Do you have a US Tax Obligation?
This is a good question many don’t think to ask. After all, you are a Canadian tax resident, paid by a Canadian employer in Canadian dollars, so why would the IRS care about you? And how could 10 to 20 days of business meetings in the US create a US tax filing obligation? You aren’t “working” in the US, most definitely not, your B-1 visa may not allow this…and in many cases you have a letter to assist you with crossing the border that indicates this…If you aren’t sure about your visa requirements we STRONGLY recommend contacting our colleague Evelyn Ackah for clarification.
US domestic tax law requires that, if a non-US taxpayer is performing services in the United States for a Canadian employer and the annual income exceeds $3,000 US (based loosely on your daily rate multiplied by the number of days working in the US), the Canadian employer has an obligation to report and withhold US Federal tax on this income to the IRS (similar to how an employer reports payroll to CRA), not to mention possible US state reporting and withholding obligations.
But reporting does not equal taxation. Article XV of the Canada – US tax treaty is written to ensure that most business travelers, performing services in a host state (in this case, the United States) for their employers from their home state (Canada) are only to be subject to tax in their home Country. This means that, in most situations, the income you earn while on those business trips in the United States is not taxable in the United States (note that this doesn’t exempt the income from being reportable). HOWEVER, in order to claim this treaty exemption in the United States, a personal US tax return must be filed and this treaty position disclosed.
So, to recap:
- Performing services in the United States often creates an income tax reporting (and income tax withholding) obligation with the IRS for your employer or the payor for your services
- The Canada – US Income tax treaty provides an exemption from US tax on these earnings
- In order to claim the treaty exemption from withholding, an 8233 waiver must be filed with the IRS. In order to claim a treaty exemption from final US tax, a US tax return must be filed with the IRS along with treaty exemption statement.
These requirements involve a great deal of resources, coordination, and paper pushing – not to mention the pushback from employees. Despite the potential penalties and interest on the failure to report and withhold, many Canadian companies still choose to turn a blind eye to this issue.
Other Canadian employers however have found that once they attack the issue and manage through the first year, the reporting and compliance becomes easier, reducing the US tax risk and exposure to the corporation and the employee significantly. The process of managing the enterprise and employee tax risk also identifies other significant and very relevant areas of concern such as immigration, security and insurance, cross border issues which can result in far more than just tax penalties and interest.
Citizen Abroad Tax Advisors assists Canadian employers with the assessment and management of the US tax reporting and compliance for employees traveling to and working in the United States.