W4 Issues: Dual Citizen Living in Canada, telecommuting to US -

Hi David and Partners, 

I think I am in need of some serious US/Canada tax advice by telephone, and
help in filling out my forms.

My problem is as follows and I would appreciate if there is anything,
immediately, I should be doing to resolve this: 
 

I am a dual Canadian/US citizen, married to a Canadian citizen living in
Montreal, Canada, where we own a house, have health cards, etc. I
telecommute with 4 US companies, and have a small Canadian business income
from my own business. My wife also has a very small Canadian business income
from her own business. 

I originally filled out my W4 for these US companies with a US address
across the border where we often visit, collect mail, etc., and have a bank
account (we used to live and work in the US from 2000-03). I was under the
impression that that was sufficient enough for them to withhold tax on my
income, given that I am a US citizen. I would then claim the tax back in my
tax claims to both countries. This I have done in my 2003, 04 and 05 tax
forms and tax was returned to me as asked. In my US tax forms I noted that I
live permanently in Canada, filing Form 2555 each year, and form 90-22.1. In
my Canadian tax forms I note the income as foreign. 

I have not informed US social security that I live in Canada, and only
learned recently that that should have been done. SS is withheld on my US
pay stubs, however I typically get all social security fees back when I
submit my tax forms to the US. 

I am NOW of the understanding that the US employers may be subject to fines
for hiring me as a Canadian resident, and I may be subject to fines for
filling out the W4 incorrectly. My employers have no provisions for hiring
Canadian residents, and were I to fill out my W4 with a Canadian address,
they would probably cancel my employment. 

How do I make this situation normal and legal? Did I, in fact, fill out the
W4 incorrectly? If it was incorrect, as I see it, I have two options: 

1. Inform my employers I live in Canada and thus lose my work. Prepare for
criminal charges, getting fined and/or sued by the employers for an
incorrect W4 statement of residence. Perhaps re-submit previous tax forms,
but I am not sure why. I probably should tell US social security where I am
officially too. 

2. Move to the US right away. Dispose of all Canadian assets (house, bank
accounts, RRSPs). Still be prepared for fines, however, my W4 would now be
"correct" and, hopefully, my work secure. And yet even with this option I
fear that 3 years of incorrect W4s will net me fines, and perhaps my
employers will get fines, and I still may lose my job. 

Thanks for your help with this tricky situation. There are other
complications, but I think this is the biggest one for now. 
_______________________________________________________________
david ingram replies:

Do not worry about criminal charges.  That will not happen.  Your only problem is that you are paying into the US Social Security system which is not doing you any good as far as foreign tax credits are concerned. 

Without seeing you r returns, I really can not advise more However, for the future, you should have your three employers pay you what they were paying plus the extra payroll benefits they are paying and issue you a 1099 instead of a W2.

You know where we are if you need help to straighten it out.  I am very good working with employers in this case.

This older reply will help you.

QUESTION:

Hi,

I'm an American citizen residing in Canada (permanent resident) and working for an American company remotely from home in Canada. I get a W2 at year-end. I assume I have to file both US and Canadian tax returns.

My questions are :
1) Do I file a US tax return and claim a foreign tax credit on my Canadians tax return. Or is it vice versa?
2) Do I still file state/local tax return in the US (I lived in Maryland prior to landing in Canada), even though I now reside in Canada?
3) For the extra tax I end up paying to the 2nd country (in excess to what I pay to the first country), can I claim any type of credit or deductions on that tax in next tax year?

Thank you very much!

====================================================
david ingram replies:

If you are working in Canada, you should not be getting a W-2.  The reason is that as a reasident of Canada, you should not be paying into US Social Security or Medicare or paying basic income tax to the USA.

Your first tax liability for services rendered in Canada under Article IV of the US Canada Incomne Tax Treaty is to Canada.

You should be filing a Candian T1 return and paying Canada and provincial income tax first.  Then you would file your US return and either:

1.    Use form 2555 to exempt up to $82,400 of income from US tax and then file US form 1116 to claim a foreign tax credit on the excess OR

2.    Use form 1116 to claim the foreign tax credit onyour US return for tax paid to Canada.  If you have children, you woul dusually do the latter because it would usually qualify you for the $1,000 per child USA refundabvle tax credit.

3.    In the case of interest (10%) and dividends (15%), you must get any excess tax back from the US by reclassifying the income on form 1116.

4.    In the case of interest, you can claim the difference between 10 and 15% as a deduction on Canadian schedule 4.

5.    You should NOT be paying into a US 401(K) or US Social Security. Canada will not allow the 401(K) as a deduction.

Your employer should start paying you on a 1099 Basis and pay you your salary plus their share of Social Security plus their share of Medicare plus their share of any 401 or other pension plan they contruibute to.

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David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
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Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office)
 
 
Disclaimer:  This question has been answered without detailed information or consultation and is to be regarded only as general comment.   Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation  in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
 
Be ALERT,  the world needs more "lerts"
 
ity.
 
Phone consultations are $400 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or a phone consultation is in Canada.
 
This is not intended to be definitive but in general I am quoting $800 to $2,400 for a dual country tax return.
 
$800 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,000 would be the same with one rental
 
$1,200 would be the same with one business no rental
 
$1,200 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.
 
$1,500 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
 
$2,400 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 $150.00 up.
 
With a Rental for $350
 
A Business for $350 - Rental and business likely $450
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 $800 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.
 
Just a guideline not etched in stone. 
 
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