Best tax arrangement for a Canadian working for a US company

yabahala · Post by **yabahala** » Thu Mar 30, 2006 10:33 pm

Greetings,

First off, pardon me if the questions below have been answered before. I actually find the search feature on the board a little weak. The weakness stems from the fact that search results donâ€™t give you an indication of the their relevance to your search criteria. However, I highly regard this board and think that it provides a great service.

In short, I decided after living in the states for about 7 years that itâ€™s time for me to move back to Canada. The decision is personal, and my employer in the states is allowing me to work from Canada. I am a software consultant and my boss is supportive of me being based out of Canada. However, the company I work for does not have any offices in Canada, so I canâ€™t get on a Canadian payroll. I will need to remain under a US payroll and I basically want to minimize any the hoops that my employer needs to go through. I am thinking that getting the US wage and being up in Canada is the best of both worlds!

From my understanding, there is no issues with me being employed by a US company and living in Canada. My plan is to continue to work under my H1B visa when I go on the road to work for customers in the States.

My questions: -

1) Do I continue to file both Federal and State income tax in the US ? I think I canâ€™t get away from filing federal taxes, but what about state ?
2) Can I elect not contribute to social security and Medicare in the States and just contribute to CPP in Canada?
3) How does my situation affect my ability to pay into a 401K?
4) Can I contribute to an RRSP in Canada?

I basically want to know what is the most beneficial tax situation that I can be in. Any thoughts?

Thank you,
yabahala

nelsona · Post by **nelsona** » Thu Mar 30, 2006 11:46 pm

the company I work for does not have any offices in Canada, so I canâ€™t get on a Canadian payroll

This is not true. In fact if you live in Canada, you cannot continue to be paid as a US employee. They will either have to set you up on a Cdn payrol, or pay you as a contractor.

This is the most beneficial arrangemt for you, anyways, as 401(k) doesn't work for you anymore.

worryfreeinvestor · Post by **worryfreeinvestor** » Fri Mar 31, 2006 2:09 am

Are you a Canadian citizen? Then just move back to Canada and change your relationship from employee to consultant. The company pays you and you pay all your taxes in Canada and none in the US. Of course, if you're a salesperson or something like that and plan to travel frequently to the U.S., US immigration & customs enforcement (ICE) is likely to bust you pretty quickly.

yabahala · Post by **yabahala** » Fri Mar 31, 2006 1:40 pm

Thanks for the replies.

To clarify I am a Canadian citizen and I don't work in Sales. I am a technical software specialist. But, I potentially could be traveling back and forth, perhaps 2 or so trips a month. Each trip lasting 2-3 days.

I think switching to a consulant (or contractor) role might work. However, how does this impact my ability to work on contracts while I am in the States. Do I need to get a work visa ? As I mentioned earlier, I am on a H1B. I am assuming that once I switch to a consultant my H1B would be revoked !

Also, any thoughts on what it would take for a company to establish a canadian payrol. Is this an elaborate process ? There is another employee at the company that is also thinking about moving back to Canada. Perhaps it's worth it to my employer to pursue this for both of us. Any thoughts on the costs and planning that would be involved ?

Many thanks,
yabahala

Carson · Post by **Carson** » Fri Mar 31, 2006 2:04 pm

yabahala wrote:Thanks for the replies.

To clarify I am a Canadian citizen and I don't work in Sales. I am a technical software specialist. But, I potentially could be traveling back and forth, perhaps 2 or so trips a month. Each trip lasting 2-3 days.

I think switching to a consulant (or contractor) role might work. However, how does this impact my ability to work on contracts while I am in the States. Do I need to get a work visa ? As I mentioned earlier, I am on a H1B. I am assuming that once I switch to a consultant my H1B would be revoked !

Also, any thoughts on what it would take for a company to establish a canadian payrol. Is this an elaborate process ? There is another employee at the company that is also thinking about moving back to Canada. Perhaps it's worth it to my employer to pursue this for both of us. Any thoughts on the costs and planning that would be involved ?

Many thanks,
yabahala

I will answer your second question and leave the immigration issue to others.

Establishing a Canadian payroll is not difficult if they use a Canadian payroll service. But, complications arise because your employer will then have an employee(s) in Canada, which means they have established a branch office in Canada for tax purposes. That requires them to allocate income and expenses to the "Canadian operation", and the requirement to file corporate returns, etc. They also need to get a provincial "extra-provincial licence" which gives them permission to do business in the province where you are. It gets very complicated and as you would expect, expensive.

So, if the company's accountant has any idea of what's involved, he/she won't advise your employer to treat you as a Canadian employee.

IMHO, the way to go is treat you as a contractor. Though, that leads to your other question.

yabahala · Post by **yabahala** » Fri Mar 31, 2006 5:34 pm

Thanks for your reply.

I would like to follow up on one point that nelsona made. I've been a regular reader of this forum and I know that nelsona has a lot of experience and many of us value his contributions to our issues. I however, would like a little more clarifications specifically to the point below.

Is it possible (given all of the tax headaches) to be employed by a US company (that has no presence in Canada) while I physically reside in Canada ? In such an arrangement I will be carrying out work for clients in the US and will be traveling back and forth to the US to perform work there. I will also perform work from my home-office on US based projects. I am justifying some of the headaches, because I will be earning a US salary that will yield me a higher income than a similar position that I could take on for a Canadian based employer.

Also, where do I go from here in terms of research to figure this out ? Do you know of any web-sites or even good lawyer/accountant that can help me with this ?

Again, thanks for your time.

nelsona · Post by **nelsona** » Sat Apr 01, 2006 1:09 am

Is it possible (given all of the tax headaches) to be employed by a US company (that has no presence in Canada) while I physically reside in Canada ?

Of course, but if you are an employee, they must pay you as a CDn employee (fed/Prov tax withheld, their and your portion of CPP and EI sent to govt).
This is typically done through a Cdn payroll service -- and is done quite frequently. I'm not aware of this causing the 'corporate presence' issues that Carson warns baout, but that is his experience.

If you are a CDn-based self employed, entering the US on contract work (either for you main payor, of for other contracts, would be done either in B1 or TN status, which should not be a problem: you wouldn't be living in US. Your tax liability would be to canad and your province, and perhaps to the individual states where you would occasionally work, but not to the IRS.

Grasmick.com is a TN/B1 immig specialist, and used to run this website.

nelsona · Post by **nelsona** » Sat Apr 01, 2006 1:11 am

... that is used to host the forerunner of this message board, which was admined by Serbinski.

yabahala · Post by **yabahala** » Sat Apr 01, 2006 10:27 am

Thanks for the replies.

worryfreeinvestor · Post by **worryfreeinvestor** » Sun Apr 02, 2006 2:35 pm

There are tons of management consultants in Canada who win contracts with U.S. companies and fly/drive down periodically to consult in person with their clients.

HOWEVER, as with so many issues in this forum, I can only report "second-hand news" as I have never been in such a situation.

If you go down to work at the client-site, the IRS and the relevent state will want to know about the income, even if it's just a few days a year. Acquaintances of mine (with whom I am no longer regrettably in touch) have told me they had TN1s, even though they resided in Canada. They paid U.S. and state income tax and claimed a credit on their Canadian T1.

It's not uncommon in management consulting and I'd bet it's not uncommon in the software business either. However, this tax forum is unlikely the place where you will get more precise information. I would get in touch with groups of management consultants or software consultants, if I were you.

The costs of setting up a Canadian subsidiary are surely way too much to accomodate the needs of one employee. I am quite confident that you will confirm that "consultant" is the only way to go, not "employee."