years, i.e. pay yourself more so the corporation has less than $50,000 in assets (assuming you have no other assets subject to departure tax, e.g. stocks or mutual funds outside of a Canadian tax shelter, such as an RRSP.)

Also a bit of advice on the border crossing thing - a copy of a 1042-S from one of your US clients is pretty solid evidence you live outside the country and intend to stay there. Also establishes a business meeting reason if they hassle you over B-1 status, which does happen occasionally. "Here is an IRS Form 1042-S proving this company is a client of mine and pays me for services conducted outside the US". Doesn't get better than that.

Also be careful about starting a "business" in California. The structure of how you go about doing it is extremely important for tax reasons. If you're not a US resident you cannot use an S-corporation so that means the full whack of US corporation tax (which is high), there is a tax credit I think but T2s are not easy to fill out at the best of times. Better to run it through the Canadian corporation while you a resident of Canada but that means all your income from US clients is still subject to US foreign withholding.

Wow. lots of action items it appears. Thank you for your input Steven.

Naivety is not an excuse, so I am going to sit down with my accountant and work through your response. Don't want to get in a bind. And for the future makes sense to start planning now.

Related to 1042-s >> As a corporation I invoice clients. I have never been asked to fill out a form of any kind that I can recall. So how do I go about doing that so I have something to show at the border if need be. Should I ask my clients to fill out a 1042-S for me? Do I then need to prove to them they are not required to withhold? Is there a specific form for that? What's the best route for that? Seems you have some experience in this area.

Will have to think more about setting up co. in California. Have to do that before L-1. And given all you've suggested, don't want to rush into it.

Hopefully the 1042 option will give me more support at the border should I ever need it.

t

All payments to you or your corporation are subject to non-resident withholding by the US clients, they must withhold 30% (minus any deductions you're entitled to) and report it to the IRS on Forms 1042-S and annually on 1042. There are some limited exceptions, and you can enter into a withholding agreement with the IRS to reduce the rate but I've never had to go that far. Have a read of IRS publication 515.

You have to report US source income on Form 1040NR (alien individuals) or Form 1120-F (foreign corporations), and then claim a foreign tax credit in Canada (at least as an individual). The general guide for the T1 tells you how to do it from a personal level, but you're using a corporation so that makes it more complex.

Form 1120-F can be a little intimidating. Pretty complex to work out your balance sheet too, you probably need to talk to the CRA on how to report the foreign tax expense and which GIFI code it is. I'm pretty sure you can use it to offset Canadian corporation tax but on a CCPC there might be special rules. (Yes there is, I checked, you claim the foreign tax credit using schedule 21 but any excess tax payment cannot be used as a loss against operating expenses like a regular corporation can).

It's simpler and cheaper than setting up a subsidary US corporation though.

I read this on a cross border business site in my research today.

"When operating in the U.S. through your own corporation, your corporation becomes entitled to gross compensation for your services on the basis of invoices rendered to the client, and is paid for these invoices without deduction.
This occurs because the corporation, unless it has a permanent establishment in the U.S., is exempt from U.S. withholding as a provider of "Independent Personal Services" as defined in Article XIV of the Canada U.S. Treaty"

How does this align with what you've just said?

Specifically, they are paying my company for services rendered, not person income? I'm confused.

A Canadian corporation is a "foreign person" and in this case it is performing "independent personal services". Corporations have to file 1120-F on US source income and individuals file 1040NR (unless the income is less than $3,400 total).

Whether they have to do withholding depends on where the service is performed. If all the work is done in Canada and you are not a US citizen or an LPR, there is no withholding. They can if they want to file a 1042 with code 3 for informational purposes (usually happens if they're filing 1042s for other reasons).

If you're doing the work in the US though or have a permanent establishment there, then there is withholding (obviously a bit of a grey area there, because incidental meetings don't qualify as work, especially if you're invoicing from Canada). If you meet the "substantial presence" test then they definitely have to do withholding, but they may have to anyway.

It's not clear from your post whether you work in the US or not, but it sounded like you do, so it sounds likely there would be withholding in that situation.

I think you probably need to talk to the IRS to establish the specifics for your situation. Obviously if you get an L-1 intermittent visa and start working while in the US, you are going to be subject to withholding.

I have to say I never get terribly wound up about this personally, because at the end of the day it's their tax obligation, not yours. Your only US obligation is to file a tax return for your US-source income. At the end of the day you still pay tax whether the withholding has been done or not. And you still have to claim the foreign tax credit to avoid dual-taxation.

Much obliged Steve. Very valuable information. It has caused me to be very clear on what I am doing and how I am doing it. Forced me to revisit things with my accountant. All very good.

Thank you. I'll likely be back for more. We'll see what the next steps bring.

Probably a good idea to read this: http://www.cra-arc.gc.ca/E/pub/tg/p151/README.html

That deals with individuals, rather than corporations, but it gives you an idea in simple terms of how the US tax system works.

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.

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