Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: What are the tax implications (1) to the Canadian company providing services in the U.S. for a minimum of 180 days within a 12-month period and (2) to Canadian employees working under contract for the same period or longer.
Position: (1) The Treaty may deem the corporation to have a permanent establishment in the U.S. under Article V(9). The corporation is a resident of Canada and is taxable on its worldwide income; however, it may also be liable for tax in the U.S. on profits attributable to the deemed permanent establishment. (2) Under Article XV(2), if an employee performs services in the U.S. for a period greater than 183 days, he/she may be liable for tax in the U.S.
Reasons: Article V(9) and Article XV(2) of the Treaty.
XXXXXXXXXX
2010-038280
K. Podor
May 3, 2011
XXXXXXXXXX :
Re: Canadian Resident Performing Services Outside of Canada
This is in response to your correspondence dated August 4, 2010 wherein you requested information regarding the taxation of a Canadian corporation and its employees contracted to provide consulting and programming services in the U.S. for a minimum period of 180 days within a 12-month period.
Comments:
For the purposes of answering these questions, we have assumed that the Canadian corporation and its employees are resident in Canada and are eligible for benefits under the Canada-United States Tax Convention (the "Treaty"). In order to claim these benefits, it may be necessary for the Canadian corporation and/or its employees to file tax returns in both jurisdictions.
Canadian Corporation Providing Services in the U.S.
A corporation that is resident in Canada is taxed on its worldwide income. In the situation you outlined the Canadian corporation will perform services in the U.S. for a period likely to exceed 183 days. Depending on the circumstances, paragraph 9 of Article V of the Treaty could apply to deem the corporation to have a permanent establishment in the U.S. The determination of whether a permanent establishment exists in a particular jurisdiction is a question of fact which can only be determined by reference to specific facts and the provisions of the Treaty.
If the corporation is deemed to have a permanent establishment in the U.S., the corporation's profits that relate to the functions performed and the risks assumed by the provision of the services in the U.S. would be attributed to the deemed permanent establishment. In determining profits of the permanent establishment, expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses, are deductible whether incurred in the jurisdiction in which the permanent establishment is situated or elsewhere. Given your circumstances, we recommend that you consider the applicability of additional provisions of the Treaty. For example, Article VII of the Treaty applies to the taxation of business profits.
If the corporation is required to pay U.S. taxes, the corporation may be entitled to reduce its Canadian tax liability by claiming a foreign tax credit for the U.S. tax paid on income earned in the U.S. For a detailed discussion on claiming foreign tax credits, please refer to Interpretation Bulletin-270R3, Foreign Tax Credits. This bulletin and other Canada Revenue Agency (CRA) publications can be found on the CRA website at www.cra.gc.ca under Forms and Publications.
To obtain additional information regarding U.S. tax rules and tax return filing requirements applicable to non-residents performing services in the U.S., you should contact the Internal Revenue Services (IRS) or a tax practitioner that deals with cross-border service providers.
Canadian Employees Working in the U.S.
Canada taxes individuals on the basis of residence. If an individual is a resident of Canada, the individual is taxed on his/her worldwide income.
Where a Canadian-resident employee derives employment income from employment in the U.S., Article XV of the Treaty may apply to preclude the U.S. from taxing his/her employment income. Paragraph 2 will apply if one of the following conditions is met:
1. The remuneration does not exceed ten thousand dollars ($10,000) in U.S. currency; or
2. The employee is present in the U.S. for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, the remuneration is not paid by a person who is a resident of the U.S. and is not borne by a permanent establishment in the U.S.
The CRA cannot provide comments on the status of the Canadian corporation's employees for U.S. tax purposes. It is beyond the mandate of the CRA to comment on the impact of U.S. tax rules and practices regarding how an employee would be taxed in the U.S. We suggest you contact either the IRS or a tax practitioner who is familiar with cross-border employment issues.
Waiver of Withholdings:
The Canadian corporation may be required to withhold and remit U.S. tax in respect of remuneration paid to its employees who are performing employment duties in the U.S. At the same time, the normal withholding requirements in Canada, under subsection 153(1) of the Act and section 102 of the Income Tax Regulations, will apply. The CRA may provide a waiver on a portion of the Canadian withholding taxes in respect of employment exercised in the U.S. Applications are made to the local Tax Services Office. The procedure for applying for a "letter of authority" under subsection 153(1.1) of the Act is explained in chapter 5 of the Guide T4001, Employer's Guide: Payroll Deductions and Remittances.
We trust these comments are helpful.
Steve Fron, CA
A/Manager
International and Trust Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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