Permanent Establishment Treaty XV

[SM]

I’m having trouble understanding when you can use the treaty to eliminate the need to pay tax in the US as a temporary employee or contractor. Assuming I’m a Canadian resident and an employee in the US, earn more than $10,000 USD, physically present in the US for LESS than 183 days, my Canadian parent company does not have a permanent establishment in the US, and my Canadian parent company pays me; article XV should apply and dispense with any US tax liability correct?

I guess I’m getting confused about the permanent establishment part. A permanent establishment is created if more than 50% of your revenue is generated in the US. I assume this means 50% of the EMPLOYER’S revenue and not the EMPLOYEE’S revenue. So as long as the Canadian parent company has the majority of their operations in Canada, I should be able to use Article XV correct?

If I’m paid directly by the US company OR I’m in the US for more than 183 days, the permanent establishment rule doesn’t matter; I can’t use the treaty and must pay tax on the income to the US correct?

What if I was a contractor working for myself, does this change anything? Let’s say the only work I performed within the 12 month period was some contracting work in the US (none in Canada). Would that mean I essentially created a permanent establishment because more than 50% of my revenue was generated in the US? But if I had the majority of my client’s in Canada (more than 50%) I could then use the treaty to eliminate the tax in the US?

[nelsona]

The Permanent establishment (PE) definitions were adjusted in last protocol -- Article V, particularly V.9, with the inclusion of DAYS of presence in the defition.

From what you describe, you and your firm would appear safe from any establishment of a PE, upto pargraph 9(a).

Small firms or self-employed usually run afoul of 9(a), because of the 50% rule. However, 9(b) is the one that is now becoming more and more invoked for larger firms, since it merely looks at the relevant project, rather than the gross activities of the firm.
In essence, if a firm sends down a series of individuals, none of which meet the 183-day rule, but who -- as a team -- meet the 183 mark in ANY 356 day period described in 9(b), the employment income of EACH of those team members during that period become taxable in US (if there remuneration exceeded US$10K), for failing to meet the exception under XV.2(b)


If you are a self-employed contractor, then, spending more than 183 days makes you taxable in US under Article VII.1, because you fail the PE exception under V.9(a).

[nelsona]

I think you would have a hard time arguing -- as a single self-employed or C2C contractor -- that if you spend more than 1/2 your time in US, that you are generating less than 1/2 your revenues in the US.

Besides, if you read the V.9(a) carefully, it is not looking at the 12-month period to establish the 50%, it is looking only that the period or periods you are in the US.

Obviously, if you are self-employed, then when you are in US, you are essentilly deriving 100% of your income DURING THOSE DAYS from that source in the US.

[SM]

Thanks so much for your insight, this is very helpful. If I’m an employee paid directly by the US Company, none of this matters correct? In other words, to even have a chance of meeting all of the other treaty criteria (less than 183 days, PE exception, etc) I must be paid by a Canadian company correct? Does this rule apply to self-employed contractors as well? In other words, would I have to be contracted by the Canadian parent company rather than the US company?

So if I understand you correctly, being a self-employed contractor in the US makes it harder to get treaty relief, if not impossible? As you mentioned, they will only look at your income derived from your time in the US. So if you earned 90% of your revenue in Canada and the other 10% in the US; as long as the 10% you earn in the US is over $10K you would still be taxed on it in the US correct?. If you stay in the US less than 183 days does this change anything or would you still be taxed in the US even if you only earned 10% of your overall income in the US?

[SM]

Sorry I think I confused things by saying 12 month period in my original post for the self-employment portion. I meant to say in the US less than 183 days within a 12 month period (to differentiate between the calendar year)

[nelsona]

If you are an employee and working for a US firm, earn less than $10K in a calendar year and are present in US less than 183 days in that calendar year, you are exempt from US federal income tax. It will still be collected (as will FICA) but you will get the tax (not FICA) back at tax time. State tax is always a separate issue.

Working for a CDn firm , and avoiding the PE issue, allows you to earn an unlimited amount US-tax (and FICA) exempt.

As a self-employed, you still have the less than 183 day rule to avoid US taxation. It doesn't matter how much you earn is you do not meet the 183-day limit per any 365-day period. It doesn't matter who contracts you for tax purposes.
so there is benefit for being a contractor, if you spend less than 1/2 your time in US, you will never be liable for tax. many work a 4-day week (which is 3 nights) in US and never meet the 183-day limit.

For VISA purposes, the client would have to sponsor YOU, whether directly as an employee/contractor or through an agent.

[SM]

Thanks so much, this is clear now. One last question if you don't mind. What if I decided to be a Canadian contractor working remotely from Canada for a US firm and never was physically present in the US (all they do is send me a cheque)? Does this change anything? In essence, I would never fail the 183 day test, but if my income was primarily earned from the US client (more than 50%), I would fail the 50% test.

[nelsona]

The 183-day is the trigger point. As I said, as long as you NEVER spend more than 1/2 your time in US, as a contractor you will never be subject to US federal tax -- asuming you don't meet one of the other definitions of PE, which do not have anything to do with days.

Without this the 50% test never comes into play