Let's say an independent Canadian consultant were to do some work in the United States. Assume the work permit / visa issues are not a problem.
If the Canadian were in the U.S. for, say, three weeks, and billed his U.S. client via his Canadian corporation, would he in any way need to file a U.S. income tax return?
If the Canadian were not incorporated but were instead a sole-proprietor, does it change anything?
At what point in time would the IRS expect the non-resident consultant to file taxes?
asked 17 Oct '09, 19:37
Chris W. Rea
Assuming you actually have permission to do the work, then if you're billing the work from a business to a business, then you don't have to talk to the IRS. This should include Corporations and Sole Proprietorship as far as I know. It just seems a bit odd to me with the Sole Proprietorship because that's usually for tradespeople, and they wouldn't be allowed to cross the border to work in the US anyway. A full-on consultant would almost always incorporate themselves.
As a Canadian I did work as an employee in the US for about 6 years under a TN visa. The employer deducted US taxes. I then had to file a US tax return, and a Canadian tax return. Any tax ultimately paid to the US was deemed a "foreign tax credit" which is a non-refundable tax credit. So at the end of the year, if you paid $9 to the US and Canada said you owed $10, then you would only have to pay Canada $1. However, since a Canadian has practically no deductions in the US, your taxes will be fairly high. In most cases the US taxes were more or about the same as what you would have paid in Canada, so you didn't owe anything extra at the end of the year.
answered 18 Oct '09, 10:56
A sole proprietorship is earning income under your TIN or SSN, so yes you have to file taxes on this income if you are a US person for tax purposes.
If you are working in the US, then a US tax return should be prepared but as a NR if you are not in the US to meet a citizenship test or a substantial presense test.
Nexus issues may play a part depending on where the work was performed and how much if any of that is considered US source income if a corporation.
answered 18 Oct '09, 14:11
Article XIV of the US/Canadian Tax Treaty covered independent personal services which would have made them taxable if the provider had a fixed base of operation regularly available and the income was attributable to the fixed base.
However, Article 9 of the 2007 protocol deleted Article XIV.
The question of nexus rests with "residency" and whether or not a "permanent establishment" exists in the contracting state where the income is derived.
If income is only being earned in the U.S. on a temporary or infrequent (casual) basis, then it may only be taxable in Canada where you reside. Ultimately, the decision is based upon the number and substantiality of contacts with the U.S.
Not knowing the complete facts and cirsumstances, I would suggest consulting the 2007 protocol as well as the original 1980 treaty which it modified.
For your convenience, here is the link on the IRS website.
In the alternative, you could also contact the international office of the Canada Customs & Revenue Agency in Ottawa. (I have found them to be extremely helpful on such issues in the past.)
answered 18 Oct '09, 16:15
As an independent contractor, the answer is from the first dollar. It relates to the IRS requirements for filing a tax return. What the ultimate tax liability is another issue. The 5th protocol eliminated the fixed base and independent contractor provisions and amended the permanent establishment definition so you will need to look at the new rules. If he he does not have a PE under the new rules, then pursuant to IRC sec. 6114 he would need to file a treaty election seting forth the amount of gross revenues and allowable deductions to determine the net income that is not subject to Federal taxation. States are the tough problem as you need to research each state where he performs any work as to whether there is a filing requirement and how the income in the state is determine.
If the consulting is done by a corporation, the answer does not change substantially at the Federal leve but can at the State level.
answered 19 Nov '09, 23:46
Agreed but of course in some states, nexus is a very broad term and if work is performed in their state due to their nexus requirements, then some states wish to tax that.
The multistate tax commission has links to nexus questionnaires for all 50 states in the US to help with that purpose
answered 18 Oct '09, 18:58