Posted by: Daryl & Wendy Ashby | February 11, 2010

Foreign Taxes May Apply

While the following article may not relate directly to the Real Estate market, we believe it is informative nonetheless to those who may choose to live here part time, yet continue with their overseas employment.

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Many Canadian business owners and their employees travel regularly to the United States and elsewhere to meet customers and explore business opportunities. These trips can be the lifeblood of an expanding company but they also can trigger unexpected tax for companies, their owners and employees.

Companies can avoid these surprises, by paying attention to and managing any tax costs that arise. U.S. tax authorities, for example, may aggressively pursue individuals and companies from other countries who travelled on business, and impose taxes on income sales and payroll, too. Wherever you travel on business, your company travels with you. If you or your employees conduct business in another country, your company may be deemed to conduct business there.

Most developed countries have tax treaties with Canada to prevent taxation of the same income in both countries. These treaties typically state that a company of one country will not be taxable in the other unless the company has a “permanent establishment” in that country. A permanent establishment usually includes a place of management, a branch, a factory, and certain other business endeavours, but an employee’s presence can sometimes be enough to create a permanent establishment for the employer.

Keep in mind individual states are not covered by federal tax treaties. If a business traveller enters a state to do more than solicit sales (such as provide services, training or quality control), the company could have “state tax nexus,” potentially creating a state income tax or “sales-and-use tax liability. You may be able to reduce or eliminate these liabilities if you are aware of the risks ahead of time.

Employees working outside Canada also can be subject to personal income tax in that country. Most tax treaties provide exemptions for limited services of employees in a foreign country, although the rules can be complicated and typically include filing a tax return.

The Canada-U. S. treaty provides that a Canadian resident employee will not be taxable in the United States if that employee passes one of two tests: The employee’s earnings in the United States from their Canadian employer do not exceed US$10,000, or the employee is present in the United States for no more than 183 days of 12 months and compensation is not paid by or on behalf of a U.S. resident or by a permanent U.S. establishment.

An employee working in another country also may create an obligation for the company to comply with payroll reporting and tax withholding rules of the country. For example, a Canadian company is obliged to report compensation of an employee working in the United States if the compensation for the U.S. workdays exceeds US$3,650 for 2010. Unless the employee files a form for a treaty exemption, the employer is also liable for withholding income taxes and reporting the income and can face severe penalties for not complying. Even if the employee files the required form, the company must still report the income and the employee must still file a tax return.

The Canadian government has even stricter rules. An employer (Canadian or foreign) must withhold Canadian income taxes on compensation paid to a non-resident of Canada for services rendered in Canada, even if the payment is made outside Canada and is tax-exempt under a treaty.

The employer can avoid withholding tax if it or the employee gets a waiver from the Canada Revenue Agency, which can take weeks to get. Even then, the employer must file a “Statement of Remuneration Paid” (T4 slip) and the employee must file a Canadian income tax return to report the exempt income.

Canadians travelling regularly to the United States may have another reporting obligation to the Internal Revenue Service. Along with their companies, they may have to file a Report of Foreign Bank and Financial Accounts, which includes detailed information about their Canadian bank and other financial accounts.

The IRS recently expanded the scope of these rules to include non-U. S. citizens and residents and certain non-U. S. companies if their business presence in the country is “regular and continuous.” It is still unclear when a Canadian would have to file this report.

Although it takes an extra effort to comply with all these rules, doing so can ease expansion into new and profitable business areas, while protecting companies and their employees from unexpected tax consequences. It’s a small price to pay for new opportunities.

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