What are the basic requirements for U.S. income tax return for Canadian residents (non-residents of U.S.) who conduct business in the U.S., such as providing self employed personal services or have a rental income in the U.S. ?
As a U.S. non-residents who are taxable in the U.S. on their U.S. source income must file form 1040 NR by June 15 each year for the prior calendar year. Married residents of Canada may claim exemptions for a spouse and dependent children who lived with them. Although the maximum tax rate used on the form 1040 NR is the same as that for form 1040, fewer deductions and exemptions are generally available, resulting in a higher overall federal tax cost. Non-residents filing form 1040 NR cannot claim the standard deduction, but must itemize deductions.
A Canadian resident providing personal services in the U.S. as a self-employed individual formerly fell under the Canada U.S. Income Tax Convention (Treaty) — Article XIV – “Independent Personal Services”, which exempted self employment income from taxation in the U.S. regardless of amount or time spent in the U.S. as long as no permanent establishment was maintained in the U.S. Effective January 1, 2008, Treaty Article XIV has been eliminated, and instead replaced by the following in the Fifth Protocol:
Permanent Establishment:
A permanent establishment is now created where an individual spends more than 183 days in the other state and during that time more than 50% of the gross revenue generated by the business is derived from services rendered in the other state by that individual. A permanent establishment may also be created where services are provided in the other state for more than 183 days in any 12-month period with respect to a project for a resident of the other state.
Proportional Taxation:
Consistent with changes in the definition of “permanent establishment” mentioned above, the blanket exemption from taxation available to individuals or businesses providing business services in the other state (but not through a permanent establishment) has been repealed. Now, “business profits” are taxable in each state on a basis proportional to the activity carried out through a permanent establishment in each state.
Assuming that the individual is not deemed to have a permanent establishment in the U.S., the following filings may be required each year:
- U.S. 1040 NR Nonresident Alien Individual tax return – this return would not include any income, but would be filed to preserve the Treaty based exemption from taxation.
- Form 8833 – Disclosure of Treaty Based Position – disclosing the basis for exclusion of income. Law requires this, with severe penalties for failure to disclose a Treaty based position.
- Form 8840 – Closer Connection Exemption – to prevent taxation of world income in the United States by virtue of presence in the U.S. – through the establishment of a closer connection to Canada;
- Form 8233 Exemption from Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual – to prevent withholding of income tax at source on self employment income from U.S. sources.
- Canadian T-1 Individual Income Tax Return – including world income and the self employment income earned in the United States;
- Canadian form CPT56 – Application for Certification of Coverage of Employment under the Canada Pension Plan Pursuant to Article V of the Agreement on Social Security between Canada and the United States. – to prevent the requirement to deduct and pay social security taxes in the United States.
If, however, the individual does have a permanent establishment in the U.S., the following forms will be required each year:
- U.S. 1040 NR Nonresident Alien Individual tax return – this return would include income and expenses associated with the U.S. permanent establishment.
- Canadian T-1 Individual Income Tax Return – including world income and the self employment income earned in the United States;
- Canadian form CPT56 – Application for Certification of Coverage of Employment under the Canada Pension Plan Pursuant to Article V of the Agreement on Social Security between Canada and the United States. – to prevent the requirement to deduct and pay social security taxes in the United States.
For more information or U.S. income tax services and planning, please contact AccXpert TaxServices at taxservices@accxpert.com.