Are you sending employees to the United States for business purposes? Do you have employees attending trade shows or meeting clients in the United States? Or do you have employees rendering training services or installing products at clients? In such cases, were you aware that U.S. tax obligations might be applicable and penalties for non-compliance would be applicable?
This bulletin serves to advise Canadian corporations temporarily sending employees to the United States of their U.S. tax obligations.
Taxable income within United States
According to U.S. tax law:
Compensation for services performed in the United States shall be treated as income from sources within the United States, except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if:
- services are performed by a nonresident temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year; and
- such compensation does not exceed $3,000 in the aggregate.
Benefit of the Canada-United States Tax Treaty:
However, a Canadian corporation with no permanent establishment in the United States sending employees to the United States could benefit of the Canada / U.S. tax treaty.
In such case, the Canadian corporation would be exempt from U.S. tax withholding if the employee’s compensation shall not exceed $10,000 per year.
If the employee’s compensation is over $10,000 per year, the Canadian corporation is only exempt from U.S. tax withholding if:
- The employee was in the United States less than 183 days in any 12-month period commencing or ending in the fiscal year concerned; and
- The remuneration is not paid by, or on behalf of, a U.S. resident employer or a non-resident with a fixed base in the United States.
However, please note that this exemption could be applicable on the Federal level only, since states do not automatically follow the tax treaty. It is important to verify the tax laws in the states where the services are rendered.
Employer obligations
If the employee exceeds the earnings threshold of $3,000 set by the Internal Revenue Service (« IRS ») but is otherwise exempt under the Canada / U.S. tax treaty, he must provide the signed Form 8233 “Exemption from withholding on Compensation for Independent (and certain dependent) Personal Services of a Nonresident Alien Individual” to his employer with the completed sections I, II and III.
Since the employer is in charge of U.S. tax withholding on compensation, he shall complete Part IV of Form 8233. Then, the employer is responsible for forwarding Form 8233 to the IRS.
Employee obligations
Except to the extent that the income earned in the United States by an employee does not exceed $3,000 and that his presence in the United States for business purposes shall not exceed 90 days, the employee will be subject to U.S. tax. However, as for the employer, the employee may benefit from the tax treaty under the same conditions listed above. An employee who is not subject to U.S. tax under the Canada-United States tax treaty must complete a U.S. tax return, Form 1040NR “Nonresident Alien Individual Tax Return”. This return would not include any income but would be filed to request the Treaty based exemption on the employee’s U.S. source income. Furthermore, in certain cases, Form 8840 “Closer Connection Exemption” could be required, in order to prevent the taxation in the United States of worldwide income through the establishment of a closer connection to Canada.
A person who fails to file the above-mentioned documents may end-up with penalties from the IRS.
It is important to note that the « U.S. Custom and Border Protection Service » and the IRS are currently expanding their ability to collaborate electronically. A growing number of border services officers are starting to ask questions about the filing of tax returns. This is why tax compliance rules explained in this Tax Bulletin should be strictly adhered to in the future in order to avoid a restriction of passage to U.S. Customs for Canadian employees and to avoid penalties.
