B W wrote:David,
 
I'm not sure I agree with your interpretation of the treaty changes. My understanding is that the Independent Personal services is now covered by the business profits article. In other words, a consultant would need to have a permanent establishment in Canada before Canada was entitled to tax the income. In other words, the fixed base concept is replaced by the PE.
 
I don't believe the consultant's income would fall under Article 15 which is now titled "Income from Employment" unless the consultant is an employee.
 
Thanks for the interesting discussion.
 

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david ingram replies:

I agree with your thought but disagree with the actaul outcome. 

Taking out article XIV was (in my opinion) a clear attempt to clear up the tax problems with the contract employee consultants.
It depends upon the visa issued, and in my opinion, no 'issued' visa qyalifies for business profits under normal circumstances.

For instance, the terms of a TN is that one can NOT be self-employed.  By definition then, a management consultant TN is / must be an employee.  He or she may be an  employee without benefits but they are an employee nevertheless.  My understanding is that the intention is to tax any of the management consultant types who have been showing themselves as self-employed which only makes sense.

If someone is genuinely in business, has muiltiple clients and no fixed base (including an apartment to live in), then they may be self-employed with business profits but then they will not be working on an H1, L1, or TN visa. 

If they have an E-2, they 'will' be self employed but by definition, they will now have a fixed base since the temrs of an E-2 are a fairly major investment in that US busines.
In my opinion, the only one who will now qualify is the person who has a legitimate full time business in either country and goes to the other country to gather information and take it back to their home country.

For instance, with a US B-1 visa status, I might go to your place in Texas and gather up a bunch of work and bring it back to Canada where I look after it.

BUT, as soon as "I" get a TN or an H1 to maybe actaully do the work in the USA, I am an employee.  Remember that the terms of Article XV now states 'salaries, wages and other remuneration' . 

I may be wrong and stated that I was willing to take other opinions.  So far, you are the only one to take exception to the opinion.  I expect that in the next few months, better counsel than I will have decided where it is going to go.

Thanks for the opinion. Further opinions welcomed.  

I am a Canadian with an L -1 A inter-company transfer VISA and have sold everything and have moved to the USA. I have purchased a home in Texas where I am working/residing and my daughter attends school. I am being paid and taxed at source in US dollars. Intention is to stay permanently and obtain green card. In the meantime, will I have any tax obligations ?



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david ingram replies:

As described, you have no further tax obligations to Canada other than filing a final departing Canada return.

Your final Canadian return should show the date of departure and the exemption amounts on Schedule 1 and 428 should have the amounts pro-rated by the number of days you were physically in Canada.  I.e number of days in Canada divided by 365 times the amount on line 300 as an example.

Everything you own is considered to have been sold at the time of departure and if there is a capital gains, there will be departure tax to pay or you will have to post security WITH THE CRA.

If you had left a summer cabin or stock portfolio or other assets worth more than $25,000 behind, you would need to file form 1116

http://www.cra-arc.gc.ca/E/pbg/tf/t1161/t1161-06e.pdf

We have used 50% of our home as a Bed & Breakfast for 18 years.  House has appreciated considerably and hope to be able to minimize the Capital Gains Taxes on the property when we sell.   Thanks for your answers...everybody seems to be running a B&B these days if they have a spare room or two.     Regards,   Vancouver Island   
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david ingram replies:   There is nothing to minimize.

As long as you have not claimed CCA (Capital cost Allowance or depreciation) on the actual building, there is no capital gains tax on the sale of a bed and breakfast that you physically live in.

Bulletin 120R6 implies that there is capital gains tax if you are renting out more than two rooms but since the law was passed on June 17, 1971, I have yet to see a bed and breakfast taxed ( I have dealt with the sale of at least 35) and I have never seen a duplex or even a four-plex where the owner lived in the building, taxed. �

Dear David.   Born in Canada but because both parents were originally from USA I have dual citizenship . I only pursued this and got my passport  and social security card 13 years ago . I have lived and worked only in Canada all of my life, I understand that I need to file taxes in USA, married wife is Canuck. How much to file simple no business or rentals and  when can I get an appointment. Regards   ----------------------------------------------------------------------------------
david ingram replies:

Please phone 604-980-0321 Monday to Friday between 10:30 AM and 4 PM and get Gillian Bryan to set up an appointment time.

As described, you are likely looking at $150.00 to $200 per year depending upon how many financial and RRSP accounts you have.

Being a US citizen is wondeful if you are going to use the citizenship for a purpose  If you were working for a multi-national company who wanted you to work on both sides of the border or if you were a performer or actor or if you were a long haul truck driver going south or an airline captain or even a taxi driver in Niagara Falls or White Rock, being a dual citizen can have a tremendous economical advantage because you get to work on both sides of the border with no restrictions.

However, as you have found, it also involves the reponsibility of filing a US return each and every year.  In fact, most people in your position have a larger responsibility to file a US return than a Canadian return.

Let me explain using 2006 Tax rates for both the US and Canada and ignoring any exchange difference between the two countries since there is little or none for 2007.

If you were a single person with a 15 year old son and an 11 year old daughter as dependents and no other deductions and you earned exactly $100,000 a year (let's forget about exchange) and your employer deducted (for 2006) $1,910.70 CPP, $729.30 EI and $26,505 income tax, you would NOT need to file a Canadian Income Tax return because you have a refund coming of $517.06 if you lived in BC.  However, because of different provincial tax rates, you would OWE $3,429.95 if you lived in Manitoba unless you bought a $10,000 RRSP in which case you would have a $910.05.00 refund)

If you bought the $10,000 RRSP in BC, you would .have a refund of $4,546.28.

Becasue you have a refund coming, under Canadian Law, you would not 'have to' file a tax retrurn unless you wanted your refund OR unless the CRA specifically wrote you and demanded a tax return be filed by you.

However, as a US citizen living in Canada (or any other country), you are in big trouble if you do not file your return.

1.   You owe the IRS $15,251 in tax because you have not filed a tax return to claim the foreign tax credits which would cancel the US tax.

2.    You are subject to a minimum penalty of $10,000 and a maximum penalty of $500,000 plus 5 years in jail for not reporting your RRSP and any bank accounts or other accounts you have signing authority over (maybe your mother's or father's or the kid's or even an account at work).

3.    A penalty of 35% of the principal plus 5% of the balance for every year you do not report the RRSP  (a foreign trust) and its internal earnings to the IRS.  If you use form 8891, you can exempt the income but the penalty is as above for not reporting it.

And if you happened to be the owner of 10% or more of a Canadian (or French or German or Indonesian or any other country) corporation, a fine of $10,000 for the first 90 days and $10,000 for every 30 days after to a max of $50,000 per corporation per shareholder per year.

As you can see, there is far far far more responsibility to file a US tax return than a Canadian return.

Another good reason.  In the example above, the US citizen single parent with two children and $100,000 of income in Canada is entitled to a $750.00 US REFUND becaus eof the US refundable Child Tax Credit which applies no matter where you live.  If your income was only $50,000, there would be a $2,000 refund.  What a good reason for filing your US returns. 

Catch up returns usually cost between $150 with no investment statements to $500 per year when there are rental houses and a lot of stock market trades and RRSP and bank account reporting.

Our quote for 2005 and 2006 for new US / Canada returns to be filed 'fresh' was $800 to $2,800.  For 2007, we are raising that to $1,000 to $3,000 because the foreign bank reporting and RRSP reporting has become so time consuming.

Catch up returns have also become more time consuming since June 20, 2007 whn we were told by the IRS that they wanted six back years pl;us the current year for people such as yourself and they wanted all the bank account reporting TDF 90 forms filed for each year as well. Up until that datre, it was our practice to just file TDF 90 forms for the last year involved.

The following disclaimer contains a more detailed set of parameters.

Does an American who works part time, as a consultant in Canada, pay taxes in Canada or the U.S.,on the funds received, from the work in Canada?


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david ingram replies:

Prior to Jan 1, 2008, it depends upon the contract, the work location, the visa the consultant is working under and whether the income was earned before or after Jan 1, 2008 under the terms of the new treaty that was signed / passed on Sept 21, 2007.

Prior to Sept 21, there was no doubt that if a self employed person worked in Canada and did not have a fixed base of operations in Canada  while continuing to live in the USA, that Self-Employed person did not pay tax to Canada although they had to file a tax return and claim the benefits of Article XIV of the treaty.

Article 9 of the new Protocols,  (find the whole amendment at   http://canada.usembassy.gov/content/can_usa/canadaprotocol07.pdf ) deletes Article XIV and my reading does not find it addressed specifically other than by the new terms of Article XV of the treaty which is amended by Article X of the protocols.  ( Iam wiling to be corrected here Andrew or Gary or??)

This new amendment refers to salaries, wages and other remuneration and seems to take into account that self-employed consultant's fees.  In this case, they will be taxable in Canada first if the amount exceeds $10,000 or the consultant is in Canada more than 183 days. 

Now these new protocols are being introduced in a graduated manner.  Article 27 of the new protocols states that the new rules will take effect on Jan 1, 2008.  Other specific dates are being used for other articles with one going back to Sept 17, 2000 and of the parts (article 3) not taking effect until the third year.  Assuming you are earning over $10,000 in Canada, under Article XV of the Treaty you should expect to pay tax to Canada first and claim a foreign tax credit on your US return by filing US form 1116..

Hope this helps �

QUESTION:

We moved from Canada on January 1st 2006. . My husband runs a business and I still work for Air Canada (22+years) commuting to the US.

The International Tax Office have helped us in putting our return together for 2006. They told us to file the request for NR status and than sent our Income Tax Returns. I still have tax deduction taken as if I am a resident of Canada.

We also have a condo in Halifax  that we own for 15 years and it has been rented till recently (April 2007).
We didnt know if we were considered non residents or not as I am working for Air Canada. However from the International office we understood we can claim non residency status.
Here is our problem:
We think we needed to file NR status back in January 2006 along with NR6 and NR4 for 2006-2007.
What do we do now?
They already sent us a fine for failing the file a form stating our house in California was investment property in 2005 (which it wasnt, we have a house and two guest houses, the main house was vacant and we used it while waiting for our US visa, renting a condo in Vancouver for that period).
My husband has his assessment from Canada for 2005 at -35000k (loss).
The condo didnt generate income. Canada was taking taxes from my Salary as if I was a resident. We dont have much income and we are suffering from a major financial hardship and not sure how to proceed with CRA as we cant afford to pay penalties. We didnt hide anything. We still dont have NR status.

Do we need to file for voluntary disclosure (we don't owe money)? Do we need to file the NR6 and NR4 along with a consideration for financial hardship?

I wish I could afford your consultation fee but the big mistake of moving to the USA has cost us financially/mentally etc.. and we can barely meet our mortgage obligations. This CRA issue (done unintentionally) is gonna cause us a major financial disaster.

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david ingram replies:

1.    I likely have 27 Air Canada employees who are living out of Canada at the moment.  When Canadian Airlines was flying I had over 100 but an amazing number have taken early retirement or moved back to Canada three to seven years ago as their Canadian dollar lost its spending power. With the difference in the dollar now, I expect a couple of them to return to the USA.

2.    It is too late for you to file a Form NR-6 for 2006 or up to today 1n 2007. An NR-6 is only effective from the day it is filed.  There is no retroactivity for the form.

3.   If you are flying domestically, the proper deductions for you are as a resident.  If you are flying Overseas, as a non-resident, you are taxable on your flights that are over Canadian Air Space.  The CRA has prepared a rather sophisticated EXCEL Spreadsheet to assist with the calculation.  You can get hold of it by asking the CRA for a copy. It is, of course, of no use if you are flying domesticly.

4.   When you left Canada, you should have filed Forms T1161. 1243 and 1244.  Failure to file form T1161 results in a fine of $25.00 a day (each)  to a maximum of $2,500 each.  Real Estate Property in Canada can be exempted from paying the tax 'now' but real property outside of Canada or Stock or mutual fund holdings or a private company incur the tax right now.  If you owned the Florida property for a day before you left, it would have to be reported and any capital gains from the day you bought has to be paid now or security for the tax posted with the CRA.  This is calculated using forms 1243 and 1244. I will make the statement that 98 out of a 100 Caandian accountants have never seen or filled out a 1243 or 1244 or T1161.  The situation is so 'unknown' that I think that the CRA's leveliing penalties is unconsionable. .  If you were penalized, you should write to the FAIRNESS COMMTTEE AND to the minister of National Revenue, Stephen Harper and your local MP before you left.

5.   It may be that you are better off being a taxable resident of Canada as you have described your situation.  It is possible for your husband to be a tax resident of the US and a factual resident of Canada while you are a tax resident of Canada.  At any time, I will have a dozen couples in that situation for one reason or other.

6.   Although the CRA ties to make people tax residents quite regularly, it is my experie3nce that theye CRA usually loses when we are dealing with the US IRS because the IRS wants you as a tax resident as well.  Article IV of the treaty is what determines the outcome.  Keeping an empty residence in Canada rally does complicate the decision, particularly if you actually stay in it.

As you have discovered with your property tax inequality, this stuff is technical and it is difficult for anyone to keep up with it all. I used to have 14 offices in Flordia and participated in teh sale of over 3,000 pieces of real estate in Cape Coral but would not begin today to think that I knew all the ins and outs of municipal tax legislation in Florida,  

Last, but not least, Capt Hauser (of Air Canada) lost his non-resident status in July 2006 in the Supreme Court of Canada.  You should be looking up his case to get ideas about what the latest rules are according to the Supreme court of Canada..

In the meantime, you should go to www.centa.com and read the US/Canada Income Tax section in the second box down on the right hand side. The first half is dedicated or deals mostly with US citizens living in Canada but at just about the very center, you will find several cases dealing with Canadians out of the Country AND the details of Judge Teskey's decision in the Dennis Lee Case. you will also find Article IV of the Treaty a couple of pages in.

What the heck, I will repeat most  of it here in this older Q & A.

QUESTION:

My wife quit drawing a pay cheque a few years ago to raise our two children. Because I will have an indexed pension when I retire (in about 20 years), I have been making bi-weekly contributions to a spousal RRSP (mutual funds) in my wife’s name.

We currently have a mortgage on our house that is a very good rate however the term will expire in 2 years. In light of the poor performance, of late, of our RRSP mutual funds and the probability of having to renew our mortgage at a much higher rate in two years, we are considering withdrawing some of my wife’s RRSPs to pay down our mortgage. 

My wife has some RRSPs that she purchased a few years ago when she working as well as the ones I have purchased in her name as spousal.

I have recently been transferred with work and we sold our home and purchased a new house in a different town. We are porting our mortgage to the new house. In the past we have both used the first time home buyers plan (to withdraw RRSPs for down payments), myself 17 years ago to buy my first house and my wife, 5 years ago to buy our first house. Do you know if this plan is still available and could we use it in our situation to reduce our mortgage?

If this is not the case, are we able to withdraw RRSPs in my wife’s name in the same year that I am making spousal RRSP contributions? What would be the optimum amount of withdrawal (with the least amount of tax) per year given, that she currently has little personal income. What would the tax hold back be on her withdrawal and does it change depending on her situation?

Please let me know what you think and where I might look to find out more information on this.

Your help is greatly appreciated

Sincerely,

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david ingram replies:


To qualify for a first time Home Buyers withdrawal from an RRSP,  you can NOT have owned a house you lived in for five years before the withdrawal.  Obviously, that  does not work for you.

Any Spousal RRSP withdrawals within 3 years of the date of deposit are taxed to the spouse who contributed the money (you) at 'your' highest marginal tax rate.

Your wife could take up to $35,000 out of her own RRSP at a tax rate of 23%. The withholding would be different but when the tax return is done at the end of the year, her tax rate would be about 23%.

Of course, if she just took out about $9,000, she woul dnot pay any tax and would get a refund any tax (uusally 10% on amounts of $5,000 and less) withheld but you would then lose her as an exemption at the same 23%.

Hi Mr Ingram

 

I wondered whether you know of any Immigration lawyers who can help us set up a business in

Seattle.  I am a Canadian Citizen.

 

Having done that, we would then require an accountant who can do cross-border taxes for us.

 

Many thanks


 


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david ingram replies:

I believe you are the person who phoned me in my car.  I know you told me what the business was and for the life of me, can not remember what it was.

You have four choices

1.   If you do not want to live in the US, you can set up a business, hire staff, and write all the cheques you want.  You can check the books, and you can display a product but not accept cash for it.  You would do this under the B-1 Business Visitor status which can be valid as long as you maintain a full time residence in Canada..
.  However, you can NOT live in the US full time, answer the phone, sweep the floor, or drive a delivery truck, etc., with a B-1 Status.

2.   Under the terms of an E-5 visa, you could invest $1,000,000 US (which today is a little LESS than $1,000,000 Canadian).   You must hire 10 full time US residents as employees for a two year period.  The advantage of this is that it gives you an immediate green card which becomes permannet after you have shown that your business has been active for two years with its 10 employees. (I feel old, I can actually remember when I could get $1.10 US for a Canadian dollar and expect that again by next summer.)

Another method is to make an investment of $500,000 in a bvusiness in an area which is not a major city.  for instance, an ionvestment of $500,000 USin one particular senior's home in Bellingham, gets you a green card with no management or other personal physical requirements.  David Andersson, a Vancouver Lawyer is one of the people behind this.  He is also a lawyer who can assist you with the R-5 processw OR the E-2 process described next.  David's Vancouver phone number is 604 608-0818. 

3.    The next possible Visa which gives you the right to live in the US for as long as the business is active, is an E-2 visa.  This requires a significant investment which might be $50,000 or $200,000 and is dependent upon the business you invest in.

Dennis Olsen was the US consul in charge of E2 visas in Vancouver back in the early 90's.  Then the US closed down the Vancovuer office and moved it all to Toronto.  Dennis left the US Consulate anbd set up in private practice.  The Vancouver office is again handling E2 visas.  You can find out a lot more by reading my Jan 15, 1995 newsletter which was written by Dennis Olsen.  Dennis practices in Everett, Washington but the phione numbers I had for him arenot in service so he must have moved.

4.   You could establish a business in Canada and then open a branch in the US and transfer yourself under the terms of an L1 visa.  If you already have the business in Vancouver, that might be an immediate possibility.

Another US immigration lawyer you might want to talk to has offices in Everett and Vancouver but works out of her Everett Office most of the time.  Terry Preshaw JD can be reached at (425) 259-1807  or ocassionally  at (604) 689-8472.

GOTO www.centa.com and click on 'entering The US' for a list of the various methods and visas.

QUESTION:

I am a Canadian citizen who left Canada to work in the USA for 5 years. I have since retuned to Canada where I plan to stay. I was wondering if the money I paid into Social Security while in the states is lost or is there a way to transfer the money back to Canada??
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david ingram replies:

This older Q & A might help

QUESTION:

Hi David,

I have been working in USA for last 10 years under TN visa and have been paying FICA etc in US but have not filed return to Canada until 2006.

Can I benefit from all the FICA payments later or should I find a way/if there is any way to transfer it to Canadian retirement?

Thanks

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david ingram replies:

Answered many times - just last week in fact, and reproduced here with a slight improvement suggested by Andrew Nelson
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QUESTION: My apologies if this questions have asked many times before.I could not find right and easy answer for this.

I am a Canadian citizen working in USA under TN visa for last 2 yrs. I wonder what will happen for social security tax i pay in USA.Does it goes to Canadian social security.Is it possible to get refund ?

Thanks in advance.
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david ingram replies;

The US Canada Social Security Totalization Agreement means that you will be able to collect Social Security from the US when you retire whether you have 1 year ( technically 6 quarters which can be earned from July to June which is one year but if you started working on Jan 1, you would need to work 1 year and another $2,000 or so in another year to qualify.    For 2007, you need just short of $1,000 of earnings to qualify for one qhuarter.)

The actual agreement in all its glory CAN BE FOUND AT:
 http://www.socialsecurity.gov/international/Agreement_Pamphlets/canada.html