Recently at Citizen Abroad we have been working with a group of highly specialized US based consultants (USConsultant) who were contracted to provide services on a Canadian project for a short term basis (less than one year total contract spanning two calendar years).
The Canadian client (CanClient) who contracted with these US tax residents, indicated that it could only do so if each USConsultant provided services through an Entity (i.e. CanClient will not work with sole-proprietors). Pretty standard yet careful approach by a Canadian company worried about the “employee” status of a contractor hired mostly for his or her personal skills. Nonetheless, that was an easy fix for the USConsultants who, if they didn’t have a structure in place already, quickly were advised by their US based CPAs or attorneys to register Sole Member LLCs in their respective home states and a contract was written between CanClient and USConsultant LLC.
USConsultant boots were on the ground on CanClient’s project by the following week.
Fast forward to the end of month one and USConsultant prepares an invoice from USConsultant LLC for CanClient…USConsultant at this point is informed of the requirement for CanClient to withhold 15% of the total invoice value under Regulation 105 (payments to non-residents for fees earned for services in Canada) and CanClient sends required forms to USConsultant for completion. USConsultant discovers that USConsultant LLC must also register for a Canadian Business Number and an HST (sales tax) number is required and HST must be collected.
At this point USConsultant is referred to Citizen Abroad and we begin to provide the full picture of Canadian taxation of USLLCs to USConsultant. Briefly, the conversation went as follows:
- Yes, you must register and it takes Canada Revenue Non-Resident Business Registration a MINIMUM of 2 weeks to issue BN and GST/HST number,
- CanClient is correct, USConsultant LLC is subject to Canadian Regulation 105 withholding (15%) which should be refunded as it seems the LLC will not have a Canadian permanent establishment (PE) as USConsultant doesn’t anticipate days in Canada over 183 in any 12 month period covering the contract years.
- Yes, there is absolutely a waiver available for the Reg 105 withholding, but it takes Canada Revenue Agency (CRA) approximately 4 -8 weeks to process so, until then…withholding is required, Recommend waiver for 2018 as it is now November 2017 and CanClient must have waiver in hand to waive the 15% withholding.
- The USConsultant LLC must charge and remit HST on its services. A GST return must be filed annually.
- The USConsultant LLC must file a Canadian Corporate T2 return (yes Corporate return as CRA views the LLC to be a Corporation not a passthrough) to get a refund of the Reg 105 tax withheld (to claim Treaty benefits). It may take CRA up to 6 months to refund this tax (which is well beyond the US tax filing and payment deadline) of April 15th (not to mention estimated payment deadlines). This is an annual filing requirement.
- There are fees involved to provide the services and compliance in items 1-5 above and these fees will far outweigh USConsultant’s US tax return compliance fees. These fees are NOT INSIGNIFICANT when you consider that USConsultant will charge $100,000 – $135,000 Cdn over the term of the contract.
As you can see, the above is a LESS THAN DESIRABLE result, but it would be much worse if the USConsultant LLC is considered to have a Permanent Establishment (PE) in Canada. But that is another article….
Our recommendation to USConsultant? Consult with CanClient as a self-employed individual (this was a no go from CanClient) – it won’t save much in terms of fees for the steps in items 1-5 above, but it can protect you from a seriously high tax rate (over 50% effective rate as LLC with PE in Canada – as compared to the USConsultant’s estimated US effective rate of 15%) should you have a PE in Canada.
If truly there is no risk of PE in Canada (watch your days, USConsultant!), stay the course and consider the fees an investment in avoiding the long arm of CRA who has become amazingly adept at “reaching” out to those individuals and companies for whom T4A-NRs have been issued, tax withheld and no GST or other reporting has been provided.
Oh, and for those who like the “do nothing” approach… (aside from my warning re CRA above)…those who say “let the 15% be withheld, keep your head down and claim a foreign tax credit on your US 1040”? Tax paid on income that is otherwise exempt due to a US-Canada tax treaty is not eligible for the foreign tax credit…so the non-compliance would continue onto USConsultant’s personal 1040…I don’t feel good about that…do you?
DISCLAIMER – Of course, this is a simple article originally written for LinkedIn sharing the tax complexities of some clients at our firm and the content should DEFINITELY not be construed as tax advice, please DO NOT USE IT AS SUCH. Instead, pick up the phone, call us and engage us. We will help you with your specific questions. Remember – not all tax is personal tax but all tax is individual and the above may not apply to you as it did to our US Consultants.