Canadian Corp invoicing US Corp

dkl · Post by **dkl** » Fri Nov 19, 2004 10:48 am

Hello all,

I'm presently employed in the US on TN VISA working under W2 for my employer (IT consulting). I'm in the process of incorporating in Canada and have secured an arrangement with my employer to allow my Canadian corp to invoice them. I will no longer be a W2 employee of theirs, but an employee of my Canadian corp. I've read enough to know that I can legally work udner TN classification, and can even have my Canadian corp write a letter of support to petition INS at port of entry to obtain a TN VISA.

The confusion for my US employer comes with my tax status while working there. I've explained to them that I'm not their employee and I'm not self-employed - I'm employed by a Canadian corporation, and the agreement that we have reached is between the Canadian coproration and them. There is considerable confusion on their part surrounding this arrangement and how to properly set it up to IRS regulations...

There is a tax treaty between US and Canada correct? Is this what frees them from having to withhold taxes on the payments to the Canadian corp? How would they 'properly' set me up in their system to account for this? I know my Canadian corp needs to obtain a tax ID number from IRS. They believe they cannot set me up as 1099, and here's what they are saying:

"The IRS requirements for contractor status still apply. Tax witholding rate would change and it may not be to his advantage. The preliminary response of both lawyers was that even if he set himself up as a business and received a Tax ID number, based on what we know right now, they would recommend he remain classified as an employee"

If 1099 is not the way to go, then what is? What are they missing?

Thanks for any input.

Dave.

Sat Nov 20, 2004 11:05 pm

Hi Dave:

There are several issues here.

First of all, it seems like your employer is concerned about becoming responsible for social security taxes, etc. if they fail to treat you like an employee. There may be some merit in this, since IRS has expressed this concern, and has audited cases like yours... and has classified some "contractors" as employees.

There is nothing you can do if they take this position.

However, if you can operate through your Canadian corporation, the advantage is that under a TN visa, you can prove that you have a connection to Canada, and will return upon the termination of your contract.

See this link to determine what you need to do if you take this route:

http://www.serbinski.com/Whatsnew/Canad ... he_USA.pdf

Essentially, you will need to have your Canadian corporation establish you on a US payroll. Read the article for the complete story.

Regards,

Mark T. Serbinski, CA, CPA

dkl · Post by **dkl** » Sun Nov 21, 2004 3:29 pm

Mark,

Thanks for the reply.

I forgot to mention that I'm resident in Canada and commute across the border each day, so I'm not resident in the US, thus I don't believe my Canadian corp wants to establish me on a US payroll. I imagine this changes things considerably...

In this situation (Canadian residency, commute across border each day working completely for Canadian corp), does withholding tax apply when Canadian corp invoices US corp? Does US corp setup Canadian corp under 1099? It seems to me that 1099 is a 'self-employed' status and not a corporation....

Dave.

lancehuang · Post by **lancehuang** » Thu Dec 02, 2004 8:00 pm

Hi, Dave:

Are you sure you can issue TN letter by your own Canadian corporation? I think TN letter has to come from US employer. Thanks for advise.

Lance

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by dkl

Hello all,

I'm presently employed in the US on TN VISA working under W2 for my employer (IT consulting). I'm in the process of incorporating in Canada and have secured an arrangement with my employer to allow my Canadian corp to invoice them. I will no longer be a W2 employee of theirs, but an employee of my Canadian corp. I've read enough to know that I can legally work udner TN classification, and can even have my Canadian corp write a letter of support to petition INS at port of entry to obtain a TN VISA.

The confusion for my US employer comes with my tax status while working there. I've explained to them that I'm not their employee and I'm not self-employed - I'm employed by a Canadian corporation, and the agreement that we have reached is between the Canadian coproration and them. There is considerable confusion on their part surrounding this arrangement and how to properly set it up to IRS regulations...

There is a tax treaty between US and Canada correct? Is this what frees them from having to withhold taxes on the payments to the Canadian corp? How would they 'properly' set me up in their system to account for this? I know my Canadian corp needs to obtain a tax ID number from IRS. They believe they cannot set me up as 1099, and here's what they are saying:

"The IRS requirements for contractor status still apply. Tax witholding rate would change and it may not be to his advantage. The preliminary response of both lawyers was that even if he set himself up as a business and received a Tax ID number, based on what we know right now, they would recommend he remain classified as an employee"

If 1099 is not the way to go, then what is? What are they missing?

Thanks for any input.

Dave.
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lancehuang · Post by **lancehuang** » Thu Dec 02, 2004 8:05 pm

Hi, Mark:

Does canadian corporation have to pay US tax if the income comes from US? Canadian corporation pays tax to Canadian government, and there should be treaty between two country. If canadian corporation needs to pay US tax, what's the procedure? Thanks.

Lance

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by Mark T. Serbinski, CA CPA

Hi Dave:

There are several issues here.

First of all, it seems like your employer is concerned about becoming responsible for social security taxes, etc. if they fail to treat you like an employee. There may be some merit in this, since IRS has expressed this concern, and has audited cases like yours... and has classified some "contractors" as employees.

There is nothing you can do if they take this position.

However, if you can operate through your Canadian corporation, the advantage is that under a TN visa, you can prove that you have a connection to Canada, and will return upon the termination of your contract.

See this link to determine what you need to do if you take this route:

http://www.serbinski.com/Whatsnew/Taxat ... tizens.pdf

Essentially, you will need to have your Canadian corporation establish you on a US payroll. Read the article for the complete story.

Regards,

Mark T. Serbinski, CA, CPA
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dkl · Post by **dkl** » Thu Dec 02, 2004 9:56 pm

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by lancehuang

Hi, Dave:

Are you sure you can issue TN letter by your own Canadian corporation? I think TN letter has to come from US employer. Thanks for advise.

Lance

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by dkl

Hello all,

I'm presently employed in the US on TN VISA working under W2 for my employer (IT consulting). I'm in the process of incorporating in Canada and have secured an arrangement with my employer to allow my Canadian corp to invoice them. I will no longer be a W2 employee of theirs, but an employee of my Canadian corp. I've read enough to know that I can legally work udner TN classification, and can even have my Canadian corp write a letter of support to petition INS at port of entry to obtain a TN VISA.

The confusion for my US employer comes with my tax status while working there. I've explained to them that I'm not their employee and I'm not self-employed - I'm employed by a Canadian corporation, and the agreement that we have reached is between the Canadian coproration and them. There is considerable confusion on their part surrounding this arrangement and how to properly set it up to IRS regulations...

There is a tax treaty between US and Canada correct? Is this what frees them from having to withhold taxes on the payments to the Canadian corp? How would they 'properly' set me up in their system to account for this? I know my Canadian corp needs to obtain a tax ID number from IRS. They believe they cannot set me up as 1099, and here's what they are saying:

"The IRS requirements for contractor status still apply. Tax witholding rate would change and it may not be to his advantage. The preliminary response of both lawyers was that even if he set himself up as a business and received a Tax ID number, based on what we know right now, they would recommend he remain classified as an employee"

If 1099 is not the way to go, then what is? What are they missing?

Thanks for any input.

Dave.
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dkl · Post by **dkl** » Thu Dec 02, 2004 9:58 pm

------ User error while posting this ------ [:p]

Lance,

Yeah, I'm sure. Check out the NAFTA Handbook from U.S. Citizenship and Immigration Services (http://uscis.gov/graphics/shared/lawenf ... ftahan.pdf). On page 128, at the bottom, you will find the following text:

(ii) Documentation demonstrating engagement in business activities at a professional level and demonstrating professional qualifications. The applicant must present documentation sufficient to satisfy the immigration officer at the time of application for admission, that the applicant is seeking entry to the United States to engage in business activities for a United States employer(s) or entity(ies) at a professional level, and that the applicant meets the criteria to perform at such a professional level. This documentation may be in the form of a letter from the prospective employer(s) in the United States or from the foreign employer, in the case of a Canadian citizen seeking entry to provide prearranged services to a United States entity, and may be required to be supported by licenses, diplomas, degrees, certificates, or membership in a professional organization.

The biggest thing I've learned from reading through that handbook is that, despite the attitude of the INS officers, the TN-1 VISA is extremely easy to obtain, provided you meet the requirements for the professional category (and are otherwise admissable - IE: don't have an extensive criminal record and expect to get a TN VISA).

Also, don't be worried about being classified as being 'self-employed'. I've read some forums where people are scared to DEATH about owning their own Canadian corporation and being denied entry to the US by the INS. You are not however, allowed to enter the US and work for a US company that you own or have substantial control over. Read through the handbook for details of that as well.

One MAJOR word of advise to anyone attempting to incorporate in Canada and do work in the US: Be sure you FULLY understand the Internal Revenue Service's regulations surrounding self-employment, etc and the tax treaty between the US and Canada. There are a lot of VERY complex rules involved and if you don't tread carefully they (IRS) has the legal ability to come after you and your corporation for BIG penalties and taxes. What are the risks you ask? Here's one simple example: If you spend more than 182 days in the US in a calendar year, you are subject to US tax and must file a 1040NR with form 8833. Also be careful when arranging for services to perform in the US. If the IRS deems you to have a 'permanent establishment' in the US for tax purposes, you will NOT be exempt from US tax per the tax treaty between US and Canada and your Canadian corporation will be held liable for paying tax on income earned in the US. 'Permanent establishment' doesn't mean you live there or have a building - it can be as simple as being in the US and actively 'selling' your product or service. You will also be deemed to have 'permanent establishment' in the US if the Canadian corporation has an employee working in the US that has the ability to sign contracts....

In January 2004 the IRS also clarified some rules regarding 'independent contractors'. The concern was that some individuals were switching from W2 employees to 1099 - this frees the employer from paying social security taxes, etc, etc. Being considered "self-employed" for tax purposes is now not up to the employer/employee, but the IRS and a number of 'tests' they have. Every situation is different, so be careful. The risk a US company takes if IRS does not classify you as a coproration are great - the US company will be held liable for all withholding taxes, social security taxes, and penalties.....

My advise: Spend the money and consult with Mark Serbinski on your situation - it's worth every penny and could save you from making some very costly mistakes. And understand your filing requirements with the IRS - Mark will have to clarify this point for those interested, but if you fail to file in the US, you may waive treaty benefits and could be subject to tax in the US AND Canada - yes, double tax.

Dave.

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by lancehuang

Hi, Dave:

Are you sure you can issue TN letter by your own Canadian corporation? I think TN letter has to come from US employer. Thanks for advise.

Lance

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by dkl

Hello all,

I'm presently employed in the US on TN VISA working under W2 for my employer (IT consulting). I'm in the process of incorporating in Canada and have secured an arrangement with my employer to allow my Canadian corp to invoice them. I will no longer be a W2 employee of theirs, but an employee of my Canadian corp. I've read enough to know that I can legally work udner TN classification, and can even have my Canadian corp write a letter of support to petition INS at port of entry to obtain a TN VISA.

The confusion for my US employer comes with my tax status while working there. I've explained to them that I'm not their employee and I'm not self-employed - I'm employed by a Canadian corporation, and the agreement that we have reached is between the Canadian coproration and them. There is considerable confusion on their part surrounding this arrangement and how to properly set it up to IRS regulations...

There is a tax treaty between US and Canada correct? Is this what frees them from having to withhold taxes on the payments to the Canadian corp? How would they 'properly' set me up in their system to account for this? I know my Canadian corp needs to obtain a tax ID number from IRS. They believe they cannot set me up as 1099, and here's what they are saying:

"The IRS requirements for contractor status still apply. Tax witholding rate would change and it may not be to his advantage. The preliminary response of both lawyers was that even if he set himself up as a business and received a Tax ID number, based on what we know right now, they would recommend he remain classified as an employee"

If 1099 is not the way to go, then what is? What are they missing?

Thanks for any input.

Dave.
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lancehuang · Post by **lancehuang** » Wed Jan 12, 2005 1:32 pm

Hi, Dave:

Thanks for your reply. I am in the same situation as yours. In your case, will you file both US personal and corporation tax return? Thanks

Lance