I'm starting a Canadian corporation to provide Project Management Consultant services (I'm a dual citizen residing in Canada, with no US income/assets).
My corporation will have a contract with a head hunter agency, who will have a contract with an Engineering firm, who will have a contract with the client. I will work on the client's site, using the client's equipment, with set hours. I will not have any liability if projects exceed budget/schedule. Based on this, it seems I would likely be deemed a Personal Service Business. From what I understand, this shouldn't be too much of an issue in Canada, as I intend to take the maximum salary I can, with a bonus at the end of each year to clean out the coporate balance (since CRA changed the divend tax rates). Expected salary is in the $100-$115K range.
My question is how will this be viewed by the IRS? Will I still be able to use the Foreign Tax Credit?
Any advice/guidance you can provide is greatly appreciated.
Canadian Personal Services Business - US Taxation
Moderator: Mark T Serbinski CA CPA
As a US citizemn living in canad, of course all your income is reported in both countries.
How the taxes are sliced can basically be summed up in 3 categories:
1. Income that is Cdn-sourced.
2. Income that is US-sourced and taxable in US for both US citizens and non-citizens.
3. Income that is US-sourced by only taxable in US for US citizens.
Treatment:
1. taxed in canada with no FTC given. taxed in US, but with posibility of Foreign earned income exclusion (2555) of foreign tax credit (1116)
2. taxed in canada but with FTC given. taxed in US with no 2555/1116 available
3.taxed in canada, but no FTC given. taxed in US with special "re-sourced" 1116 to reduce the US tax to zero.
The income you describe will either be 2 or or a combination, based on the number of days you spend in US in any 365 day period.
If you never exceed 1/2 your days in US, then it is all type (#3).
If you have periods where you exceed 1/2 your time in US, then the income arising form those period(s) is type (#2). From what you describeyouwill probably be type 2, the income will be first taxed in US and credit will be given on your cdn return for the US tax you owe.
How the taxes are sliced can basically be summed up in 3 categories:
1. Income that is Cdn-sourced.
2. Income that is US-sourced and taxable in US for both US citizens and non-citizens.
3. Income that is US-sourced by only taxable in US for US citizens.
Treatment:
1. taxed in canada with no FTC given. taxed in US, but with posibility of Foreign earned income exclusion (2555) of foreign tax credit (1116)
2. taxed in canada but with FTC given. taxed in US with no 2555/1116 available
3.taxed in canada, but no FTC given. taxed in US with special "re-sourced" 1116 to reduce the US tax to zero.
The income you describe will either be 2 or or a combination, based on the number of days you spend in US in any 365 day period.
If you never exceed 1/2 your days in US, then it is all type (#3).
If you have periods where you exceed 1/2 your time in US, then the income arising form those period(s) is type (#2). From what you describeyouwill probably be type 2, the income will be first taxed in US and credit will be given on your cdn return for the US tax you owe.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
This falls under the "Business Income" portion of the treaty, and the days in US count towrds determining whether you have a fixed base in US or not. This has changed in the lasyt 5 years or so.
Before, no matter how many days you spent in US, if you lived in canada and had no fixed base in US the income was type (#3) income (ie. US had to credit you).
Now, if you merely spend suffcient days in US, the income becomes taxable in US first. This even applies to employees of small Cdn companies, like you describe.
Before, no matter how many days you spent in US, if you lived in canada and had no fixed base in US the income was type (#3) income (ie. US had to credit you).
Now, if you merely spend suffcient days in US, the income becomes taxable in US first. This even applies to employees of small Cdn companies, like you describe.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Thanks for the response, nelsona. I will definitely not come anywhere close to half my time spent in the US, so that's not an issue. I'm confused, however, on how this would be considered us-source income. My corporation, the intermediary agency, the Eng firm and client are all in Canada (sorry if I didn't make that clear). As long as I take all the corporations earnings as salary, can I just use the Foreign Tax Credit when filing my US taxes? Even if it's considered a PSB?
it's US-sourced because you are physically working in US (from how I interpreted your initial post). Where you are working determines source, not who you are working for.
For non-US citizens living in canada, the treaty (and IRS regs) have several outs so that that one does not have to pay US tax on this US-source income, or evne report the income to IRS, but US citizens do not have these outs.
What they have in the treaty is the right to "re-source" the income as Cdn, and use the FTC on 1040 in the way I described in #3.
maybe this info wil help you to come up with a less layrinthian way of working directly for your client.
For non-US citizens living in canada, the treaty (and IRS regs) have several outs so that that one does not have to pay US tax on this US-source income, or evne report the income to IRS, but US citizens do not have these outs.
What they have in the treaty is the right to "re-source" the income as Cdn, and use the FTC on 1040 in the way I described in #3.
maybe this info wil help you to come up with a less layrinthian way of working directly for your client.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
This income you earn from your corp in Canada will most likely not be considered as PSB since its not earned from the client directly but earned through an agency who is sourcing you the income. The client is in Canada so I guess you do not travel to the US at all to service this client. YOur question is therefore how will CRA view this as a PSB? I would say no because your are working for an agency who has many clients and will assign tyhis client to you. As far as the US goes you will be taking max salary from the corp so this is good because this will lower the tax in the corp and give you the foreign tax credit on your 1040 for teh salary or you can claim the foreign earned income exclusiuon which ever is best for you. Remember though you still have many reporting requirements to make for the corp since you own more than 10% you must fill in required reporting obligation with IRS you will not need to file a 1120F most likely but there is still reporting obligations to meet.
JG