Which tax deductions should be taken from pay - David Ingram gives expert income tax service & immigration help to non-resident

I was hoping you could help direct us to some documentation that highlights what the proper procedure would be for our situation. My husband is a Canadian Citizen and resident and was working in Bellingham, WA under a TN Visa (one year renewal require) for the past 7 yrs. He has now been transfered to the Surrey, British Columbia Canada their Sister location as of Nov 2007. He was always on the US payroll and paid US taxes and filed both US / Canadian taxes. Now, that he is in Canada and is a Canadian Citizen, we believe he should be getting paid out of the Canadian Payroll systems with Fed/CPP/EI deduction instead of US taxes.He believes the company is in the process of letting him go and replacing him with a Jr. employee for less pay. As they are an "At Will" State and don't need to pay him a severance once they let him go they are keeping him on the US payroll for their protection. Would you be able to tell us what we would do in this situation and what taxes should be deducted from him income?Thank you in advance for your help in this matter.

david ingram replies:

TN employees have virtually no rights at any time. It is the mostdangerous visa to work under in the US because any employment contractcan not be for more than a year.

I do NOT consider myself an expert on BC employee.employer law. However, there is no doubt that his company should NOT be deducting UStax, FICA or Medicare at this point. If he is working at a BC Companylocation, the employer should be deducting Canadian and BC tax and CPPand EI.

And, I do not believe that the employer has anyprotection by keeping him on a US payroll.

It is my opinion that if he were to be laid off at this time, acomplaint to the BC labour relations people and the EI employeedeductions people, would result in the employer would finding itself indire straits.

If he is reporting to a BC site and working for a branch or sisteroperation, he is clearly covered under BC labour law in my opinion.

And for the record, it is costing the US employer MORE out of theirpocket expenses in payroll taxes to keep him on a US payroll than if hewas on a BC payroll at the same salary or within 20% of the same salary.

He should go to his employer and (blaming his wife which always gets aguy sympathy) tell them that you have been checking around and havetold him he should be having Canadian taxes and stuff deducted unlessthey are intending to send him right back to the US.

Let me know what happens. You can even reprint this q & a to showthem.

But, if you do, to keep peace in the corporateworld, take out this line and he others highlighted in red. It willread fine and he might get some action.

This older question will help a bit as well.


I telecommute. is the US company required to make deductions? If so,is there an amount of income that is exempt?
david ingram replies:

Assuming that you are doing all your work in Canada and are paying yourproper tax to Canada, there will be no tax liability to the USA onthose earnings.

Therefore, it does not make any sense that the company would deduct anyUS tax whatsoever.

Canada is a sovereign nation with a tax treaty with the United States. Even though a US citizen is required to file a US tax return no matterwhee they live, Article IV(2)(a)(b)(c)and (d) of the US/Canada IncomeTax Convention spell out where you pay tax on your world income firstand it would have you pay tax on your world income to Canada first asdescribed..

If you are a Canadian citizen, you have no tax liability whatsoever tothe US if all your duties are in Canada.

If you are a US citizen, you are entitled to foreign tax credits and anearned income exemption of up to $82,400.00 against the income earnedin Canada.

You would calculate and pay your Canadian tax first and then report itagain on your US 1040. You would claim a foreign tax credit for thetax paid to Canada on US form 1116.

If you have children, you can file form 8812 and claim a refundable taxcredit for up to $1,000 per child.

But your question was about the US company deducting US Federal andmaybe even state tax.

There is no onus on Your US employer to deduct any taxes from youwhatsoever unless you have been transferred to Canada for a period offive years of less. If that is the case, they can write to the CanadaPension Plan and ask for permission to not deduct CPP and continuepaying (and deducting) FICA but that is all. If you are working inCanada, a sovereign nation, they either have to deduct Canadian IncomeTax, Provincial Income Tax, CPP and EI, or pay you as a contractemployee with no deductions by means of a 1099.

An analogy would be if you worked and lived in California and yourcompany was in Chicago, they would NOT deduct Illinois state tax. Ifthey did, you would be all over them saying "I work and live inCalifornia, why would you deduct Illinois Tax, what are you thinking".You might even be a little sarcastic and cast aspersions on theintelligence of the HR person who would deduct Illinois when you liveand work in California (or Ohio, Minnesota, Oregon or Rhode Island forthat matter).

(On the other hand, a Tennessee person telecommuting to New York WAStaxed New York State Tax last year but he was also physically workingone week a month in New York).

If you have been in Canada over a year and got all your US tax back in2006, you can even use line 7 of a W4 form to have your employer stopmaking deductions.

Best and easiest would be for you to become a self employed service andbill them on a 1099 basis. In this case, they should pay you the amountof their payroll taxes and holiday and fringe benefits extra.

The following was the topic of a 5.5 hour seminar I gave last Sunday.


I want tomake it clear that what you are about to read applies to Americans whohave never lived in the United States, as well as those who haveemigrated from the U.S. to other countries (including CANADA).

Even if they have no U.S. income now, and they have never had onecent of U.S. income in their lives, United States citizens are requiredto file a United States income tax return (reporting their worldincome) no matter where they live in the world if they haveincome from any source (including non-taxable internal earnings in anRRSP). There are severe penalties for failing to file an annual U.S.return. In one case, $190,000 of tax and penalties were levied againsta U.S. citizen living in Vancouver, and shows that the IRS can go backto 1986 (or even 1967) with impunity. In this case, the gentleman haslived in Canada since 1986, and was told by professionals that he didnot have to file United States returns. The IRS found him after he losthis U.S. passport in a robbery and had to get it renewed.

And, in case you are thinking this is a wealthy man who will justhave to "pay up"; the person involved averaged less than $15,000Canadian per year of earnings from employment for the years 1986 to1995. This bill could have wiped him out for life, and HE LOST MONEY. ACanadian professional accountant told him explicitly that he did nothave to file U.S. tax returns because he had lost money and he wasliving in Canada. It is true that MOST Canadians do not have to fileCanadian returns if they move to the U.S., or Australia, or Germany,etc. BUT! ALL AMERICANS do have to keep filing no matter where theylive.

If you ARE a U.S. citizen, and have not been filing your U.S.returns, you should get a copy of my November, 1993 CEN-TAPEDE and usethe information in that newsletter to file your returns retroactively.Find that newsletter at www.centa.comin the top left hand box.

What else does anAmerican in Canada (or Paris for that matter) have to worry about?

1. Taxation of the Family Residence Americans come to Canada and are amazed that thefamily home in Canada is income tax free. Unfortunately for theAmerican, the sale of a Canadian (or Australian, etc.) family house isstill reportable by the American on their annual 1040 income tax return($250,000 US per person is exempt but should be reported and exempted.

2. Gift Tax (if this applies to you,read my February 1994 newsletter) Afterselling the family house (which they think is tax free) it is notunusual for an American living in Canada to give their children some ofthe proceeds and buy a less expensive house or condo for themselves. AU.S. citizen can only give a child up to $12,000 a year beforeincurring U.S. gift tax. The February, 94 newsletter has all the rates,but suffice it to say that if U.S. mom gives her daughter $22,000 U.S.in one year, MOM OWES gift tax of $1,800 and has to file a U.S. 709gift tax return.

You might ask, "How will the IRS find out?" Easy! The daughterwill go across the U.S. border with her new car, and a customs/IRSagent will ask her where she got the money to buy the car. Or daughterwill buy a Hawaii condo with the money and when she is audited on thesale and asked "where did the money come from to buy the condo?" shewill have to answer that "Mom gave it to her."

This situation took place in my office the week I wrote this. Ispent 21 hours over a 3 day period in a tax audit with a young couple,the tax department auditor, and a 1 1/2 year old tyke. The auditorspent 4 hours asking how much they spent for beer, diapers, clothing,rent, gas, travel, and Xmas gifts, etc., IN DETAIL back as far as 1986for some items. The auditor was doing a "source and application offunds" audit and was particularly concerned with how much money thehusband's father had given them, and just as importantly, when? Afterthirty-one years in the tax business, I still could not figure outwhether the auditor was after the 35 year old "kids," or whether theauditor was after the father. I am inclined to think the auditor wasafter "dad."

The auditor also mentioned the "close" cooperation which now existsbetween customs, tax, and immigration. She can get whatever she wants=66rom any of the departments and we are seeing these ourselves almostdaily. In addition, the U.S. and Canadian tax authorities are now proactivein their reporting. If a Canadian auditor is dealing with someonewith an American identity or income (rental, stock, director's fees,etc.) the Canadian auditor MUST now automatically report it to the U.S.and vice versa because of the U.S. / CANADA Tax Treaty signed onNovember 8, 1995.

3. Ownership of Foreign Companies(Also see September 94 newsletter) Ifa U.S. citizen owns 10% or more of a foreign corporation, he or she hasto file some rather rigorous forms with their 1040 tax return.Basically, Form 5471 requires them to recalculate the company's profitsusing a Dec 31 year end, and put their resulting share of profits (evenif not received) on their 1040 return. Penalties for failure to filethis form can add up at (are you ready for this?) $10,000 every 30 dayslate up to a maximum of $50,000. This can be even more significant ifyou own 4 Canadian companies. The hard part here is for the American torealize that his Canadian Company is a foreign companyto the U.S. This, of course, also applies to A Canadian who moves tothe USA and still owns shares in a family corporation in Canada =96Usually dad gave them the shares.

4. Taxation of "Tax Free" Dividends This is always a heart breaking moment. A Canadianaccountant has spent hours explaining to "hubby" why his wife shouldhave "X" number of shares in his company and how beneficial it isbecause she can take out $30,000 (varies) of actualdividends and not have to pay any tax to Canada because of Canada'sdividend tax credit. They are totally dismayed and the accountantmortified to find out that the dividends were 100% taxable on her U.S.return, and that the U.S. does not recognize the Canadian dividend taxcredit. In addition, she is also liable to file the 5471 formsmentioned in "3" above or suffer the penalties. And, shemust file the TDF 90-22.1 mentioned in 5 below.

5. Reporting of Foreign (Canadian)Accounts. U.S. citizens with signingauthority on foreign financial accounts which total more than $10,000U.S. at any one time in a year must report the details of ALL theaccounts to the U.S. Treasury in Detroit on a form TDF 90-22.1.Failure to file this "simple little form" carries a penalty of up to$500,000 PLUS 5 years in jail. Note that this form is filed withTREASURY in Detroit, NOT WITH the IRS. See the bottom of Schedule B ofyour 1040. And, of course, this applies in spades to a Canadian in theUS. As of about June 17, 2007, I am informed that themin penalty will be $10,000 for failure to file this form which ismentioned in the last two questions on the bottom of schedule B.

Notice that this TDF 90 form requires details of accounts on whichyou have a signing authority. It does not need to be youraccount, or contain your money or securities. If you are anurse and sign on the nurse's union account, you must report thedetails asked for on the form TDF 90. If you are a cub leader or asigning officer for your Kinsmen account or a deacon at your church andsign the church's account, you must give the details to the Departmentof the Treasury in Detroit. This also applies to RRSP accounts whichare even more serious because they are also classified as "FOREIGNTRUSTS". http://www.irs.gov/pub/irs-pdf/f90221.pdf

6. Annual Taxation of RRSP Accounts NOTE that ANY U.S. CITIZEN who owns a CANADIANRRSP (which is a foreign trust under U.S. law) isliable for a fine of up to $500,000 U.S. PLUS 5 years in jail ifthey do not report the existence of the account to the TreasuryDepartment as explained in item "5".

In addition, there are further penalties for failing to report theRRSP earnings on an annual basis to the IRS. A new form 8891 wasprovided in 2004. On an annual basis, you must reportthe following to the IRS:

1. The name of the financial institution holding the RRSP;

2. The total contributions made up to Dec 31, 2006 includingrollovers;

3. The earnings (interest, dividends, capital gains) in 2006 (orany other relevant year) and

4. The balance in the account as of (at) Dec 31, 2006 or otherrelevant year.

5. Any Withdrawals made in 2006 (or any other year)

Note that the internal earnings of the RRSP MUST be reported on theU.S. 1040 income tax return. The RRSP earnings can only be exemptedAFTER reporting them under the US/Canada Tax Treaty. Note thatresidents of every country other than Canada must file form 3520 / 3520A. http://www.irs.gov/pub/irs-pdf/f8891.pdf.Failure to file the 8891 is 35%of the principal plus 5% for each year not reported. OUCH!!

7. Social Security Tax on CanadianSelf Employed Earnings If you are earningmoney in Canada, you are liable to pay U.S. FICA taxes of 15.3% on upto $94,200 of earnings (2.9% over 94,200) UNLESS youfile an exemption request under the US / CANADA Tax Treaty or Article Vof the CANADA / US Social Security Agreement

8. All Canadian Wages or SelfEmployed Income is Taxable in the U.S. There is an "up to$82,400" U.S. exemption but to get the exemption, you HAVE tofile the return and submit a form 2555 to claim the exemption.If you do not fill in the exemption form, your Canadian earnings aretaxable on a U.S. return and you could end up with double taxation ifyou do not come forward voluntarily. Note though, that if theAmerican in Canada has children, he or she can claim up to $1,000 perchild refundable tax credit by filling in form 8812 and 1116 instead ofform 2555.

Canadians performing services in the United States, and in 43 of thestates in particular, are required to file the respective statereturn(s) and a US federal 1040NR or 1040 income tax return, even iftheir remuneration was paid from Canada. This applies, but is notlimited to:

* Executives attending meetings inthe US and, in particular, California,

* Service technicians servicingCanadian products under warranty,

* Salespeople selling Canadianproducts in the US,

* Journalists (e.g. covering CanucksHockey games, INDY races or O J Simpson trial),

* Horse trainers, race car mechanics

The above are exempt from tax up to $10,000 of earned incomebut the taxpayer must file returns to prove his or her exemption perArticle XV. If you earned over $10,000 in the US, US taxation dependson where the employer gets its ultimate tax deduction for the wagespaid out. If you are in the US more than 183 days, you are usuallytaxable on your world income.

** Entertainers, actors, musicians, performers,

** Professionalathletes, race car drivers, jockeys.

The above are exempt from tax upto $15,000 in gross earned income (which includes travel expenses) butstill have to file the return to prove their exemption under ArticleXVI.

*** Transport Employees, Truckers,Flight Attendants, Pilots if over $15,000.

Transportation employees areexempt from tax in most cases even if in the US for more than 183 days,if they are exercising their regular employment. They must, however,file the tax return to exempt the income.

Canadians with US rentalproperties must file a 1040NR with schedules E and 4562 and therelevant state tax if in a taxing state. The penalty for failure tofile the 1040NR EVEN IF YOU ARE LOSING MONEY is $1,000 to $10,000 perowner plus 30% of the Gross Rent with no expenses allowed.

David Ingram wrote:
It is very unlikely that blind or unexpected emailto me will be answered. I receive anywhere from 100 to 700 unsolicited emails a day and usually answer anywhere from 2 to 20 ifthey are not from existing clients. Existing clients are advised toput their 'name and PAYING CUSTOMER' in the subject and get answeredfirst. I also refuse to be a slave to email and do not look at itevery day and have never ever looked at it when i am out of town.

However, I regularly search for the words"PAYINGCUSTOMER" and always answer them first if they did not get spammed out.As an example, as I write this on June 28th, since June 16th (12 days),my 'spammed out' box has 7,118 unread messages, my deleted box has 2630I have actually looked at and deleted and I have answered 63 emailquestions I have answered for clients and strangers. I have also putaside 446 messages that I am maybe going to try and answer because theylook interesting.

Therefore, if an email is not answered in 24 to 36hours, it is lost in space. You can try and resend it but ifimportant, you will have to phone to make an appointment. GillianBryan generally accepts appointment requests for me between 10:30 AMand 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles)time at (604) 980-0321

David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week Vancouver (LA) time - (please do not fax or phone outside of thosehours as this is a home office)
Disclaimer: This question hasbeen answered without detailed information or consultation and is to beregarded only as general comment. Nothing in this message is orshould be construed as advice in any particular circumstances. Nocontract exists between the reader and the author and any and allnon-contractual duties are expressly denied. All readers should obtainformal advice from a competent and appropriately qualified legalpractitioner or tax specialist for expert help, assistance,preparation, or consultation in connection with personal orbusiness affairs such as at www.centa.com. If you forward this message, this disclaimer must beincluded."
David Ingram gives expert income tax &immigration help to non-resident Americans & Canadians from NewYork to California to Mexico family, estate, income trust trusts Crossborder, dual citizen - out of country investments are all handled withcompetence & authority.

This from "askan income trusts tax and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily basis with expatriate taxreturns with multi jurisdictional cross and trans border expatriateproblems for the United States, Canada, Mexico, Great Britain, UnitedKingdom, Kuwait, Dubai, Saudi Arabia, Thailand, Indonesia, Japan,China, New Zealand, France, Germany, Spain, Italy, Russia, Georgia,Brazil, Peru, Ecuador, Bolivia, Scotland, Ireland, Hawaii, Florida,Montana, Morocco, Israel, Iraq, Iran, India, Pakistan, Afghanistan,Mali, Bangkok, Greenland, Iceland, Cuba, Bahamas, Bermuda, Barbados, StVincent, Grenada,, Virgin Islands, US, UK, GB, and any of the 43 stateswith state tax returns, etc. Rockwall, Dallas, San Antonio Houston,Denmark, Finland, Sweden Norway Bulgaria Croatia Income Tax andImmigration Tips, Income Tax Immigration Wizard AntarcticaRwanda Guru Consultant Specialist Section 216(4) 216(1) NR6 NR-6 NR 6Non-Resident Real Estate tax specialist expert preparer expatriate antimoney laundering money seasoning FINTRAC E677 E667 105 106TDF-90 Reporting $10,000 cross border transactions Grand Cayman ArubaZimbabwe South Africa Namibia help USA US Income Tax Convention

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david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604)980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week Vancouver (LA) time - (please do not fax orphone outside of those hours as this is a home office) US Canada Canadian American Mexican Income Tax service help.
pert US CanadaCanadian American Mexican Income Tax service and help.
David Ingramgives expert income tax service & immigration help to non-residentAmericans & Canadians from New York to California to Mexico family, estate, income trust trusts Cross border, dual citizen - out ofcountry investments are all handled with competence & authority.
Phone consultationsare $450 for 15 minutes to 50 minutes (professional hour). Please notethat GST is added if product remains in Canada or is to be returned toCanada or a phone consultation is in Canada. ($472.50 with GST if inCanada) expert US Canada Canadian American MexicanIncome Tax service and help.
This is not intended to be definitivebut in general I am quoting $900 to $3,000 for a dual country taxreturn.

$900 would be one T4 or W2 slip, one or two interest slips and you lived in one country only (but werefiling 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 onerental
$1,300 would be the same with onebusiness no rental
$1,300 would be the minimum with amove in or out of the country. These are complicated because of theback and forth foreign tax credits. - The IRS says a foreign tax credittakes 1 hour and 53 minutes.
$1,600 would be the minimum with arental or two in the country you do not live in or a rental and abusiness 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 andyou 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 andno capital gains, etc. for $200.00 up.
With a Rental for $400, two or threerentals for $550 to $700 (i.e. $150 per rental) First year Rental -plus $250.
A Business for $400 - Rental andbusiness likely $550 to $700
And an American only (lives in the USwith no Canadian income or filing period) with about the same things inthe same range with a little bit more if there is a state return.
Moving in or out of the country orpart year earnings in the US will ALWAYS be $1,300 and up.
TDF 90-22.1 forms are $50 for thefirst 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 - (maybeamalgamate 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 theCanadian return as a guide for seven years at a time will be from $150to$600.00 per year depending upon numbers of bank accounts, RRSP's,existence of rental houses, self employment, etc. Note that thesereturns tend to be informational rather than taxable. In fact, ifthere are children involved, we usually get refunds of $1,000 per childper year for 3 years. We have done several catch-ups where the clienthas received as much as $6,000 back for an $1,800 bill and one recentlywith 6 children is resulting in over $12,000 refund.

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