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I think maybe I should have been more specific. I am asking from the employers point of view what taxes the employee would be subject to for withholding purposes. Thanks so much for your help.
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david ingram replies:
If your employee is living and working in Michigan, you would make the same deductions you make for everyone else.
If the employee is commuting to work in Michigan you would make the same deductions but exempt the person from any 401(K) plan and give the employer's share to the employee so that he or she can buy a Canadian RRSP.
If the employee is working part time in the US and part time in Canada, you should reduce the US withholding by the amount necessary for the employee to make installment payments to Canada on the amount earned in Canada.
If the employee is working on both sides of the border, it is a problem for the employee if you deduct all the tax in one country.
The employee needs to pay tax to the US first on any monies earned in the US and to Canada first on any monies earned in Canada.
Then the Canadian resident would add the US income to the top of his or her Canadian income and pay tax to Canada on all of it. He or she would then claim a foreign tax credit in Canada for any tax paid to Michigan and the US federal gov't. The foreign tax credit would include any FICA and medicare paid.
If the person is on both sides of the border and living in Canada you should set up a Canadian payroll and make the social security deductions in Canada.
David Ingram
-----Original Message-----
QUESTION:
How would you tax a Canadian resident with a TN visa working in Michigan? We are based in the US.
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david ingram replies:
1. I would file a US 1040
2. I would file a Michigan MI-1040 plus details of any of the 12 Michigan cities with a City tax
3. If I had a rental house in Canada, I would file a Canadian tax return under section 216(4) and then convert the figures to US dollars and report them on my 1040 using Schedule E to report the rental and form 1116 to claim any foreign tax credit.
If I still had a Canadian RRSP, I would report the internal earnings and claim an exemption following the precepts set out in REV.PROC 2002-23 while I was waiting for the new form. from the IRS to be designed and printed.
If all my foreign accounts totaled over $10,000 US, I would make sure that I had filled in a form TDF-90-22 for each and every account.
http://www.irs.gov/pub/irs-fill/f9022-1.pdf - Failure to fill these forms in can result in penalties of up to $500,000 plus 5 years in jail.
Extract from 2002-23 which is essentially the rule in spite of other bulletins issued until the new form comes out.
At any rate every US person must conform to REV.PROC 2002-23, This means that (for each RRIF, RRSP, RPP) we must provide:
Section 4 Election Procedures
.01 In General
(i). A Statement that the taxpayer is claiming the benefit of Article XVIII(7) of the US / Canada Income Tax Convention
(ii) The name of the trustee of the plan and the account number
(iii) The balance of the plan at the beginning of the current year.
.02 Reporting
neficiaries shall attach a copy of the statement required in 4.01 until the tax year in which a final distribution is made.
.03 ROLLOVERS
If a rollover is made to a plan that does not attract Canadian Income Tax, and qualifies under Revenue Ruling 89-95, the previous election is deemed to carry over to the transferee plan.
.04 Transferee Plan Reporting
In the year of transfer, the beneficiary shall attach an additional statement
(i). A Statement that the taxpayer is claiming the benefit of Article XVIII(7) of the US / Canada Income Tax Convention
(ii) The name of the trustee of the transferee plan and the account number
(iii) The name of the trustee of the transferor plan and the account number
(iv) The total amount of income accrued in the transferor plan on which United States Income tax was deferred under Article XVIII(7) or former Article XXIX(5); and
(v) The initial balance in the transferee plan.
Beneficiaries of a transfer plan shall attach a copy of the statement required in paragraph 4.02 (transferor plan) and a copy of the statement required in this paragraph 4.04 (transferee plan) to their timely filed (including extensions) United States federal income tax return for each year subsequent to the transfer year until the tax year in which a final distribution is made from the transferee plan.
.05 MULTIPLE PLANS
An individual who is a beneficiary of more than one eligible plan must make a separate election and file a separate statement for each eligible plan.
.06 Extension of time for Making an Elections
An extension of time for making an election under paragraph 4.01 may be available under the procedures applicable under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration regulations.
.07 PROSPECTIVE CHANGE OF ELECTION
An election once made cannot be revoked except with the consent of the Commissioner.
SECTION 5. DISTRIBUTIONS FROM AN ELIGIBLE PLAN
Distributions received by a beneficiary from an eligible plan shall be included in gross income by the beneficiary in the manner provided under section 72 of the Internal Revenue Code, subject to any other applicable provision of the Convention.
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