New tax law on working in the US while living in Canada?

Hi,

I am planning to work for a US company while living in Canada. However, I heard that since earlier last year, there was a new tax law such that a person can't be hired directly by a US company while residing in Canada unless the company has a Canadian office and the salary comes out of the Canadian payroll.

Can anyone please confirm this? I haven't been able to find any relevant information on it.

Thanks!

Where'd you hear that from? I'm thinkin' its a crock. There are probably a dozen people on this forum alone who are in the US on TN visas with employers who did not transfer them from a Canadian subsidiary.

Are you directly employed, i.e. you've filed a W-4 with them?

It's been the case since the year dot that if they have Canadian employees (i.e. in Canada) their business has to be registered with a Canadian business number, they have to fill out a T2 every year, do payroll withholding for Canadian employees etc. Because they are essentially a Canadian employer at that point.

Typically US businesses that have one or two non-resident employees in Canada don't do it that way, you register as self-employed, do all the withholding, invoice statement, balance sheet etc. yourself and simply invoice them as an independent contractor, as it saves them doing all the paperwork.

On the US end you have to make a tax treaty claim by filing an 8833 together with a 1040NR to report your US-source income. There is no US tax unless you physically do some of the work in the US. However you must file a tax treaty claim otherwise the client has to perform non-resident withholding (at 30%).

Have a read of IRS publication 519, 515 explains it from their end.

Form 8833 is tricky to fill in, I suggest you get an IRS agent to help you, call the non-resident helpline in PA not the regular one, they haven't got a clue.

Hi Steven,

Thanks for the reply.

I learned the new law in my last job. I was working at the Canadian office of a US company and wanted to apply for a job in the US office. I wanted to stay in Canada and work remotely which the hiring manager was ok with but the recruiter told us that I would have to relocate. Now that I am planning to work for a US company, I want to make sure that I can stay in Canada. And you have answered my question.

From your other posts, I think becoming an independent contractor is probably the better way to go, but I know little about it. Can you recommend some good reading on that (website, books etc).

Thanks again!

I'm afraid you have to plough through the rather tedious CRA and IRS tax publications. Have a look at the CRA guide for self-employed persons for example, and also IRS publication 519, which waffles on endlessly about what Joe Jimbob who lives in Tasmania has to do and then in some obscure table tells you that it doesn't apply to Canadians because of the tax treaty. Or worse yet, makes some off-hand comment that this situation may not apply to you if there is some tax treaty provision that modifies it (look at IRS publication 597 - which is now out of date because of the new treaty).

Essentially how it works is this, you either register as self-employed or start up a corporation and the corporation employs you.

You (self-employed) or the corporation invoices the client. From a tax standpoint you follow all the Canadian laws as per usual as anyone else would, the only additional bit is the tax treaty claim, which is 1040NR plus Form 8833, if it's a corporation it's 1120-F plus Form 8833. There is no US tax to pay so there is no need to claim a foreign tax credit. The client (if they want) can file an informational return with the IRS on Form 1042, as there is no actual withholding though it's not absolutely required. The other bit is Form 8233, which is basically to inform your client they don't have to do withholding and has basically the same information on it as Form 8833. I suspect this form simply makes your client's eyes spin in their head and then disappears into a filing cabinet never to be seen again, but there you go.

Where it gets much more complex is if you have to enter the US to work at any point, and under the new tax treaty tax has to be paid proportionally so there is no easy way around it. The only way I know of getting around it is if you have a corporation that employs you, and you spend less than 90 days in the US and earn less than $10,000 there.

In every other case you have to pay US taxes and there are basically several ways to do this.

By far (and I do mean by far) the simplest method is if your client can directly employ you, i.e. you fill in a W-4, they give you a W-2 at the start of the following year, you file as a non-resident alien (1040NR and 8840 or 8833) and they have to do NRA withholding for you (which isn't complicated if they press the right button in their tax software). You never use your corporation, the fact you are self-employed in Canada is irrelevant, you simply report the income from that W-2 on your T1 and claim a foreign tax credit.

Every other method is a frigging minefield, frankly. For example your corporation could employ you in the US, but first of all that is dicey from an immigration standpoint because you're not employed by the company in the US, what immigration status are you in? Second of all, the Canadian corporation has to get an EIN and do payroll withholding. Third, it has to pay US corporation tax (35%) on US profits. Fourth, the US salary (and other US costs) paid to you has to be declared as a cost on the 1120-F, which is complex to do. Fifth, the corporation has to claim a foreign tax credit and you won't get your money back as Canadian corporation taxes are lower. And there's also the 1042 your client has to do. And doubtless other bits I've forgotten. Essentially you're working the same way a multi-national does at that point, but it's even harder because your corporation is a CCPC that depends on your Canadian residency status.

The other method is to register as a self-employed non-resident alien individual, and one thing I remember from an IRS seminar I went to years ago was to never do this unless you absolutely have to because it's the least used filing category and the most heavily audited. Literally only a few hundred people a year file this way and there is one guy who has to justify his salary who audits them, so eventually you will get audited. Basically the only people who can file that way are people on E visas who for whatever reason don't want to move their tax home to the US (usually because they come and go frequently). There might be some other non-immigrant category where you can file that way but I'm not aware of it. I'm sure some people just ignore their immigration status (usually because the employer wants to offload the social security withholding onto them), but if you're going to break the law it's better to file as a resident self-employed individual as that is very common, but it's only possible if you live in the US pretty much permanently.

I suppose if you were someone who is typically self-employed like a dentist and you got a job offer on TN-1 then you might want to be a non-resident alien self-employed individual for IRS purposes. But the purpose of a job offer is that you work for the person who offered the job, which means you cannot be self-employed.

Anyway have a read of IRS publication 519.

Thanks Steve for such a detailed reply.