I'm a canadian citizen and resident performing contract work for a US
company (as an individual). As far as I can tell, I'm performing
independent personal services and don't have a fixed base in the US,
and as such under the US-Canada tax treaty I am allowed to pay taxes
only in Canada. The employer has sent me a form W-8BEN to fill out. So
my questions are as follows:

1) Are the above assumptions correct (if not, how do things actually work)?
2) Are there any other forms that need to be filled out? If so, which
are they, who needs to send them (me or employer), who must they be
sent to, and when?

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Clarification of Question by tm8747a-ga on 01 Nov 2006 21:53 PST

Forgot to ask one thing:
3) I have a bank account at a United Nations credit union in NYC and
would like to have payments deposited there. Does it make a difference
as far as the taxes go that the money would remain in the US?

Hi tm8747a,

Yes, your assumptions are correct and you will be fine claiming the
US/Canada Tax Treaty.

1) Are the above assumptions correct (if not, how do things actually work)?

You don't say if you are commuting to the U.S. or working from home,
but in either case, Canada is your tax home. The IRS will consider you
a nonresident alien with no U.S. source income and therefore you are
exempt from tax. If your employer paid you with cash, there would be
nothing to do except declare it on your Canadian return. But because
he will be declaring you as an expense, he needs you to fill out Form
W-8BEN for the withholding tax exemption (otherwise, he'd take a chunk
out of every paycheque and you'd have to file a 1040NR at tax time to
get it back).

An explanation of "U.S. Source Income":
US TAX FOR ALIENS: Publication 519: US Tax Guide for Aliens:
Chapter 2, page 11:
"A nonresident alien usually is subject to U.S. income tax only on
U.S. source income (services performed in the U.S)."
Table 2?1, page 11: 
Summary of Source Rules for Income of Nonresident:
 A. Factor Determining Source:
  1. Salaries, wages, other compensation: Where services performed
  2. Business income: Personal services:  Where services performed
Chapter 2, page 12: 
"All wages and any other compensation for services performed in the
United States are considered to be from sources in the United States."
"If your compensation is for personal services performed both inside
and outside the United States, you must figure the amount of income
that is for services performed in the United States."
http://www.irs.gov/pub/irs-pdf/p519.pdf

If you commute, the same will apply -
IRS Pub 519 - Nonresident Alien or Resident Alien?
Days of Presence in the United States
"You are treated as present in the United States on any day you are
physically present in the country at any time during the day. However,
there are exceptions to this rule. Do not count the following as days
of presence in the United States for the substantial presence test.
 * Days you commute to work in the United States from a residence in
Canada or Mexico if you regularly commute from Canada or Mexico.
Regular commuters from Canada or Mexico.   Do not count the days on
which you commute to work in the United States from your residence in
Canada or Mexico if you regularly commute from Canada or Mexico..."
http://www.irs.gov/publications/p519/ch01.html

Form W-8BEN Instructions
http://www.irs.gov/instructions/iw8ben/ch02.html

2) Are there any other forms that need to be filled out? If so, which
are they, who needs to send them (me or employer), who must they be
sent to, and when?

You will need to apply for an ITIN number by claiming the US/Canada
Tax Treaty, Article IV.

W-7 Application for IRS Individual Taxpayer Identification Number
Reason you are submitting Form W-7.
a. Nonresident alien required to obtain ITIN to claim tax treaty benefit.
Mail to:
Internal Revenue Service
Philadelphia Service Center
ITIN Unit
P.O. Box 447
Bensalem, PA 190
http://www.irs.gov/pub/irs-pdf/fw7.pdf

Convention Between Canada and the United States of America With
Respect to Taxes on Income and on Capital
Article IV: Residence
http://www.fin.gc.ca/treaties/USA_e.html

Form W-8BEN Instructions
"If you do not have an SSN and are not eligible to get one, you must
get an individual taxpayer identification number (ITIN). To apply for
an ITIN, file Form W-7 with the IRS. It usually takes 4-6 weeks to get
an ITIN.
http://www.irs.gov/instructions/iw8ben/ch02.html

Your company should file Forms 1042 and 1042-S (using Code 03) with
the IRS and send you copies of the 1042-S to attach to your Canadian
income tax form. When reporting the income on your return, don't
forget to exchange the US amount into Canadian currency (you can call
your bank some time in January to get the average rate of exchange for
the entire previous year).

Form 1042: Annual Withholding Tax Return for Source Income of Foreign Persons:
http://www.irs.gov/pub/irs-pdf/f1042.pdf

Form 1042-S: Foreign Person?s U.S. Source Income Subject to Withholding:
Box 6, Exemption Code 03: Income is not from U.S. sources:
* "Non-U.S. source income received by a nonresident alien is not
subject to U.S. tax. Use Exemption Code 03 when entering an amount for
information reporting purposes only."
http://www.irs.gov/pub/irs-pdf/f1042s03.pdf

3) I have a bank account at a United Nations credit union in NYC and
would like to have payments deposited there. Does it make a difference
as far as the taxes go that the money would remain in the US?

No, not at all, especially if it doesn't generate any interest. If you
receive interest, you'll either have to apply for the withholding
exemption with the bank, or, submit a 1040NR at tax time to get the
tax that was withheld back. Another thing to consider is the pesky
rate of exchange. Again, you can either keep track of the actual
Canadian amount when you make a withdrawal, or use the average for the
year.

I was glad to work on this for you. If you have any questions, please
post a clarification request and wait for me to respond before
closing/rating my answer. Thanks to abezon-ga for taking the time to
post the helpful comments.

Thank you,
hummer

Search Strategy:
I used my own bookmarks plus searched the IRS website.

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Clarification of Answer by hummer-ga on 02 Nov 2006 20:43 PST

Hi tm8747a,

One correction. 

"You don't say if you are commuting to the U.S. or working from home,
but in either case, Canada is your tax home. The IRS will consider you
a nonresident alien with no U.S. source income and therefore you are
exempt from tax. "

Sorry, the above statement is all correct except the commuter will
have US source income and file 1040NR, the homeworker won't have to
file a 1040NR unless he needs to collect withholding tax. I know that
point well and I'm sorry for the slip up and for any confusion it may
have caused.

Thanks to abezon for pointing out it out to me. Tm8747a, please let me
know if you have any questions.

Sincerely,
hummer

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Request for Answer Clarification by tm8747a-ga on 05 Nov 2006 05:39 PST

Sorry I didn't make that clear, I do work from home in Canada, I never
set foot in the US. Just a couple small clarifications. The forms 1042
and 1042S are to be filled by my employer and not by me then? And
also, my employer has since asked me to fill Form 8233. Is that really
necessary? Thanks a lot for the thorough answer!

---

Clarification of Answer by hummer-ga on 05 Nov 2006 10:22 PST

Dear tm8747a,

Ok, I'm going to start from scratch now that I know the source of your
income. I was trying to deal with two many scenarios in my answer and
it seems a bit muddled.

1) Source of Income

The source of your income is Canada because that is where you are when
you earn it (contrary to popular belief, income source has nothing to
do with where the actual money comes from).

An explanation of "U.S. Source Income":
US TAX FOR ALIENS: Publication 519: US Tax Guide for Aliens:
Chapter 2, page 11:
"A nonresident alien usually is subject to U.S. income tax only on
U.S. source income (services performed in the U.S)."
http://www.irs.gov/pub/irs-pdf/p519.pdf

This means that you are not subject to US income tax, withholding,
medicare, or any other deductions that are imposed on US source income
and neither is it reportable to the IRS. In other words, the company
can just write you a check for the total amount that you've earned and
send it to you. If you earn $1000, $1000 is what you should receive.

2) Tax Home

Canada is your "tax home" and it is the only country you owe income tax to.

3) Form 8233

Form 8233 (to claim tax treaty) is used when needed to avoid double
taxation for people who earn income in countries other than their tax
home. This is not the case with you and you should not submit this
form.  Further, you should not apply for a ITIN number either. Both
would only be needed if you actually worked south of the border.

University of California
Services Performed Outside the U.S.
Q. Can I pay a nonresident alien for services performed outside the
United States without an SSN or ITIN?
A. Yes. Payments to a nonresident alien for services performed outside
the United States are not considered U.S. source wages and are
therefore not subject to reporting or withholding."
http://www.ucop.edu/ucophome/cao/paycoord/nra-qa.html 

4) Forms 1042 and 1042S

These forms are the responsibility of the company and need not worry
you. They will file forms 1042 & 1042s to the IRS, using Code 03
(Income is not from U.S. sources). They should send you a copy of
1042-S which you will attach to your Canadian return. However, if you
don't receive a copy that is ok, just declare the income on your
return anyway.

Form 1042-S: Foreign Person?s U.S. Source Income Subject to Withholding:
Box 6, Exemption Code 03: Income is not from U.S. sources:
* "Non-U.S. source income received by a nonresident alien is not
subject to U.S. tax. Use Exemption Code 03 when entering an amount for
information reporting purposes only."
http://www.irs.gov/pub/irs-pdf/f1042s03.pdf

5) Chartered Accountant

If you seek advise from a CA, make sure he is familiar with
cross-border issues. It is a common mistake to think that receiving
money from the US means you have US income.

There, I hope that is clearer. Please let me know if you still have a question.
hummer

The researcher was thorough, updated answer after further
clarification was demanded, and corrected himself where appropriate.
He also paid attention to comments and took them into account. I was
extremely satisifed with the service I received.

1. yes. 

2. yes. you must file a form w-7 to get a US tax ID number. you'll
need to have your passport notarized by a US notary public (Canadian
notary is not sufficient). download the w-7 & instructions at
www.irs.gov. processing takes 8 weeks.
on the w-8BEN, you should state that you are exempt under a tax treaty
& refer to article XIV & claim a 0% withholding rate under treaty. you
can try submitting the w-8BEN to the client & see if they insist on
getting an ITIN. they may just accept it without an ITIN.

3. no.

hummer wrote:
"You don't say if you are commuting to the U.S. or working from home,
but in either case, Canada is your tax home. The IRS will consider you
a nonresident alien with no U.S. source income and therefore you are
exempt from tax."

You have gone a little off track here, hummer. You're confusing the
test for residency status with the test for income source. Whether he
commutes is very important. The US will tax US-source income on Form
1040NR. US-source income includes income from work performed in the
US, whether that work is performed as an employee or as an independent
contractor. Thus, if the poster is commuting to the US to work, he is
performing his services in the US & his self employment income is
subject to US income taxes, even though he remains a nonresident
alien. (It is exempt from social security & medicare taxes as long as
he is commuting & remains a resident of Canada.)

If the poster does not perform his services in the US, *then* the
payments are not US-source income & they are totally exempt from US
taxes. He'll just have a whopping big tax bill from CRA.... Keep good
records of expenses!  :)

Abezon, I re-read your last comment and I believe perhaps you went a
bit astray also. Either way, commuter or not, a nonresident Canadian
does not owe the US income tax.  In both situations, Canada is the tax
home. The only difference is the commuter will have to file Form w-7
(US tax number), Form W-8BEN (withholding exemption), Form 1040NR (to
declare US Source Income) and Form 8233 (to Claim Tax Treaty on the
1040NR) but he will not owe any tax and will get any withholding
returned because of the tax treaty which is there to avoid double
taxation.

IRS Pub 519 - Nonresident Alien or Resident Alien?
Days of Presence in the United States
"...Do not count the following as days of presence in the United
States for the substantial presence test... Days you commute to work
in the United States from a residence in Canada or Mexico if you
regularly commute from Canada or Mexico."
http://www.irs.gov/publications/p519/ch01.html

If he paid tax to the US and tax to Canada, he would be paying tax
twice on the same income. Commuters and non-commuters alike are exempt
from US tax because they are both considered residents of Canada.

Regards,
hummer