Canadian Company with Consulting Project in USA

[ggmackellogg]

Hello. I am new in the forums. I think my question has probably been answered before by very knowledgeable and helpful people but I can't seem to find the replies. Hence, this query:

Situation:

My business colleague and I set up a CCPC based in Vancouver. We do consulting business in Vancouver. In January 2011, our company signed a consulting contract with a US company based in Seattle. In April 2011, my business colleague, who is an American and a Canadian PR, began working in Seattle for that client. My business colleague is an employee of the CCPC that we set up. The US company pays us via check in the US. We deposit our check in the US (we opened a US bank account) then remit the US$ to our US$ account in Canada then convert the amount to Canadian $ to help pay our salaries and meet business costs. Note that we also get revenues in Canada from our clients based in Canada (Vancouver).

Several questions:

1. For FY 2011, are we deemed to be doing business in the US? From our understanding, we are not because we have no permanent establishment in the US. We computed the number of days my colleague will be in the US this fiscal year 2011 and we have determined that it will be less than 180 days. We do not have an office in Seattle. My business colleague works at the client's site.

2. Depending on the answer in No. 1, do we need to file anything with the IRS in the US? We plan to simply file everything with the CRA for fiscal year 2011.

3. For our Seattle client, we get paid in US$. How do we declare this for Canadian tax purposes? What's the appropriate exchange rate to use? Note that every month, we transfer the US$ amount from the US to our US$ account in Canada then convert to Canadian $.

4. Our contract is for 1 year and potentially renewable for another year. If this is the case, we forsee than in Fiscal Year 2012 (next year), we may be deemed to have a Permanent Establishment in the states because my business colleague will be in the US for more than 180 days during a 12 month rolling period. If this is the case:

- What are the tax implications, US-wise?
- We understand that US corporate tax is higher than Canadian corporate taxes. How do we minimize the tax?
- Will there be a need for us to form a US entity to help minimize taxes?

5. Sometime this year, we plan to hire a Canadian to work for our company. Like my business colleague, that person will be sent by our company to work in Seattle. Unlike my business colleague, this employee is Canadian....not American. In this scenario:

- What are the tax implications for Fiscal Year 2011? We assume we still have no PE in 2011 and wonder if this assumption is correct.

Thanks in advance for any help with answers. People here have been awesome with their responses.

[nelsona]

1. Counting of days is in ROLLING 365-day, so, if at any time he exceeds 183 days he and your comapny will be considered as having a fixed based, espaecially if a large % of your earnings are derived from thsi contract.

2. Typically an 1120-F is filed, regardless of taxability.

3. How you are paid, and where you put the mobney are unimportant. The bank of canada has simple calculators which determine the average exchange rate for any period you need. Use this.

4. See 1. I can't help you on corp tax.

5. Same as your US employee, except that he will need status to work in US, which may require TN (sponsored by the US client), if B2 entry is not permitted

[ggmackellogg]

Thanks for your quick reply.

Regarding your answer in (1), you mentioned rolling 365 days.

Let's say for Fiscal 2011, he worked for 160 days? I assume that for Fiscal 2011, we will not be considered as having a PE and therefore will owe taxes only to the CRA?

Is my understanding correct that let's say, in 2012, he works for at least 24 days, this means that in 2012, we now have a PE and therefore income earned in USA during 2012 will now have USA tax consequences?

[nelsona]

The rolling period can be any 365 day period. This can result in "becoming' taxable for the previous year. Once the 184 day thresshold is met, that entire period becomes taxable.

Also, there is some ambiguity with regrds to having multiple employees going down at different times. While none may have exceeded the time limit, the permanent establishment may be achieved, making all wages for that entire period taxable.

[ggmackellogg]

Thanks for reply. Hmmmm.....so let's say in 2011, less than 183 days is spent.

Then let's say come Feb - -we file our form. We don't declare income in US because we're not a PE. In the meantime, let's say we suspend our work in the US.

Come March, we resume work.

Does this mean then that we would need to revise our filing in February and say that we earned income in the USA?

[nelsona]

It could very well be.
At the very least your employees would become taxable n their US wages.

Your corp's taxability would be based on how predominant the US project is on your overall revenue. There are tests to meet.