Self employed or not - US CANADA Cross border income tax (Independent contractor) on TN -

David,
 
Do you know if the CRA interprets the NAFTA visas in the same way? For example, does CRA assume a US citizen with a NAFTA visa is an employee even if other factors suggest the person is self-employed? I've heard conflicting reports on how the Canadians deal with this.
 
Thanks for any advice




david ingram replies:

The North American Free Trade Agreement (NAFTA) applies to Canada, the USA, and Mexico

The  terms of the agreement are that no one can be self employed when working in the other country under the auspices of a TN visa.

Self-employment means that you have your own business premises, have your own business cards and are open for business to deal with anybody.  Being a captive worker for one company using their premises, their computer, their truck, and working their hours is NOT being self employed even if your contract of employment refers to you as an independent contractor and no deductions are being made.  Being an independent contractor under those circumstances just means that you are an employee with no benefits whether you are in Mexico, the USA or Canada.

NAFTA does allow you to have more than one visa.  therefore, it is possible to get any number of NAFTA visas to work AS AN EMPLOYEE for any number of employers.  I have seen one consulting engineer specialist with eight TN visas. This situation applies to someone who works a day a month for three companies, two days a week for another, one or two days every couple of months for someone else, etc.  In these situations, the company usually just gives the person a check with no deductions.  However, the person is still an employee for that company for that day whether in the USA, Mexico or Canada..

The following Canadian tax case will help you with that diagnosis.

In 1983, Jaroslav Verner fared very badly.  The Canadian Tax Review Board turned down office in the home, entertainment, auto expenses and secretarial services for a self-employed engineer with three clients.  The problem was that he carried out the work or most of it on the clients' premises. His office 'library' seemed to have little to do with his work as a hydraulic specialist.  His '100%' business used Corvette was used mostly to drive back and forth to his clients' premises - i.e. back and forth to work. (if you lose the office in the home, you do not get auto expenses away from your office.)
In this case, the court acknowledged that the documentation for the expenses was meticulous (rare) but that the relationship between the expenses and actually earning income (i.e. necessary) was tenuous in the extreme.  As the expenses in question were $8,996.70 in 1975 and $7,486.61 for 1976 and were finally turned down in 1983, (eight and seven years later), a case can easily be made for 'the wheels of justice move slowly' .  On this case, the $16,500 o turned down expenses would amount to $6,500 of tax which after interest was applied would be about $14,000.  (in my own case, $535,000 of tax worked out to $4,680,000 22 years later)
 
There is nothing new or old about the above case.  Even though a professional engineer with a degree, Mr Verner was ruled to have three part time jobs without benefits.  the reason would be that he did the work on the client's premises using their facilities and equipment. It is not unusual for a nurse in Vancouver to work two days a week at three different hospitals.  Even though a professional and working at three places, he or she is a part-time employee and not entitled to expenses.  When I was in the hospital in Penticton in 1999, one of my nurses was working that way for the Oliver, Penticton and Kelowna hospitals because she could not get a full time job in the Penticton Hospital where she lived.

-------------
The next case shows that a position can change from self-employed to employee quite easily as well

In 1985, Joseph Gleddie won two years and lost two years.  He had contracted his services to PanCanadian petroleum Limited in 1976 as an independent contractor.  In 1979, his contract changed with constraints placed upon his duties.  He was required to be in the offices of PCP by 8:30 AM, submit time sheets, and was assigned priorities and work schedules.   Judge Delmar Taylor of the Tax Court ruled that he was self employed for 1976, 77 and 78 and entitled to claim business expenses but was not self-employed in 79 and 80 as his position had changed to employee.


In a landmark Illinois case in 2001, the Illinois Supreme Court ruled that all of the "independent contractor" couriers and messengers and truck drivers for AFM MESSENGER SERVICE INC (and by default all the rest of the messenger / couriers) in the state of Illinois were employees. 

Read more about this case at http://www.w-p.com/CM/Articles/Messenger-Courier.asp

Hope this gives you further clarification.

I would use another definition.  If you are in the US as a TN person with an independent contractor letter and i met you on  the premises of the company that hired you would you, if asked for,

1.   give me a business card with that company's name and phone numbers on it,  OR

2.   give me a business card for your own 'independent contracting business?

I expect that the answer is one and if so, you are clearly an employee without benefits.

david ingram

To: centapede@lists.centa.com; centapede-us@lists.centa.com; centapede-ca@lists.centa.com; webmaster@jurock.com
Date: Mon, 15 Sep 2008 15:20:50 -0700
From: centapede@lists.centa.com
Subject: US CANADA Cross border income tax (Independent contractor) on TN - david ingram expert cross border non-resident income tax help and preparation by five tax experts with years of experience with Canada, Panama, American and Mexican income tax



QUESTION:

Dear Sir,

I moved to USA feb 2008 (under TN visa) to work with an US company as an independent contractor.

I signed this contract through a Canadian emplyment agency. Hence my Canadian employer (agency) is paying me salary.

Further I am working in Oil and Gas business so that I may be eligible for International tax credit.

Because I am working as an independent contractor with US company, they don't deduct any income tax on source. I am in USA for more than 183 days this year.

I have tie with canada i.e. bank accounts, RRSP, RESP, investment accounts, canadian employer etc. I was renting in canada and now renting in USA.

Question:

1. What should be my residential status for tax purpose?

2. Do I need to pay tax in Canada or USA or both?

Thanks,


P.S.-My tax residence in canada is in Burnaby, BC. Canada.
----------------------------------------------------------
david ingram replies:

This was rejected but picked out of the rejected emails because my 'picks' did not appeal to me.

If you are in the US on a TN visa, you can NOT be self employed.  You are not an independent contractor.  What you are is an employee without benefits which means you have to pay both halves of the US Social Security of 16%  plus your regular income tax to the US and if working in Louisiana or Oklahoma as opposed to Texas or Alaska, you will have to file a state return as well.

Your first liability as you have described yourself is to the USA.

You may file a US 1040 return and report your world income for the year including anything earned in Canada before you moved to the US .

OR

If you had a lot of Canadian income before you left, you may want to file a Dual Status US return where you do not claim the standard deduction but have to use itemized deductions.

------------------
THEN

You will either file a departing Canada tax return or a factual resident tax return but either of them require you to file Canadian form T1161.

You imply that you gave up your Canadian rental residence.  If that is the case, you are absolutely a Taxable (on your world income ) resident of the US under Article IV of the US Canada Income Tax Convention.

BUT

On the other hand, if you have a wife and children in Canada in a rented or owned place and you come 'home' every two weeks and do not intend to move your family to the US, you are likely only taxable on your US income in the US and taxable on your world income in Canada.
 
AND,

If you are a resident of Canada and working for a Canadian Employer, then you owe tax to the US as described above but would qualify for the overseas employment tax credit (form T626) if you are away for more than six months.
---------------
This older q & a might help

QUESTION: I started working in the states last April for about 8 months with a TN visa. I was wondering if I have to pay taxes on income earned in the states to Canada as well? ------------------------------------------david ingram replies:

You should file a departing Canada Income tax return with form T1161 and maybe a 1243 and 1244 if you have left any assets behind.

These older questions will help a bit


 
xxxxx wrote:
hello
i am a single Canadian working full-time in Texas  for a us employer
i have been in the us since Jan 2, 2007 on a tn visa.
i currently have a W2 and also have slips for rsp contributions
from canada for 2007.

what would be the cost for filing my tax returns to both countries?
also do you recommend contributing to ira roth's instead of rsp's
when i am working in the us?

thank you
xxxxx
-------------------------------------------------
david ingram replies:

As described, you have no tax to pay to Canada and should not have bought an RRSP for 2007.

Basically, you should be filing a departing Canada return and look at T1161 to see if it is necessary to file it -  Usually, you would file it is you own a summer cottage, home, non-RRSP mutual fund or brokerage account or are leaving a share of a family business or farm behind.

For the US, you would file a US1040.  there is no tax return in Texas, Nevada, Alaska, Florida for you to file.

If your intention is to come back to Canada, you should likely NOT buy a ROTH.  If you want a tax deduction buy a conventional IRA or participate larger in a company 401(K)

We charge $900 to $3000 for US Canada tax returns

There is a more detailed list further down below.



I am Canadian citizen and have been working in USA on TN-Visa since 2004. I have a valid Canadian driver license, no medical card, working bank account and has no property. All my family is staying with me in USA.

1) Am I suppose to file a Canadian taxes every year.

2) If I do, what would be the roughly tax break up like 20% paying in Canada and 80% in USA.

3) What would be your fee to file Canadian and USA taxes.

Thanks & regards.

----------------------------------------------------
david ingram replies:

You should have filed a departing Canada return in 2004.  there is no need to file a 2005, 2006, or 2007 return as you have described your situation.

If, on the other hand, the Canadian government asks you for a return for any of those years, you, as a Canadian citizen, are required to file.  Report all of your US income on the T1 and then deduct it all on line 256 of the return under Article IV of the US - Canada Income Tax Convention (treaty).

This older question and answer may help

----
I moved to Nevada for a job July 2006, and still work there now.  Do I do my
taxes in canada and us seperately? My earnings for 2006 in Canada were very
low.
_______________________________________________
david ingram replies:

You have more than one choice.

1.   a) You file a departing Canada tax return including form T1161 and 1243 and 1244 if you left more than $25,000 worth of assets behind.
   
        b)
You file a 1040NR Dual Status Statement for the US and then a 1040 Dual Status Return to report the US income only.  The statement is there to separate out any US income you may have received BEFORE you actually went to the US. You can NOT claim the standard deduction on a Dual Status Return You can only use itemized deductions on a Dual Status Return. 

2.   a)   You file Canada as in 1a) above.

       b)   You file a 1040 tax return reporting your world income for the year including the Canadian income.  Then you file US form 1116 to claim a foreign tax credit for the tax, CPP and EI you paid to Canada.  This allows you to claim the standard deduction on the US return.

Good luck.  Remember that you can always send the returns here by fax, courier snail mail or pdf email.
--------------

QUESTION:

Dear experts:
I am currently holding a TN visa working for a US employer. I have my family ties to Canada but I reside in the States for more than 183 days/year. Should I file as US resident or Canadan resident for the Tax purpose? In each case, what kind of tax forms or schedules I have to look at?
Thanks
_____________________________________________________________________________
david ingram replies

If you are applying for an H1B visa and intend to get a green card and your family is not moving unitl the resident alien cards come through, you should be filing as a US resident and not paying tax in Canada.  If you have a house, it should be put in your wife's name only.  You would file a US joint return with your wife and claim your children as dependents.

If you are not intending to stay in the US and are still spending a lot of time in Canada, you would file as a Canadian resident and claim a foreign tax credit for the taxes, FICA and Medicare taxes you pay to the US after filing your US 1040.

There is an in between position where you might be a factual resident of Canada where you report your US income to Canada but deduct it then on line 256 under Article IV of the US Canada Income Tax Convention. In this case you would be a tax resident of the US and file a joint US return with your wife.

You need to sit down in person or by phone with someone who really understands it.

my charges are explained below


-----------------------------------



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This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.

--
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