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.
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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.
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This older question will help a bit as well.
USCITIZENS OR GREEN CARD HOLDERS IN CANADA AND CANADIANS IN THE US -FOREIGN ACCOUNT REPORTING REQUIREMENTS
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.