Self employed in America living in Canada

[fpippin]

I have lived in America for the past 8 years. My husband and I are American citizens and own a business in America. In four weeks I am moving back to Canada, I am originally a Canadian citizen, my husband will be joining me in about 6 months.

The problem I have is that having lived in America for so long I have no Canadian credit to buy a home and do not have 35% for a down payment. I realize I need to begin building credit in Canada and that is not a problem - the issue is my income.

I will continue to work for our American business while I live in Canada. I will not travel to the States for business.

The question is how should I be paid? Should my American company pay me in Canada as a sub-contractor? Should I set up a business in Canada that will bill my American business?

Also, my husband will have a residence in Canada and the US, should we file taxes jointly? We are looking for the best plan of action and a good accountant.

Thank you,
Fiona

[Steven]

Well, becoming a sub-contractor means you have to set up your own business in Canada!

It sounds as though your US business is quite small but on the other hand you have control of it.

There are two ways of doing it, either the US business registers itself with the CRA and gets a business number so it can do payroll and GST, or alternatively you either register as self-employed or set up a CCPC and invoice the US company. Then you do the payroll and GST yourself. But either way because you own the US business it sounds as though you're going to be doing it yourself.

It really depends on the nature of the business in the US, if it has lots of employees and you're just a one-off, probably better to just go the self-employed route in Canada. If you're doing all the tax paperwork for the US company you might as well just get it a business number and do it that way, although this can get complicated because expenses to the company have to be charged against the income from each country.

How to do your personal taxes is a bit of a tricky one, a spouse is a residential tie for tax purposes. Also married couples can only have one principal residence, which means the other one becomes subject to capital gains tax.

Given that you're both US citizens, you have to file 1040 jointly if you're married (regardless of where you live), although I think it is possible for one of you to be non-resident and file a 2555 so you don't get taxed twice, you'd have to check with the IRS on that one.

So in essence if only you move to Canada, you would register as self-employed and file a T1 as a single self-employed person, and you would file jointly on 1040 in the US, you would file a 2555 to exclude your Canadian-source income from US taxes. You would invoice the US company and they would pay you. GST is zero-rated for whatever you bill the US company but you still need a GST number.

There's no need for all the other forms people usually need like 1040NR, 8233 and so on because you're a US citizen and have to file 1040 every year anyway.

That's one way of doing it anyway, I can think of about half a dozen other ways, but if you're a two-person company that's probably the easiest.

[fpippin]

Thank you for the quick response.

We are a small Private Investigations company. My husband and I own the company and we have a couple of sub-contractors in America that perform the surveillance work. All our clients are American, we will not be doing any work for Canadian clients. I will work from Canada doing reports, video editing, office work... My husband and I will have a residence in Canada but he will also maintain a rental home in the States.

It sounds like getting the business number in Canada is the way to go. If I do it this way all expenses will be billed to and charged against the American company because that is where all the income will be from.

So, in this situation the Canadian company will bill the American company and the American company will pay me. My husband will collect dividends from the American company as he does now. When we file taxes should my husband claim the Canadian residence as his residence or should he claim the American residence as his residence?

Thank you for your advice,
Fiona

-- Fri Mar 27, 2009 11:36 am --

Also, if I register the business in Canada and get a business number could I pay myself with dividends like we do in America or would I need to pay myself as an employee?

Thanks,
Fiona

[Steven]

It sounds like getting the business number in Canada is the way to go. If I do it this way all expenses will be billed to and charged against the American company because that is where all the income will be from.

Canadian expenses cannot be charged to the American company in the way you mean there, they are a deduction against Canadian income. Essentially the company would have a US side and a Canadian side and they are largely separate from one another for tax purposes.

So, in this situation the Canadian company will bill the American company and the American company will pay me.

There is no Canadian company if you all you're doing is getting a business number. Effectively it is setting up a Canadian payroll if you do that and getting a GST number.

My husband will collect dividends from the American company as he does now. When we file taxes should my husband claim the Canadian residence as his residence or should he claim the American residence as his residence?

You can only have one principal residence if you're married, so you choose the one that confers the greatest tax advantage.

Also, if I register the business in Canada and get a business number could I pay myself with dividends like we do in America or would I need to pay myself as an employee?

I have a hard time figuring out why you would want to pay yourself by dividends in almost any situation. The only one I can think of is if the company has no retained earnings at the end of the year. Salaries are deductible against corporation tax, dividends are not.

Plus you generally get more out of social security and CPP than you put in, it's not a good idea to avoid contributing by using dividends.

-- Sat Mar 28, 2009 5:17 pm --

Actually now I'm more awake, if you're using an S-corporation in the US I'm not sure how practical it is to give it a Canadian business number. If it's an S-corporation you're probably better registering as self-employed in Canada and billing it. If it's a C-corporation then it's a possibility.

[fpippin]

Hi Steve,

We have two companies. The first company is a sub S that my husband and I own. We draw dividends from this company. This company shows a loss every year and we write the loss off against our personal income.

So if I only work for this company I will register as self employed and bill it - I'm guessing I will pay taxes in advance based on my projected earnings.

My husband and I are also 1/3 partners in a C corp. The other two partners will not draw a salary but will take 2/3 of the profits. If I were to work for this company then the business number pay roll route is the way to go?

[Steven]

I would say the self-employed route either way, if you don't 100% own the C-corp it's going to be hard figuring out the three-way split because of the differing tax levels on payroll in each country.

There are all sort of restrictions on S-corporations, I wouldn't want to get into the situation of it having a Canadian BN and payroll, even if it is legally possible, it would be very complex to do I suspect. Given you have no clients in Canada, simply billing for office work is relatively straightforward and doing the installment payments will be easy. You can't offset your expenses directly, but the invoiced amount is an expense to the US corporation.