self-employment and TN

[netpath]

I’m confused about self-employment and TN.

I am a Canadian citizen.
I am “self employed” working for my own Canadian corporation. The company has 3 employees: myself, my wife, and my grown son. I own 60% of the company’s shares and my wife owns the remaining 40%. My wife and I are both directors.

Over the years, I’ve held 5 TN visas in which a US corporation petitioned for my services to be delivered under a contract agreement between the US company and my Canadian company. My company declared the US revenue on its T2 and filed 1120-F and 8830 tax treaty claims with the IRS.

Last year, on a routine border crossing I ran into problems. The CBP agent asked "who do you work for?". I provided the name of my company’s US client and she asked “Are you employed by them". I said “I have a contract to work for them. I'm self-employed and have my own small company. My company has a contract with them.” I was then informed that this situation was not covered by my TN visa and sent to secondary screening. Ultimately, they allowed me to enter for this last trip and asked that I bring a copy of my contract the next time I entered the US for work.

I’ve since applied successfully for a SSN and a 3-year TN visa to work with the same US company as an individual. However, I’d really prefer to do this business through my corporation.

Questions:

(1) Under TN, can I be self-employed in Canada but work for a specific company in the US. That company having a contract for my services with my Canadian company. With me collecting a salary from my company and my company invoicing the US company for my services.

(2) Is the problem ownership? If I transferred 51% ownership of my corporation to my wife would it change the situation? I’d still be a director.

(3) If I have to continue on a personal basis, what forms must I file? I assume a 8233 with my client (/employer) and a 1040NR/8840/8833 with IRS. Will my employer be required to make any withholdings? How will they report my income?

Thanks!!
Sheldon

[Steven]

1) No, is the short answer, read this: Management Consultant & LLC Creation

Essentially because you control the company and you are employed by it you don't qualify for TN-1 in that circumstance. There may be ways of structuring it that are okay but I can't think of any off-hand when you control the company.

2) Ownership is part of the problem, but even if your wife owned the company the company is in Canada and thus cannot sponsor for TN-1. Even if the company was in the US and your wife owned 51% of it, the application has to be arms length and clearly it isn't if your wife is the majority shareholder. You certainly can be subcontracted on TN-1, say if you work for US company A and are subcontracted to US company B, but in this situation you control company A and it's not in the US.

3) 8233 would be if you were legally in the US, e.g. on an E visa and were still effectively self-employed or employed by someone else. This is isn't your situation, you need to be directly employed by whomever it was who did the TN-1 job offer letter for you.

You give them a completed W-4, on the W-4 in the answer to question 6 you put down you are a non-resident alien. They're supposed to do non-resident alien withholding but it doesn't really matter if they don't because of the tax treaty provisions. You are essentially on their payroll at that point and they treat you like any other employee, you get a W-2 at tax time. You file a 1040NR with the IRS and an 8840 or possibly 8833 as the case may be.

You use the W-2 to report your US income on your T1 using the exchange rates from www.bankofcanada.ca and claim a foreign tax credit using forms T2209 and T2036.

Essentially this is separate from your Canadian company, you still do all the paperwork for that but it's essentially as if you had two jobs, one in the US and one in Canada.

Your other alternative if your company has a significant US presence would be to get an E-1 or E-2 visa. These are very complex visas to get and require a "significant investment" in the US. http://toronto.usconsulate.gov/content/ ... ment=evisa

[netpath]

Thank you Steve for your excellent response and for the many outstanding contributions you’ve made to this board! I’ve been reading your replies for days and hoped you’d answer this one .

Regarding 1)
As you outlined in your response to "Jessibobessy" in: "Management Consultant & LLC Creation" the problem seems to lie with self employment by your own US company. A company “of which (you are) the sole or controlling shareholder or owner or over which (you) hold de facto control”

If I am self-employed in Canada but working for a US company that is "owned by a person or entity other than (myself) located in the U.S. "(my client) won’t that work? In your previous reply you say the Canadian company would have to register for an EIN in the US to do a US payroll. Why can’t the Canadian company just invoice the US company for services rendered in the US and report the revenue in Canada; along, of course, with an 1120-F and 8830 to the IRS. That’s what I was doing for years. I should mention that the work in question will be intermittent and performed in both countries.

Regarding 2)
Understood. The problem is not just apparent control, it is de facto control and the transaction must be at arms length.

Regarding 3)
This is my fall-back position. If necessary, I will lay myself off from my company as required and work as an individual for the US company periodically through the year. I basically end up with two jobs and lots of paperwork!

Thanks again!
Sheldon

[Steven]

the problem seems to lie with self employment by your own US company.

It doesn't matter if it's US, Canadian or any other nationality. A famous bit of caselaw is that a corporation is effectively based where the work of the corporation is performed. Which is why income to your corporation that is earned while the people performing the work are in the US is subject to US corporation tax (to answer your next question, you claim a foreign tax credit for that on T2 schedule 21).

If you control the corporation that is the basic problem, doesn't matter where it is. In addition to put you on a payroll in the US you would have to have an EIN and a US payroll and do US payroll withholding so effectively you take on the trappings of a US corporation even if it's not physically located there - because it performs works there and is registered with the IRS there.

If you fall under the $10,000 exemption in the tax treaty then yes you can get away with not doing US payroll but effectively the corporation has an employee in the US so it is operating there. The same would apply say for a pipe fitter who goes in as B-1 for a pipe-fitting company to do an installation.

This is an immigration problem rather than a tax problem, what CBP consider to be "self-employed" for the purposes of NAFTA and TN-1 is fairly general because of all the different ways you could structure it. If it's not arms length and you control or indirectly control whomever or whatever it is you are working for in the US, strictly speaking you're self-employed.

From a tax standpoint I have to say you are far, far, FAR better off being directly employed by your client while in the US anyway. There is no tax advantage because you have to pay US corporate rates rather than the CCPC rate, plus if you're directly employed by them the payroll withholding is their problem rather than yours.

How people who have E-1/E-2 manage their taxes in the situation you're describing is a never-ending source of wonder to me. The IRS even told me during a seminar that registering as a self-employed non-resident alien was a really bad idea.

Imagine your situation here from a tax standpoint if you did it that way: T1, T2, 1120-F, 1040NR, a whole raft of schedules for each corporate filing, GST return, possibly a State sales tax return, probably a State corporate return plus all the payroll withholding for two countries, CPP, social security, corporate withholding payments (four sets potentially) and so on (potentially two 8833s, etc.)

I feel ill thinking about it. At that point you're basically working as an accountant, or you're paying an accountant a huge amount of money.

Think about it - if you're directly employed by them you're only filing requirement in the US really is a 1040NR and an 8840. You wouldn't need to do 1120-F or any of that because your company has no US business.