Filing Implications of U.S. Source Income for Individuals and Corporations

Globalization of the economy is making it very easy and much more common for Canadians to conduct business and earn income from the U.S.

While the opportunity to expand your business into the U.S. can produce significant income and opportunities for your business it is important to understand the filing implications of earning business income from the U.S.

The filing implications will vary depending on whether or not the individual or corporation has a permanent establishment in the U.S. as defined under Article V of the Canada – U.S. Tax Treaty.

Permanent establishment are a complex set of rules and does not always require a physical presence to be deemed to have a permanent establishment in that country. Thus we recommend that you always consult your tax advisor before doing business.

For purposes of this article, I have split it up into two categories 1) Canadian resident individual engaged in trade or business in the U.S. 2) a Canadian corporation engaged in trade or business in the U.S. For both categories, I have assumed that the individual and/or Corporation does not have a permanent establishment in the U.S.

It is also important to keep in mind that every taxpayer’s situation is different and the forms/returns that they are required to file can vary substantially, so it is important to discuss your situation with a qualified and experience professional.

1)      Canadian resident individual engaged in a trade or business in the U.S with no permanent establishment, may potentially have to file some of the following forms:

• U.S. Form 1040 Non-resident tax return. This form would be filed to report any U.S. source income and related expenses that the individual earned in the U.S.
• U.S. Form 8833. This form would be filed if the individual was claiming any treaty based positions to exclude any income from U.S. income tax.
• U.S. Form 8233. This form is filed to prevent the U.S. from withholding 30% on income earned by non-resident individuals receiving compensation for independent personal services.
• U.S. Form W-8BEN. This form is filed to claim treaty benefits to reduce withholding tax.
• U.S. Form 8840. Depending on the number of days the Canadian resident individual spends in the U.S. they may be required to file form 8840 to prevent the taxation of their worldwide income in the U.S. by claiming a closer connection to Canada.
• Depending on which state(s) the income is earned the individual may have U.S. state filing requirements.
• Canadian T1 tax return. Tax return reporting their worldwide income.
• Canadian Form CPT56. This form would be filed to prevent the requirement to deduct and pay U.S. social security on their U.S. source income.

2)      A Canadian corporation engaged in trade or business in the U.S. with no permanent establishment, may potentially have to file some of the following forms:

• U.S. Form 1120-F. This form reports the corporations U.S. source income.
• U.S. Form 8833. This form would be filed if the individual was claiming any treaty based positions to exclude any income from U.S. income tax.
• Depending on which state(s) the income is earned the individual may have U.S. state filing requirements.
• Canadian T2 Corporate Income Tax Return. Tax return reporting the corporations worldwide income.

The above lists are not exhaustive and the forms required to be filed will depend on how, when and where the income is earned. There are significant penalties and consequences to not filing the correct forms, so it is important to discuss any plans to earn any non-Canadian source income with a qualified and experienced professional to ensure that you and/or your business are not exposed to any potential fines or penalties.

Hutcheson & Co. LLP has extensive experience assisting clients navigate the complex Canadian and U.S. tax filing for individuals and businesses, so if you have plans or are earning U.S. source income do not hesitate to contact one of our qualified professionals.

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