Canadian contract for US company

[trm]

I am a canadian citizen who has been working as an independent contractor for a US startup for a few years. We have a potentially large contract that would last a year however it is in Canada. So I am wondering which structure below would be most advantageous to reduce total taxes paid:

a) USA Corp bills client directly and then pays it's canadian subcontractors. This would mean the money would cross the border to the USA and then be paid back to subs in Canada.

b) Setup my one person Canadian corp as the "reseller". This means that payments would go from the client to a Canadian small business. Canadian subs would be hired and paid by the Canadian company. The Canadian company would then pay the US corp. In this scenario the money only crosses the border once.


Considerations that I was thinking of include:

1) Canadian small business tax rules - Tax rates for small Canadian businesses are ~20%. If the money goes to a USA corp then back to Canada is the income now considered 'US sourced' and now is taxable at 40%?

2) Foreign company must file Canadian taxes - If the USA Corp is the primary contractor and the majority of all business is in Canada then the US Corp will have to file canadian taxes. And I believe that is ~40%. Compared to the Canadian company as primary who would pay 20% taxes and then the US Corp would pay less overall tax since it is only receiving the income owed directly to it.

3) HST - The Canadian company would have to charge HST to the client, but the US Company would not.


Are there any other issues to consider?

I assume that this scenario has likely happened many times before. Does anyone have any suggestions on how to structure this deal?



Thank you
trm

[JGCA]

Question 1) yes the cnd corp will only benefit from a small bus tax rate of approx 16% only if its income is from CND sources otherwise its subject to the hi rate on active income of 28% 9 Ontario rate quoted all are about same except fore Alberta 14% and 26%.

2) If the US corp is not present in Canada for more than 183 days in any 360 day period and does not have a permanent establishment here it will file no CND tax

3) HST, GST and TVQ if applicable will only apply if 2) above applies

[trm]

Thank you for your response. I have two clarification questions.

1) What is the test to determine whether the US Corp is present in Canada? They have no permanent establishment but they would have 1-2 employees up here for less than maybe 80 days each. However the onsite canadian contractors would be there over 183 days. I would think that the US Corp would NOT be considered present in Canada if they have subcontractors doing the work for them.


2) Is income considered "sourced from Canada" if the canadian small business is the billing agent for the US Corp rather than the primary business on the contract?

[nelsona]

JC will no doubt elaborate, but presence is not only about permanent establishment (ie. a locale), but physical presence of 1 or more employees. Presence for more than 183 days in any 365 day period also satifies permanent establishment.

As to source: where the work is done establishes the source.