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Q: US and Canada Income Tax ( Answered 4 out of 5 stars,   1 Comment )
Subject: US and Canada Income Tax
Category: Business and Money > Accounting
Asked by: markt52-ga
List Price: $20.00
Posted: 22 May 2006 17:49 PDT
Expires: 21 Jun 2006 17:49 PDT
Question ID: 731495
I am a US citizen and worked in Canada during part of 2003 & 2004. I
was an independent consultant, spent less than 180 days in Canada and
had the non-resident 15% payroll withholding. I was paid from a US
bank and paid US taxes. My interpretation of the IRS rule was that I
do not need to file in Canada unless I want my 15% back. I did not
file in Canada. Now, Canada Revenue sent me an assessment letter
saying that I owe them a lot. What can
Canada revenue do to me in the US? If I pay them, is the full sum a
credit on my US income tax?
Subject: Re: US and Canada Income Tax
Answered By: boquinha-ga on 23 May 2006 22:53 PDT
Rated:4 out of 5 stars
Hello markt52-ga!

I recently answered a question about Canadian income tax so I knew
some of the relevant sources already. Here is the information that I

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According to Canadian tax code:

?A person who is not a resident of Canada for any part of the year,
and visits Canada for less than 183 days in a year, will pay Canadian
income tax only on income earned from Canadian sources.?

There is further clarification available on the Canada Revenue Agency
site itself. It states that if you provide services in Canada, not
tied to any ?regular and continuous employment? that ?you may have to
file a Canadian income tax return to report the gross income and net
income.? From this, ?the payer must withhold 15 % of the gross amount
of the payment.? Consultants are among those to whom this applies
(along with lecturers, entertainers, artists, and athletes).

From IRS Publication 597 ?Information on the United States-Canada
Income Tax Treaty, it states that independent services (like a
contractor) may be exempt, but there are some restrictions for those
under contract by a Canadian employer. Those earning over $10,000
Canadian are exempt from paying Canadian income tax if it was not paid
by a Canadian employer, and if they resided in Canada for less than
183 days.

It seems that a lot of the requirements hinge on the ?resident versus
non-resident? status. Here is a publication from the Canada Revenue
Agency that explains it in detail.

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IRS Publication 514, ?Foreign Tax Credit for Individuals,? the formula
for determining what your exact credit will be is listed. It includes
detailed worksheets and explanations. It is a complicated formula
based upon other deductions, housing expenses, type of income, and

Part of the calculations use a form entitled ?Form 1116? to work out
the exact eligible credit. It is not a sure thing that you can recover
all of the Canadian taxes that you may have paid. The exact amount
will depend, of course, upon your specific circumstances. The form can
be found here:

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There is a predetermined penalty for filing a return late, or failing
to pay properly. This is probably the money they are asking for

?The penalty for filing a return late is 5% of the unpaid taxes plus
an additional 1% for each complete month the return is late, up to a
maximum of 12 months--a maximum penalty of 17%.?

There is an agreement that has been in place for a few years now that
pledges cooperation between Canada and a number of governments (the
U.S. is one of them) in tax matters. Specifically:

?In signing the Convention, Canada agreed only to exchange tax
information. The benefits to Canada in exchanging tax information
under the Convention include:

* Increased international cooperation to combat tax avoidance and tax evasion;
* Enhanced ability for the CRA to verify that businesses and
individuals have paid their fair share of taxes; and
* Improved administration of the Canadian tax system.?

They don?t cite specifics as to what methods they will use, but the
Canadian and U.S. governments are actively collaborating to ?chase
down? delinquent taxpayers.

The full text of the ?Agreement on Exchange of Information on Tax
Matters? is available at the following site. There is no agreed upon
method for enforcing foreign income tax codes, but countries agree to
share information and cooperate as able. Specific enforcement is up to
each participating country.

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So, it looks as though should you need to pay the Canadian tax, you
will be able to recover at least a portion of it. As for how exactly
the Canadian government can force you at this point to pay the back
taxes, it isn?t clear. What is clear, however, is that the U.S. and
Canadian governments do have an agreement in place to help to discover
and punish those who have paid insufficient taxes. To discuss your
specific situation you can contact either the Canada Revenue Agency or
IRS directly.,,id=120193,00.html

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Tax codes certainly are confusing and convoluted, no matter the
country. I hope this has helped with your questions. If you have any
need for further clarification, please let me know how I can help.


Search terms used:

Canada income tax
tax evasion penalty Canada
Canada U.S. tax treaty
"income tax" collection cooperation Canada

Request for Answer Clarification by markt52-ga on 24 May 2006 14:31 PDT
Thanks for your answer, your research is very thorough. FYI, I called
the IRS and they told me that they do not perform any collections or
enforcement for Canada and that penalties and interest are not
deductible on my US tax return, the tax itself is a credit. And IRS
Pub 597 appears to have been revised since I read it in 2004, changing
the exemption for independent consultants. I guess I need a lawyer.
Incidentally, I tried to "do the right thing" and settle this in 2004,
but I left Canada because I worked for a company that practiced
"creative bookkeeping" and reported my income several different ways
and did not comply with US tax law. Canada Revenue has been no help
except for harrassment and they insist I owe them almost everything I
made while I was in Canada. Now, I am reluctant to pay them because
most of the US citizens I worked with in Canada have been harrassed
for more money even after they paid. I am telling you this because you
seem to be researching several of these CA tax questions.
Would you like to research for any tax court or civil court or
criminal court rulings in the US to collect Canada income tax? I guess
that would be another question and I'm not sure if I can specify you
as the researcher, can I?

Clarification of Answer by boquinha-ga on 24 May 2006 14:45 PDT
Thank you so much. I'm happy to know that you are pleased. I'm sorry
to hear that this has become such a hassle for you. It sounds like
dealing with the IRS and the Canadian Revenue Agency are not that

Yes, you can request me by name. Just put my name in the title of the
question and I'll be happy to look into it for you! Putting my name in
the question reserves it specifically for me and I can work on your
answer without a problem. If, for some reason, I am unable to answer
your question, I can release it to other researchers and let my
colleagues know that it's available.

Thank you again!

markt52-ga rated this answer:4 out of 5 stars
Thorough research and a well written answer.

Subject: Re: US and Canada Income Tax
From: boquinha-ga on 25 May 2006 16:51 PDT
Thank you! And thank you for taking the time to rate my answer.


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