This is the second year running that I’ve had to look in to the implications of being a Canadian consultant working for an American company. Of course, it seems like one needs to relearn the ropes every year when tax time rolls around, and since the US files its taxes one month earlier, this is a good time for Canadians to get on the ball about their taxes too.
I wanted to put this post together because i’m pretty sure about the same time next year, i’ll be wondering the same things, looking for the same paperwork. Why not have all the files and necessary procedures put together in one place?
Anyhow, this post ISN’T intended to be the be-all or end-all of blog posts on this matter, just something to point Canadians (and their American employers) in the right direction. It may even be edited and updated as I learn more. Also, if you’re reading this and have more information, please feel free to comment and I will be happy to add your information to the body of this message.
If you have any questions, please be sure to contact a qualified tax professional for assistance.
First of all, according to the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital, Article XIV,
Article XIV
Independent Personal Services
Income derived by an individual who is a resident of a Contracting State in respect of independent personal services may be taxed in that State. Such income may also be taxed in the other Contracting State if the individual has or had a fixed base regularly available to him in that other State but only to the extent that the income is attributable to the fixed base.
Additionally, according to Canada-US Employment Transfers by KPMG, Levine & Loughlin, Canadian residents are “exempt from US tax on personal service income if the renumeration does not exceed US $10000 or if the Canadian resident is present in the US for 183 days or less in the calendar year and the renumeration is not borne by an employer who is a resident of the US.”…”If you are a non-resident alien and you receive personal service income that is exempt from US tax, you can avoid US withholding at source by filing Form 8233 with the employer. Your employer should file Form 1042S with the IRS reporting your exemption and the amount of income you earned. You should file Form 1040NR to report the income and the treaty exemption.” – page 77.
Form PDF links from IRS website:
1040-NR: US Nonresident Alien Income Tax Return
1042-S: Foreign Person’s US Source Income Subject to Withholding
Important info about the 8233: Nonresident alien individuals need to furnish a US taxpayer identifying number on this form. Generally this means a SSN, BUT as a non-resident, you won’t be eligible for one. Instead, you need to get an individual taxpayer identification number (ITIN), which you can apply for with Form W-7: Application for IRS Individual Taxpayer Identification Number. You will need to furnish either original official ID OR copies certified by the issuing party OR a notary. Also, the form requires your original completed tax return – HOWEVER: Also states there are exeptions to the requirement to include a US Tax return. “If you claim one of these exceptions, you must submit the documentation required in lieu of a tax return.” – page 2.
The exception states these documents as being:
– a letter of employment from the payer of the income, or
– a copy of the employment contract, or
– A letter requesting your presence for a speaking engagement
along with:
– Evidence (information) on the Form W-7 that you are entitled to claim the benefits of a tax treaty, and
– A copy of the completed withholding agent’s portion of Form 8233 attached to the Form W-7, and a letter from the Social Security Administration (SSA), stating that you are ineligible to receive a social security number.
So basically it looks like a 1040-NR, 1042-S, and 8233 need to be filled out, and a copy of the 8233 needs to be attached to the W-7, which the consultant then needs to forward (along with appropriate & certified copies of ID) to the IRS (address included in W-7 form, on page 3). Be sure to allow for 6 weeks for the IRS to give you your ITIN. More in depth instructions are included in each form PDF.