Confused-Canadian IT Consulting Corp taking contracts in US

[Sujane80]

My husband and I have an IT consulting canadian corporation. This year we started taking short-term contracts in the US through a staffing company. The staffing company sponsors the TN visas. My husband is a consultant and we also currently have one employee deployed to the US on contract too. We invoice the staffing co for both of their time and are paid by direct deposit to our US dollar account in Canada. They do not deduct any taxes. We pay our employee in Canada and pay all payroll for him in Canada. My husband and I draw from the company and claim it as dividends in Canada.

I am confused as to what we might need to be doing re taxes in the US for both our employee and also our corporation. We assume that since my husband is paid by dividends from the corporation, he would not be in the same category as our employee. Our employee will be finished his contract in November and will return home - he likely will not be deployed back to the US until some time in 2012. My husband though just started a new contract and could be asked to work for a year or more on a contract in the US.

[nelsona]

Both your husband and his employee need to be careful not to spend more than 183 days in US in ANY 365-day period, otherwise income arising in US (be it employee's wages or payments to the company) will become taxable in US.

[Sujane80]

Okay, thanks. If we have to spend more than 183 days and are willing to pay whatever taxes, what do we do then? Specifically, as a corporation and also for our employee. Btw, if one does go over the 183 days for even one day, how is it detected by the IRA?

[nelsona]

You would also want to be careful that BOTH your husban and the employee not work at the same place for a total of more than 183 days in any 365-day period (not just calendar year).

For example, Hubby works Nov-Jan at ABC and then employee works Feb-May at ABC.

This *could* establish the requisite permanent establishment (ie. >183 days) on an ongoing project, especially is this project makes up a large % of the company's toatl revenues.

So, beware of having anyone from your comapny working too long at one place in any given 12-month period.

[Sujane80]

For instance, my husband has already been there over the 183 days mark in the last 12 months, but not the employee (yet). The employee has been there 160 days, and at the same location and for the same client. We may be able to bring him back here to work remotely for the rest of his contract which ends at the end of November.

[nelsona]

From what you describe, both your company and his employee are on the hook for US tax. Your husband becuse of his time in US, and your employee because of the of the permanent establishment your husband established beause of being there so long.

This was arecent change in the treaty.

Requiring US tax is not the end of the world, as it will be credited to them on their Cdn returns.

[johnit78]

Hello, from reading through the forum, this seems to be the same scenario that I am currently falling under.

I too am Canadian and Incorporated. The majority of my work will be done in the U.S this coming year.

My Canadian company will be paid directly from U.S. and Canadian companies.

Will my company still be eligible for the "small business credit" in Canada?

I pay myself through a combination of payroll and dividends.

Do I have to file "both" personal and corporate income tax in the U.S.?

Would it be more ideal to pay myself completely on payroll or dividends, so that I only have to file personal or only corporate tax?

If having to file corporate tax in the U.S., how does the IRS view my Canadian Corp (like an LLC, C-Corp, etc) what kind of tax rate would be applied based on 150K Gross for the Corp.

Thanks

John

[JGCA]

It is not recommended to pay yourself any dividends when you work in the US with a Canadian corp. The small business tax rate you talk about of say 16% is not allowed if the income was derived from the US since it is not active canadian business income it is from US.

If you take treaty protection and say you do not have a permanent establishment in the US and do not take salaries to reduce the income then no deductions will be allowed since no salary was paid if they ever deny the treaty claim of not being in the US. From a Canadian point of view the small business rate will be denied and since you took dividends and not salary you tax rate will be about 31%.

The tax rate in the US is about 15% on first $50K , then 25% over this till $75K and over this about 35%. In Canada it will be 16% on first $500K if it is eligible if not 31%.

It is not a big deal to file corp tax return in US form 1120F and form T2 in Canada the IRS will view teh Canadian corp as a corp and the Canadian govt will credit teh corp for any tax paid in the US, your proble is that if you pay out dividends in Canada then you will be subject to penalties and interest since you probalbly claimed teh small business rate and took dividends so no wages to reduce the tax in Canada.

Also to file a 1120F and T2 in Canada even a simple one your looking at over $5000 in accounting fees.

[nelsona]

"If you take treaty protection and say you do not have a permanent establishment in the US and do not take salaries to reduce the income then no deductions will be allowed since no salary was paid if they ever deny the treaty claim of not being in the US. From a Canadian point of view the small business rate will be denied and since you took dividends and not salary you tax rate will be about 31%. "

This is excellent advice JG that I've never heard put so clearly!

[kehkashun]

I'm a developer/designer for web sites. I have my own LLC. Up to this point, I was not aware of the need to charge sales tax to clients. Say I built you a web site this month. Do I need to pass along sales tax to you because I'm going to get taxed for it myself at the end of the year?