Tax query for Canadian working in US

ehaynes
New Member



Joined: 25 Aug 2008
Posts: 1
Location: Toronto

Posted: Mon Aug 25, 2008 4:58 am

 

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My husband (Canadian citizen)is considering a position in the US working for the US office of a UK company! He will maintain his home in Ontario (as myself and the children will be staying here) however he will be working full time in the US, returning for one weekend per month and two weeks at the end of every 3 months when he will be working from home. How will this affect his taxes? Who should he be paying taxes to? The US or Canada? Will he have to file both US and Canadian returns even though he will have no Canadian income? Any advise you can give would be appreciated as this is giving me major headaches at the moment.

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Steven
CanuckAbroad VIP



Joined: 28 Sep 2007
Posts: 1676
Location: Calgary

Posted: Mon Aug 25, 2008 4:06 pm

 

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If you're in Canada then he has residential ties to Canada so he still has to file in Canada. He also has to file a 1040NR and an 8833 to cover his US income. Then he claims a foreign tax credit on his T1 for the US income tax so that he doesn't get taxed twice. This document describes it in vague terms: http://www.cra-arc.gc.ca/E/pub/tg/p151/

IRS publications 515 (pages 22-26) and 519 describe the process in greater detail, however all three of these documents are now out-of-date because the tax treaty changed at the start of 2008 and the publications haven't been updated yet. Eventually the new provisions will be in the updated publication 597.

The new tax treaty requires tax to be paid proportionally, which could make things difficult in the situation you describe here, i.e. tax has to be paid based on where the work is performed, so for the portion done in Canada, tax has to be paid in Canada, and ditto for the US.

If he's directly employed, on his W-4 when he starts work he needs to state clearly that he is a non-resident alien, as withholding has to be done at a higher level for NRAs.

For directly employed employees employed in Canada, also the company has to comply with Canadian laws, i.e. they must do payroll withholding etc. which will be complex for them to do as they need a Canadian Business Number. So they essentially issue him a T4 for his Canadian-based employment and a W-2 for his US-based employment.

Under the tax treaty there is a 90-day/$10,000 exemption limit, i.e. if a resident of Canada works in the US for less than 90 days and earns less than $10,000, essentially the employer does not have to comply with US tax laws, however in this situation I don't think that will help. It also works in reverse, i.e. the US employer does not have to comply with Canadian laws if the employee spends less than 90 days working in Canada and earns less than $10,000 in Canada, however this is impossible to do in this situation as his tax home remains Canada due to the fact he has residential ties there.

Generally speaking due to the immense complexity of all this for the employer, if the employer only has a handful of employees in this situation it's better for the employee to become a sub-contractor. So your husband would register as self-employed in Canada, do payroll withholding, etc. in Canada and issue invoices to the US client. Still has to do a 1040NR and an 8833 every year to report US-source income and there is a withholding requirement when the work is done in the US, although to some extent this can be avoided by filing Form 8233 with the client.

Given the new tax treaty though I think there will be a withholding requirement but the regs for Form 8233 haven't been updated yet so I don't know exactly how they're going to do it.

My strong advice would be to talk to a decent Canadian cross-border accountant, there are several in Toronto. Also get your husband to talk to the company he works for and find out if being a self-employed sub-contractor for tax reasons is something they are willing to do - obviously if they are already registered in Canada for payroll withholding then this whole thing isn't a particularly big deal.

Another simple idea would be to simply not do any work in Canada when he's at home then it avoids the issue altogether.

If he did zero work in Canada (you can do incidental things like answer a question from the office) then it would just be a case of filing a 1040NR and a Form 8833 every year.

Form 8833 is a tough form to fill in, you will definitely need to talk directly to the IRS or a well-versed accountant to be able to fill it in correctly. Ditto for Form 8233 if it comes up. Nothing on the internet will help you with either of those forms because the regs are in the process of being drafted right now, hopefully by tax time next year the situation will be clarified.
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Steve.

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Steven
CanuckAbroad VIP



Joined: 28 Sep 2007
Posts: 1676
Location: Calgary

Posted: Mon Aug 25, 2008 9:03 pm

 

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Oh yeah and bear in mind I'm talking about Federal taxes here, if the State he's working in has State income taxes you have to do the provincial foreign tax credit stuff.
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Steve.

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