Google Answers Logo
View Question
 
Q: Canada - US cross-border Tax Issues ( Answered 4 out of 5 stars,   1 Comment )
Question  
Subject: Canada - US cross-border Tax Issues
Category: Business and Money > Finance
Asked by: salsageek-ga
List Price: $30.00
Posted: 08 Mar 2006 17:03 PST
Expires: 07 Apr 2006 18:03 PDT
Question ID: 705146
I have a Canada-US cross-border tax issue.  I have read some of the
answers here on GA, and I am relatively familiar with the issues.  I
also partially know the answer of the question I am asking.  However,
I would appreciate if someone could confirm whatever I know and fill
any holes in my knowledge.

Additionally, I would appreciate an answer from hummer-ga, if possible. 

Background:

1.  I am a non-resident alien in the United States for Immigration
purposes, but I file in the US as a US-tax resident (this means that
my world-wide income is taxable in US).  For 2005, I have lived mostly
in the United States, having been absent from the country for a total
of under 25 days.  Most of these days were spent in Canada,

2.  I took a consulting job with a Canadian company and performed
services for three months in 2005.  The terms of the contract
regarding the location of the services performed were not specified. 
Most of the services were performed while I was in US, by
telecommuting into a server in Canada - however, this point is
entirely self-reportable.  The Canadian company paid me in US dollars
using paper checks, which I deposited into my US bank account.  The
Canadian company has not given me any tax forms, either in Canada or
in the US (i.e., no US 1099, no Canada T-4, or any other similar
forms).  Furthermore, there were no with-holdings made at source by
the Canadian company or estimated payments mady by me to either
Canadian or US tax authorities.

3.  In addition to being a tax resident of US, I have legal permanent
resident status (landed immigrant) in Canada.  However, for 2005, my
domicile was mostly in the US,

I would like to know how I should file my taxes in US and in Canada.

(I) One possibly scenario is based on the following assumptions:
- services performed were based in US, 
- I was a non-resident of Canada for the entire year,
Consequently:
- the entire amount earned is taxable in US,
- no tax is due to Canada.

(II) Another possible scenario is this:
- claim that services were performed in Canada,
Consequently:
- file and pay taxes in Canada,
- report Canadian-source income on US tax forms, then take credit for
Canadian income taxes paid.

So my first question is: which scenario I should follow?

Additional question I have is as follows:
- if paying taxes according to scenario (I), how would I report to IRS
the exact amount earned (which forms would I file, how would I prove
to IRS that I earned X amount of dollars, etc).  Normally,
self-employed income earned in US from US company is reported on form
1099-Misc, and the filer files schedule C. However, in this case no
such form(s) were issued by the Canadian company.

- if paying taxes according to scenario (II), would I have been
subject to estimated tax payments?  In other words, should I worry
about paying tax penalties because I did not make estimated payments
as I received income?

Thanks!

Request for Question Clarification by hummer-ga on 08 Mar 2006 19:37 PST
Hi salsageek,

Thank you for requesting my assistance. I'll digest all of your
information tomorrow and get back to you as soon as possible.

Regards,
hummer

Clarification of Question by salsageek-ga on 08 Mar 2006 22:20 PST
Hummer, hi, thanks for the prompt attention to my request.

Regards,

salsageek

Clarification of Question by salsageek-ga on 11 Mar 2006 01:16 PST
Hi hummer, thanks for your research.

I found the link describing the definition of a factual resident of
Canada for tax purposes useful.  It is somewhat of a gray area in my
case, because I don't have a domicile in Canada, though I do plan to
return.  There is a form that has an extensive set of questions that
helps CRA determine tax residency (this was one of your links).  I
quickly scanned through it, and most of the questions for me would
lead CRA to conclude that I am not a factual resident, except possibly
for the question about the landed immigrant status.  I might follow up
with that form.

As far as posting an answer, I definitely think you have done
sufficient research for that.  So please do post it.

I would, however, appreciate if you could clarify one additional
question (one of the questions asked in the last paragraph in my
original answer).  In the past I have performed independent services
in US and have received a 1099-Misc form, which then I have used as a
basis for computing revenue for Schedule C.

This year, I have not received such a form.  Can you please research
whether I can simply report the amount in the appropriate box in
Schedule C (By reading the instructions for Schedule C, it appears
that 1099 a form that the payer must provide.  However, the wording in
the instructions might simply addresses the common case.)

Thanks.
Answer  
Subject: Re: Canada - US cross-border Tax Issues
Answered By: hummer-ga on 11 Mar 2006 07:49 PST
Rated:4 out of 5 stars
 
Hi salsgeek,

Thank you for giving me the opportunity to post my "Comments" as an
answer (I won't post them again here). Your situation is rather
complicated and I still think you should seek professional advice.  At
the very least, you could call the IRS with some of your questions.

Regarding your missing 1099, you need to call the company and tell
them that you never received it and I would also call the IRS and tell
them too.  Whether you have the 1099 or not, include the income on
Schedule C.  I can't find any of that spelled out on the IRS website,
but I agree with the following advice:

Self-Employment Income
Question from David 
"I have just learned, however, that one of my newer clients is not
intending to send me a 1099 for 2004 as they did not account for their
payments to me as a "contractor expense".
Setting aside this client's questionable accounting practices, will I
have any difficulty claiming this income on my taxes as I normally
would, without the 1099 as documentation? Is there some alternative
form of documentation that I need to file, or request from the
client?"
Answer:
"David - Giving your client the benefit of the doubt was it possible
your fees were less than $600? If so they had no requirement to send
one to you. (You still have an obligation to report all income
received.) If the earnings were for more than $600 and you already
contacted them and still have not received the 1099 by February 14 you
can contact IRS at (800) 829-1040, provide us basic information about
the company and we will send them a letter requesting that they send
you a 1099. Often that gets results. If not, don't worry, you would
still report the income you received. You do not send in the 1099 with
the return. If you are a sole proprieter you report the income as you
normally would on either Schedule C or C-EZ, Profit or Loss from
Business. For more information please refer to IRS Publication 334,
Tax Guide for Small Business..."
http://www.oregonlive.com/business/taxblog/index.ssf?/mtlogs/olive_taxblog/archives/2005_01.html

Or try these phone numbers:

General Instructions for 1099...
Information Reporting Customer Service Site
"If you have questions about reporting on Forms 1096, 1098, 1099...,
you may call a toll-free number, 1-866-455-7438..."
Other tax-related matters. For other tax information related to
business returns or accounts, call 1-800-829-4933.
http://www.irs.gov/pub/irs-pdf/i1099gi.pdf

Two more unofficial links -

NASE (National Association of the Self-Employed)
"If you didn?t receive a 1099-MISC, but derived income from the sale
of goods or service, include that amount on line 1. The key is that
even if you did not receive a form 1099-MISC, you still must include
the income that you received."
http://news.nase.org/nase_about/schedulec/F_Lines1_7.asp 

Wikipedia
"Taxpayers are usually not required to attach Form 1099s to their own
Federal income tax returns unless the Form 1099 includes a report for
Federal income tax withheld by the payor from the related payments."
http://en.wikipedia.org/wiki/Form_1099


Yes, the Canadian residency is complicated too and completing the Form
NR73, Determination of Residency Status would be a good idea. I guess
you have looked at the following link, but see the last sentence in
particular.

IT-221R3 (Consolidated) Determination of an Individual's Residence Status
 8. Generally, secondary residential ties must be looked at
collectively in order to evaluate the significance of any one such
tie, therefore, it would be unusual for a single secondary residential
tie with Canada to be sufficient in and by itself to lead to a
determination that an individual is factually resident in Canada while
abroad. Secondary residential ties that will be taken into account in
determining the residence status of an individual while outside Canada
are
(a) personal property in Canada (such as furniture, clothing,
automobiles and recreational vehicles),
(b) social ties with Canada (such as memberships in Canadian
recreational and religious organizations),
(c) economic ties with Canada (such as employment with a Canadian
employer and active involvement in a Canadian business, and Canadian
bank accounts, retirement savings plans, credit cards, and securities
accounts),
(d) landed immigrant status or appropriate work permits in Canada,
(e) hospitalization and medical insurance coverage from a province or
territory of Canada,
(f) a driver's license from a province or territory of Canada,
(g) a vehicle registered in a province or territory of Canada,
(h) a seasonal dwelling place in Canada or a leased dwelling place
referred to in  6,
(i) a Canadian passport, and
(j) memberships in Canadian unions or professional organizations.
 9. Other residential ties that the Courts have considered in
determining the residence status of an individual while outside
Canada, and which may be taken into account by the CCRA, include the
retention of a Canadian mailing address, post office box, or safety
deposit box, personal stationery (including business cards) showing a
Canadian address, telephone listings in Canada, and local (Canadian)
newspaper and magazine subscriptions. These residential ties are
generally of limited importance except when taken together with other
residential ties, or with other factors such as those described in 
10.
 Application of Term "Ordinarily Resident"
 10. Where an individual has not severed all of his or her
residential ties with Canada, but is physically absent from Canada for
a considerable period of time (that is, for a period of time extending
over several months or years), the Courts have generally focused on
the term "ordinarily resident" in determining the individual's
residence status while abroad. The strong trend in decisions of the
Courts on this issue is to regard temporary absence from Canada, even
on an extended basis, as insufficient to avoid Canadian residence for
tax purposes. Accordingly, where an individual maintains residential
ties with Canada while abroad, the following factors will be taken
into account in evaluating the significance of those ties:
(a) evidence of intention to permanently sever residential ties with Canada,
(b) regularity and length of visits to Canada, and
(c) residential ties outside Canada.
For greater certainty, the CCRA does not consider that intention to
return to Canada, in and of itself and in the absence of any
residential ties, is a factor whose presence is sufficient to lead to
a determination that an individual is resident in Canada while
abroad."
http://www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.html

I'm sorry that I haven't been able to give you more definitive answers
to your questions but hopefully I've helped to lead you in the right
directions.

Sincerely,
hummer
salsageek-ga rated this answer:4 out of 5 stars
Hi hummer, thanks for the answer.  Your links and hints have given me
more to work with.

Regards,

-salsa

Comments  
Subject: Re: Canada - US cross-border Tax Issues
From: hummer-ga on 09 Mar 2006 17:39 PST
 
Hi salsageek,

I'd like to start by saying that it would be in your best interest to
consult an accountant who is well informed in regards to Canadian-US
tax issues.  Double taxation (to the US and Canada) is avoidable by
claiming a foreign tax credit but it can be rather complicated and you
really need to consult with someone who will have all of your figures
at hand.

What I know:
1. Your income is from self employment
2. You are a "Resident Alien" for IRS purposes
3. You are a "Canadian Resident Abroad" for CRA purposes
4. Your income is US-source because you were in the US when you
performed the services.

It is important to determine your residency status in regards to
Canada. A "non-resident" means that you have severed ties with Canada
and are setting up permanent residence in the US.  Since you are a PR
in Canada, I can only assume that you have left Canada temporarily and
plan to return. If that is correct, then you are a "Factual Resident"
of Canada and need to file General Income Tax and Benefit Package for
2005.  When you provided the service for the Canadian company, you did
so as a self-employed individual and not as an employee of the
company, that is why you didn't get a T4.

Factual residents and income tax
"As a factual resident, we tax your income as if you never left
Canada. You will continue to:
 * report all income you receive from sources inside and outside
Canada for the year, and claim all deductions that apply to you;
 * claim all federal and provincial or territorial non-refundable tax
credits that apply to you;
 * pay federal tax and provincial or territorial tax where you keep
residential ties in Canada;
 * claim federal, provincial, or territorial refundable tax credits
that apply to you; and
 * be eligible to apply for the goods and services tax/harmonized
sales tax (GST/HST) credit.
This applies for the year you leave and for each year you are a
factual resident while living outside Canada."
http://www.cra-arc.gc.ca/E/pub/tg/t4131/t4131-e.html#P82_4423

Canadian Residents Going Down South
How Canadian income tax laws apply
"If you spend part of the year in the U.S. for health reasons, to
vacation, or for other reasons, and you maintain residential ties in
Canada, we usually consider you to be a factual resident of Canada."
Completing your Canadian return
"You will find most of the information you need to complete your
return in your income tax guide and forms book. However, this pamphlet
includes some additional information you will need."
"If you are a factual resident of Canada, get Form T1248, Information
About Your Residency Status, and attach it to your return."
Can you claim a federal foreign tax credit?
"If you paid U.S. tax on U.S. income that you are reporting on your
Canadian return, you may be able to claim a federal foreign tax credit
to reduce your Canadian federal tax payable.
For more information, see lines 431 and 433 in your General Income Tax
and Benefit Guide, or get Interpretation Bulletin IT-270, Foreign Tax
Credit."
http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-e.html

Canadian Residents Abroad
T4131(E) Rev. 05
Residency status
http://www.cra-arc.gc.ca/E/pub/tg/t4131/t4131-e.html

General Income Tax and Benefit Package for 2005
http://www.cra-arc.gc.ca/formspubs/t1general/menu-e.html

NO.:IT-270R3
DATE:  November 25, 2004
SUBJECT: INCOME TAX ACT Foreign Tax Credit
http://www.cra-arc.gc.ca/E/pub/tp/it270r3/it270r3-e.html

Income received as a consultant is self-employment income but as long
as your total taxable revenues were less then Cdn $30,000, you needn't
worry about registering and collecting GST.

RC4110 - Employee or Self Employed?
http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-e.html#P151_10536

RC4022-05 - General Information for GST/HST Registrants
http://www.cra-arc.gc.ca/E/pub/gp/rc4022/rc4022-05-e.html

CRA sends out instalment reminders to people who may have to pay tax
by instalments.

Who has to pay by instalments?
http://www.cra-arc.gc.ca/E/pub/tg/p110/p110-e.html#P59_1245

Taxes
"If you are living abroad but maintain residential ties in Canada, you
are usually considered a factual resident of Canada for taxation
purposes. However, there may be other factors involved, so you should
review your situation with the Canada Customs and Revenue Agency
(CCRA) before you leave in order to avoid surprises. The CCRA
publication Canadian Residents Abroad provides excellent information
for individuals.
The CCRA's International Tax Services Office processes income tax
returns for non-residents and deemed residents of Canada, including
Canadians working overseas. It also provides general assistance by
telephone, correspondence and counter service, and looks after all
non-resident tax withholding accounts.
You may also wish to consult a private financial planner, who can
provide advice and guidance on such matters as contributing to
Registered Retirement Savings Plans (RRSPs) and the Canada Pension
Plan (CPP) while you are abroad."
http://www.canuckabroad.com/overseasjobs/workabroad/practical.shtml


As a Resident Alien for tax purposes in the US, you will have to file
with the IRS (on Schedule C).

"The source of your earned income is the place where you perform the
services for which you received the income. Foreign earned income is
income you receive for performing personal services in a foreign
country. Where or how you are paid has no effect on the source of the
income. For example, income you receive for work done in France is
income from a foreign source even if the income is paid directly to
your bank account in the United States and your employer is located in
New York City."
http://www.irs.gov/businesses/small/international/article/0,,id=96811,00.html

Are you a resident alien?

You are considered a resident alien if you meet the substantial presence test.
 * If you were in the U.S. for 183 days or more in 2005, you meet the
substantial presence test. If this is your situation, you are
considered a resident alien of the U.S. Although the comments in this
section and the following section do not apply to you, you should read
"Residence under the treaty" and "Do you have to file a U.S. tax
return?".
http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-e.html#P147_10586

SCHEDULE C (Form 1040)
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf 

Publication 597 (Rev. February 2006)
http://www.irs.gov/pub/irs-pdf/p597.pdf

So what this all boils down to is although you have to file income tax
forms to both countries, you should be able to take advantage of the
tax treaty to avoid the double taxation.  I'm not posting this as an
answer because I do not feel that I've given you all that you
requested. If you feel satisfied with my response, I'd be happy to
post it as an answer, but I am also ok with leaving it as it is.

Thanks again and good luck with your tax!
hummer

Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at answers-support@google.com with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  


Google Home - Answers FAQ - Terms of Service - Privacy Policy