I am a Canadian Resident working and living in Ontario all year round. I run multiple websites where I display adds from US companies i.e. Google. Websites are hosted on dedicated servers in US. I pay hosting fees for using their server.
I file self-employment income with CRA each year. Do I also have to file my income tax with IRS?
Your valuable advice would be much appreciated.
Canadian resident's Website Income from US companies
Moderator: Mark T Serbinski CA CPA
Not sure that I agree. The OECD Commentary to the Model treaty states that a web site does not itself involve any tangible property, and thus cannot constitute a permanent establishment. Paragraph 42.2. In contrast, the server on which a web site is stored and through which it is accessible is a piece of equipment having a physical location, which may be fixed and thus constitute a permanent establishment. If it is a dedicated server, I suspect you may have a permanent establishment. Even if not a permanent establishment, you may be engaged in a trade or business in the United States and at a minimum be required to file a U.S. tax return.
I'll ket the poster decide on whether his server is a PE.
However, your last statement: "Even if not a permanent establishment, you may be engaged in a trade or business in the United States and at a minimum be required to file a U.S. tax return." Is incorrect.
No PE, no presence = not engaged in trade or business in US.
However, your last statement: "Even if not a permanent establishment, you may be engaged in a trade or business in the United States and at a minimum be required to file a U.S. tax return." Is incorrect.
No PE, no presence = not engaged in trade or business in US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Ester, clearly testone thinks you to file in US. he's not sure that you have a PE, not sure if you have agents, but thinks you should file.
I'll leave the decison up to you.
I have no idea what income you would report, but i'm sure testone will.
All the best
I'll leave the decison up to you.
I have no idea what income you would report, but i'm sure testone will.
All the best
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Yes. I believe that you “may†be engaged in a trade or business in the United States. I disagree with Nelsona’s statement that this is “incorrect†and his apparent assertion that you are definitively not engaged in the conduct of a trade or business in the United States. The fact that the server in the U.S. is a dedicated server, I believe, increases the risk that you are engaged in the conduct of a trade or business in the United States.
If you were engaged in the conduct of a trade or business in the United States, then you would need to annually file a U.S. tax return. Treas. Reg. §1.6012-1(b)(1)(i) (“* * * every nonresident alien individual * * * who is engaged in trade or business in the United States at any time during the taxable year * * * shall make a return on Form 1040NR.â€).
Many foreign persons are unsure if they are engaged in the conduct of a trade or business in the United States. Consequently, the regulations allow those persons to file “protective†tax returns where they are not conceding that they are engaged in the conduct of a trade or business in the United States. Treas. Reg. §1.874-1(b)(6). On the contrary, the foreign persons explicitly assert that they are not engaged in the conduct of a trade or business in the United States. The procedure for this is specified in the cited regulation.
The benefit of filing this protective tax return is that it starts the statute of limitations running and it prevents the I.R.S. from disallowing deductions (the penalty for failing to file a U.S. tax return when required) if it turns out that you are engaged in the conduct of a trade or business in the United States. On the tax return, you may even want to include Form 8833, claiming that if you were to be considered engaged in the conduct of a trade or business in the United States, that you do not have a permanent establishment in the U.S. Therefore [you would argue], you should not be subject to U.S. tax.
Of course, filing the protective tax return is a red flag to the I.R.S., but that is exactly what it is intended to be. Whether you decide to file the protective tax return or not is up to you. However, you should seriously consider it.
If you were engaged in the conduct of a trade or business in the United States, then you would need to annually file a U.S. tax return. Treas. Reg. §1.6012-1(b)(1)(i) (“* * * every nonresident alien individual * * * who is engaged in trade or business in the United States at any time during the taxable year * * * shall make a return on Form 1040NR.â€).
Many foreign persons are unsure if they are engaged in the conduct of a trade or business in the United States. Consequently, the regulations allow those persons to file “protective†tax returns where they are not conceding that they are engaged in the conduct of a trade or business in the United States. Treas. Reg. §1.874-1(b)(6). On the contrary, the foreign persons explicitly assert that they are not engaged in the conduct of a trade or business in the United States. The procedure for this is specified in the cited regulation.
The benefit of filing this protective tax return is that it starts the statute of limitations running and it prevents the I.R.S. from disallowing deductions (the penalty for failing to file a U.S. tax return when required) if it turns out that you are engaged in the conduct of a trade or business in the United States. On the tax return, you may even want to include Form 8833, claiming that if you were to be considered engaged in the conduct of a trade or business in the United States, that you do not have a permanent establishment in the U.S. Therefore [you would argue], you should not be subject to U.S. tax.
Of course, filing the protective tax return is a red flag to the I.R.S., but that is exactly what it is intended to be. Whether you decide to file the protective tax return or not is up to you. However, you should seriously consider it.
Thank you all for responding my questions. I actually called IRS twice and spoke with two different individuals. The responses were exactly the same, that is, I don't have to file my 2013 income tax with IRS. One of them even said that "why are you making problems for yourself?" Apparently, hosting is not considered a presence in US.
As such, I have decided not to file income tax with IRS on my website business.
Kindly,
Esther
As such, I have decided not to file income tax with IRS on my website business.
Kindly,
Esther
I agree with testone and not nelson that your case is not slam-dunk that you don't need to file.
Even if not REQUIRED to file, if you have a TOB but believe no PE, you should want to file a protective treaty based return to report that position. Not doing so opnes you up to a $1,000 penalty per instance among other possible bad exposure.
Calling the IRS and speaking with their low-level clerks who work off of manuals and not tax law sourced and who on a regular basis dole out wrong and misleading information is a bad idea. Try to reach the higher level lawyers (such as Chief Counsel office) whose names and numbers are listed on IRS releases such as Rev Procs. Even if they give you favorable advice, it will amount to nothing should you be audited by IRS and IRS will not accept the argument that you acted upon advice of its employees. that may be why it's IRS policy that it's employees cannot dispense written advice or guidance to individual requesters outside prescribed formats such as revenue rulings.
See: http://www.ey.com/Publication/vwLUAsset ... YY2877.pdf
Plus, you've limited your discussion only to federal taxation but have not explored whether the server can create nexus in the server's state of domicile - income, capital and/or sales tax.
http://www.salestaxsupport.com/sales-ta ... vertising/
In general, having a website banner ad and email marketing campaign served up outside of California shouldn't create nexus. However, states are getting more aggressive in this area and are looking at legislation that could create a collection responsibility for these types of activities if there is compensation paid for the referral sale. Laws exist covering this today in NY, NC and RI. Other states are looking at this and this list could grow. Nexus could be created based on the third-party vendor hosting your web site in another state. This is most likely if you own any of the equipment located at the hosting company. Some states may consider what you are doing a nexus creating activity particularly if you are "renting" equipment from the supplier. If you have a third party dealer who is doing sales and marketing activities on your behalf, this likely does create nexus for you. The presence in a state of people, even if they are independent agents, making sales on your behalf generally does fall into the definition of retailer doing business in the state.
http://www.bna.com/uploadedFiles/Conten ... x_Dept.pdf
Income tax nexus results from owning a web server in their jurisdiction, according to 36 states and the District of Columbia. Several of these jurisdictions said they would find nexus even if the corporation did not make sales into the state. Twenty-six jurisdictions would find nexus for an out-of-state corporation that leased space on a third-party’s internet server located within their borders. Having data on an in-state leased server would trigger nexus in 24 jurisdictions, regardless of whether the
data was stored on the server for more or less than six months. Only 12 states and the District of Columbia said nexus would arise from using the services of a web-hosting provider with a web server in their jurisdiction.
Even if not REQUIRED to file, if you have a TOB but believe no PE, you should want to file a protective treaty based return to report that position. Not doing so opnes you up to a $1,000 penalty per instance among other possible bad exposure.
Calling the IRS and speaking with their low-level clerks who work off of manuals and not tax law sourced and who on a regular basis dole out wrong and misleading information is a bad idea. Try to reach the higher level lawyers (such as Chief Counsel office) whose names and numbers are listed on IRS releases such as Rev Procs. Even if they give you favorable advice, it will amount to nothing should you be audited by IRS and IRS will not accept the argument that you acted upon advice of its employees. that may be why it's IRS policy that it's employees cannot dispense written advice or guidance to individual requesters outside prescribed formats such as revenue rulings.
See: http://www.ey.com/Publication/vwLUAsset ... YY2877.pdf
Plus, you've limited your discussion only to federal taxation but have not explored whether the server can create nexus in the server's state of domicile - income, capital and/or sales tax.
http://www.salestaxsupport.com/sales-ta ... vertising/
In general, having a website banner ad and email marketing campaign served up outside of California shouldn't create nexus. However, states are getting more aggressive in this area and are looking at legislation that could create a collection responsibility for these types of activities if there is compensation paid for the referral sale. Laws exist covering this today in NY, NC and RI. Other states are looking at this and this list could grow. Nexus could be created based on the third-party vendor hosting your web site in another state. This is most likely if you own any of the equipment located at the hosting company. Some states may consider what you are doing a nexus creating activity particularly if you are "renting" equipment from the supplier. If you have a third party dealer who is doing sales and marketing activities on your behalf, this likely does create nexus for you. The presence in a state of people, even if they are independent agents, making sales on your behalf generally does fall into the definition of retailer doing business in the state.
http://www.bna.com/uploadedFiles/Conten ... x_Dept.pdf
Income tax nexus results from owning a web server in their jurisdiction, according to 36 states and the District of Columbia. Several of these jurisdictions said they would find nexus even if the corporation did not make sales into the state. Twenty-six jurisdictions would find nexus for an out-of-state corporation that leased space on a third-party’s internet server located within their borders. Having data on an in-state leased server would trigger nexus in 24 jurisdictions, regardless of whether the
data was stored on the server for more or less than six months. Only 12 states and the District of Columbia said nexus would arise from using the services of a web-hosting provider with a web server in their jurisdiction.
Having been been around the block with a long drawn-out tax situation that involves all sorts of theoretical possibilities, but very little practical precedent, my thoughts (for what they're worth):
- the best advice may have been given by the 2 IRS agents, particularly the one that said "why are you making problems for yourself?".
- a call to the Chief Counsel office may 'amount to nothing' when it comes to audits, but it can help establish whether there is any precedent for the IRS auditing a Canadian resident under these circumstances.
- before I were to take any actions such as filing a protective treaty based return, I would want to know if there is a known instance of the IRS auditing a Canadian resident under these circumstances, otherwise I would be concerned about opening a Pandora's box (much as that IRS agent hinted at).
- the best advice may have been given by the 2 IRS agents, particularly the one that said "why are you making problems for yourself?".
- a call to the Chief Counsel office may 'amount to nothing' when it comes to audits, but it can help establish whether there is any precedent for the IRS auditing a Canadian resident under these circumstances.
- before I were to take any actions such as filing a protective treaty based return, I would want to know if there is a known instance of the IRS auditing a Canadian resident under these circumstances, otherwise I would be concerned about opening a Pandora's box (much as that IRS agent hinted at).