# How Much Foreign Tax Credit Can I Claim (Canada citizen with US company)



## tmlinfinity (Sep 17, 2014)

Hello,

I have been offered a job to work for a US employer.

The employer will pay me just like a regular employee and withhold taxes for the IRS.

I have been told that I'd be able to claim all the taxes paid to the US on the FTC form (T2209) used to accompany my Canadian tax return.

It is important to note that I will not be working in the US Monday to Friday every week.

The % of time I will spend working in the US would probably be around 60 to 70% maximum and the rest working remotely from home in Canada in a typical calendar year.

How does this now affect my tax returns?

On the US tax return, is it true that I'd only be able to claim a return on 60-70% of my income since those were the days I was physically present in the US?

I tried looking for evidence of this on the 1040NR form but couldn't.

Furthermore, for my Canadian return, would the FTC amount have to be based on my US tax return amount?

If so, for the remaining 30-40% of the US income earned supposedly "outside" the US, would the IRS five me all the taxes back for that amount?

If so, my guess is I'd use the refunded tax money to pay for additional taxes to Canada (such as the CPP, EI and Federal that should have been withheld).

Is it safer than for the US company to consider a Canadian Business + Payroll? Would anyone know the costs associated with this?

What are the overall consequences with the company not having a Canadian payroll for the company and ultimately myself?

I also hold TFSA, Mutual Fund and RRSP investments.

Thanks.

Gavin


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## tmlinfinity (Sep 17, 2014)

Some extra info.

I am a Canadian citizen who would ideally go on a TN.

I have a home in Ontario too so I'd assume I'd be filing as a non resident alien for tax purposes in the US.

Unless someone says otherwise (e.g. due to exceeding the substantial presence test etc...)


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## Eclectic12 (Oct 20, 2010)

I'd recommend talking to an expert ... you will probably get some good info from a those who have taken a job in the US but I'd want as much info as possible.

As a non-resident alien, the US will want to tax your US income as you are engaged in business in the US during the year.
http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens

I'd investigate what the closer connection exemption will do for you as it looks to me that the Substantive Presence test may reclassify you as a US resident.

Maybe not right away but the formula uses 100% of this year, 1/3 of last year and 1/6 of two years ago. Then too, it is days present in the US ... not days worked in the US for this test.

The rolling total means that for a snow bird who does *not work* in the US, three consecutive years of 123 days in the US classifies the snowbird as a US resident for tax purposes.
http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test

*Edit:*
I'd likely file the closer connection exemption paperwork each year to avoid being considered an US tax resident.




tmlinfinity said:


> ... On the US tax return, is it true that I'd only be able to claim a return on 60-70% of my income since those were the days I was physically present in the US?


Where 100% of the income is coming from a US firm - I'd expect 100% has to be reported on the US and Canadian tax returns.
This is what I recall from when the Canadian firm I worked for sent me to the US under a TN1 visa ... but this is from a while ago.




tmlinfinity said:


> ... Furthermore, for my Canadian return, would the FTC amount have to be based on my US tax return amount?


If you mean the income tax paid to the IRS ... then yes. The FTC is for where foreign taxes are paid on income reported on the Canadian tax return.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns409-485/405-eng.html





tmlinfinity said:


> ... What are the overall consequences with the company not having a Canadian payroll for the company and ultimately myself?


I'm not sure there are any consequences. They can use their existing systems to pay the IRS and as I understand it, it's up to you to file the Canadian tax return, with it's associated obligations.


Cheers


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## Eclectic12 (Oct 20, 2010)

tmlinfinity said:


> ... I have a home in Ontario too so I'd assume I'd be filing as a non resident alien for tax purposes in the US.
> Unless someone says otherwise (e.g. due to exceeding the substantial presence test etc...)


As I understand it ... until the substantial presence test (SBT) is passed, the US return would be as a non-resident alien.

As I say, I'd file the closer connection exception paperwork every year so you don't have to track when the SBT is passed.
http://www.irs.gov/uac/Form-8840,-Closer-Connection-Exception-Statement-for-Aliens


Another reason to consult a specialist is that I believe there was a posting by a Canadian who has maintained their Canadian tax residency/citizenship and is working in the US. From what I recall, the post said that in addition to the two tax returns, he had to start reporting his Canadian bank accounts/investments to the US under FATCA/FBAR. 

http://www.freedmaxick.com/fbar-filing-requirements/


Cheers


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## tmlinfinity (Sep 17, 2014)

Thanks for the reply.
As a non resident I don't think FATCA reporting would be required. Unsure about FBAR.

As for the closer connection exception, although I have a home, car etc... Registered in Canada, my business income would all be from the US due to the employer paying in USD.

So I'm wondering if that alone is enough to void to closer connection exception.


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## Eclectic12 (Oct 20, 2010)

Depending on how one views it ... I'm not sure there's a difference between FATCA and FBAR.

FATCA seems to be the legislation that requires that a range of foreign accounts including bank, brokerage, pension and retirement accounts be reported, among others. My co-worker who is married to an American and has worked in Canada for the last eleven years has to report his RRSP account under FATCA ... so I'm not sure being a non-resident matters all that much.

The part my co-worker hates is that the IRS wants the highest balance ... not the end of the month balance from the accounts, which takes some tracking.


The last link upthread says:


> U.S. citizens and residents *and certain nonresidents* who have a financial interest in or signature or other authority over any “financial accounts” in a foreign country are required to make a separate filing if the aggregate value of these accounts exceeded $10,000 at any time during a calendar year.


Under the more detailed section of _Who Must File FBAR ... ?_, I noticed that it says:


> Foreign persons residing in the US for extended periods of time (i.e. H-1B, L-1, *TN and other Visa holders*) and other individuals who meet the substantial presence test


This seems to match up to what you are planning as a TN visa holder who likely will pass the substantive presence test in a few years.


This is close to what Canadians working in the US have posted (they said filing a US tax return meant reporting the foreign accounts, the quoted link suggests that it can be delayed until passing the substantive presence test).


You may want to check out the following thread.
http://canadianmoneyforum.com/showthread.php/20754-FATCA-new-US-tax-law




tmlinfinity said:


> ... my business income would all be from the US due to the employer paying in USD.
> So I'm wondering if that alone is enough to void to closer connection exception.


It may just be the way you worded it ... but I believe it's the location of the employer that results in needing to file the double tax return, not the currency.


As to what it means and when it is voided ... I'd recommend spending some time with an expert.


Cheers


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## james4beach (Nov 15, 2012)

Gavin, I am in a *very* similar position. Yes, see an expert on US-canada taxes, because IRS penalties are tremendous. Canada isn't the problem in this equation; it's the US and their complex, aggressive taxation. (Better to see a Canadian one as in my experience, the US based accountants have little interest for the Canadian side and are quickly dismissive. I also found US accountants arrogant and ignorant of Canadian taxes, even with credentials).

I'm working in the US with a TN status. I have a home in Canada that continues to be my permanent residence as well as the address for all my bank accounts. Here is what I learned:

First, being on US payroll is not a problem. I quickly acquired a SSN, showing my TN status, and they put me on payroll. I will file both Canadian and US taxes. You will pay your employment based taxes to the US, and Canada will give you a foreign tax credit for taxes already paid to the US. If you're in a high tax state such as California or Oregon, you'll find it's almost a "wash" on taxes owing. Contrary to popular belief, you don't necessarily pay more tax in Canada.

At the start of your US adventure, your tax status is "non resident alien" (NRA). Once you exceed the length of time for the substantial presence test, the I.R.S. will designate you as a "US Person". Understand that virtually everyone becomes a US Person if you spend enough time in the US.

This is where it gets interesting. If you stick with that US Person tax status, you would have to file taxes as a "resident alien". The consequence of "resident alien" is that your obligation, just like a US citizen, is to pay tax on all your worldwide income to the USA. On the Canadian side this would require that you file a tax departure from Canada, leaving Canada as your tax home, triggering capital gains. You'll have to close your TFSA and I'm pretty sure your RRSP gets frozen, you can't trade securities. It also changes your tax residency status for all your banks. _This should only be done if you plan to permanently leave Canada_.

You're probably like me and don't want that to happen. I see my time in the US as temporary, and fully expect to return to Canada. _Remember that TN status is, by its nature, for a temporary US stay and not for US immigration or permanent residency_. I don't want to give up my TFSA and RRSP nor do I want a "tax departure" from Canada.

None of that happens if you preserve NRA status. With NRA status, you'll only pay employment income tax to the US, and US can't tax your worldwide income (i.e. Canadian investments). You remain a tax resident of Canada which means your TFSA and RRSP continue without any changes. Downside: you file two returns every year. You may or may not pay more total taxes; this depends on your Canadian province vs the US state taxes.

*So how do you retain NRA status despite being in the US for much of the year?* Depends on how long you spend in the US. One method, applicable to snowbirds, is to file form 8840. But if you spend a lot more time, like you and I do, you'll need to file form 8833 along with your 1040NR. Form 8833 allows you to invoke the Canada/US tax treaty to indicate that you are a resident of Canada using the "tie-breaker provision". Both countries want to tax you as a resident, but only one will be your tax home. Form 8833 lets you explain why you're a Canadian tax resident. Critical factors are: you're a Canadian citizen, you have a home in Canada, you will be returning to Canada at the end of your job.

Once form 8833 is invoked, you continue to be a NRA in the US and will file 1040NR returns. To be consistent with NRA status, make sure you don't misrepresent your status when asked by banks, border guards, etc. You are a non-resident of the US and non-resident of the state. When asked why you have a US address, you indicate that you have an address and are here temporarily while you work but are a resident of Canada. (This comes up with banks because NRA status leads to W8-BEN forms; as for anyone living in Canada). Don't get a US driver's license. Keep your Canadian driver's license and health card. Very little changes on the Canadian side, in fact, nothing should change in Canada.

Important notes: even with treaty exemption and despite remaining an NRA, you must still disclose all your financial accounts (bank accounts, brokerages) to the I.R.S. under FATCA and FBAR rules. Some Canadian accountants don't know this and mistakenly think the tax treaty exemption alleviates you from this; not true. Despite remaining an NRA, certain Canadian investments cause additional paperwork burden and you have to file details with the IRS. _You won't be taxed on them; but you have to file paperwork to disclose them._ In particular: Canadian mutual funds, ETFs, and the TFSA result in extra paperwork. As a result I am disposing of all of my Canadian mutual fund/ETFs (the IRS calls them PFIC) and I'm also closing excess TFSA accounts, retaining only one TFSA to simplify paperwork. The RRSP is fine to keep.

Second note: one arm of the US government doesn't know what the other arm is doing. US Immigration knows you have a TN status, which is for temporary residence in the US and not meant to stay permanently. At the same time, the I.R.S. will pressure you to file as a resident and may even disagree with your tax treaty election that describes that you're a permanent resident of Canada. Understand that one hand doesn't know what the other hand is doing; the I.R.S. wants to tax all foreigners as much as possible, while Immigration wants you to only stay temporarily and get the hell out of their country. It's funny, but also frustrating and can cause issues.


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## james4beach (Nov 15, 2012)

tmlinfinity said:


> As a non resident I don't think FATCA reporting would be required. Unsure about FBAR.


True while you are under the substantial presence test threshold. But once you exceed that threshold, which I'm sure you will, yes you do have to report FATCA and FBAR -- both of them. They get reported to different US agencies. You have to report them even if you use form 8833 to preserve NRA status under the tax treaty. I've checked with with a lawyer. The only way to avoid FATCA and FBAR is to spend less than the substantial presence test in the US.

They are in fact different things and you (may) have to file both. You file FBAR with the Treasury Department and it has a June deadline; it's not part of the tax code. You file FATCA using form 8938 that goes along with tax return. These rules are new, many accountants don't understand them, and the details are weirder than you can ever imagine.

There are dollar thresholds that determine whether or not you have to file both of those. In some situations, you may have passed the substantial presence test and actually don't have to file some. I forget the details. I am above the thresholds and have to file both, even though I'm an NRA. So you may not have to file FATCA/8938 -- there are tables showing the thresholds.



> As for the closer connection exception, although I have a home, car etc...


Closer connection exemption only applies to form 8840, the first method I mentioned. But once you spend more than 183 days you can't use closer connection. The only way is to file form 8833 for treaty exemption as I described.

As for the % of your annual wages, I'm pretty sure it will all be considered US income. Frankly in the scope of this big picture, that's the least of your problems. Wait til you learn more about FBAR and FATCA/8938 and the forms required to disclose your TFSA. The TFSA requires forms 3520 and 3520A to be filed. Get rid of all your mutual funds or they will each require form 8621 (part of FATCA). My accountant notes that her experience with 8621 has been horrible because the IRS doesn't know how to process them, so it's a _dangerous form_. I am getting rid of all my Canadian mutual funds and ETFs to avoid it.

See an expert -- as soon as you exceed substantial presence test, you have to file these. There are up to $10k penalties per failure to file the required forms.


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## tmlinfinity (Sep 17, 2014)

James, thank you so much.

I actually read publication 519 (US tax guide for aliens) and if you read the source income section (chapter 2 or 3), there is a statement about time basis where the services performed in the US is:

Total salary * (# days working in US / total # days of service performed for the company).

All within the calendar year.

Do you work remotely?

If I was only working in the US and coming home on weekends it'd be fine but that won't be the case so that's where thee is uncertainty about how much of the taxes paid I can use for the T2209 for the CRA.


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## james4beach (Nov 15, 2012)

Interesting, I didn't know that part of it. I do nearly all of my work at a US based office.


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## Guban (Jul 5, 2011)

@james
Thanks for replying. I was hoping you would bring your current expertise to enlighten this situation.
I am confused about your references to FATCA. I am under the impression that this is a reporting obligation of Canadian banks, and are not the responsibility of individuals. 

Form 8938 is a part of the tax return, and is fairly easy to fill out. FBARs are not part of the tax return, but are also relatively simple to fill out.

As to filing a 1040 vs 1040NR, I was unaware that if you become resident in the US, you would necessarily give up your residence in Canada, and be forced to do a deemed disposition of your securities. A US citizen living in Canada is resident in both countries for tax purposes, effectively.

BTW, ETFs based outside of the US are looked at as PFICs, so get rid of them too. 


@tmlinfinity, think carefully about keeping your TFSA. If you do end up filing a 1040 and a T1 general, you will be taxed on gains in your TFSA by the IRS, and not be able to claim a foreign tax credit on your T1. You may wish to empty it and load up on your RRSP, even if you don't deduct it in the current year. "Guban's gambit" does not apply here due to the cross border considerations. As James has indicated, you will also have to file a 3520/3520A, and they are a pain. If you liquidate your TFSA before you become a US person, you will not pay taxes and can always buy it back when you stop your US filing obligations. As an extra plus, you will continue to accumulate more TFSA room by still being resident in the US.
I will also echo James' suggestion in getting advice that is specific to your situation by someone who is familiar with Can/US taxes. Things can be complex and full of nasty surprises.


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## tmlinfinity (Sep 17, 2014)

Guban, James,

Thanks.

That's an interesting point about the mutual funds.

What if you have mutual funds held within your TFSA?

Would the 3520 and 3520A forms shelter you from having to file the 8621 form for Mutual Funds?


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## Guban (Jul 5, 2011)

No. Only your RRSP will do this.

The 3520/3520A are for foreign trusts, and RRSPs, while being foreign trusts, are specifically excluded from having to file these overly complex forms and just get you to file the very simple 8891 instead. Having Canadian mutual funds or ETFs outside your RRSP will still force you to file an 8621.


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## tmlinfinity (Sep 17, 2014)

Thanks again.

OK guys so if we are looking at a cross border tax return where 3520, 3520A and 8621 forms are involved, how much are we looking at for the services?

I would imagine it'd be over $1000?


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## Guban (Jul 5, 2011)

Depends on where you go. Depends what you have.
Did I mention that you need one 8621 for each mutual fund/ETF you own?

Could be over $1,000. Ask around for a quote.


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## tmlinfinity (Sep 17, 2014)

OK.

What if we look on the flip side where a company has a Canadian entity and the employee is paid in CAD and has Canadian payroll deductions but obtains a TN to work in the US for the US subsidiary?

Does the substantial presence test still come into play? Once over, will the individual be required to file a US tax return or would an exemption form be applicable to skip this?

Would FBAR and FATCA rules apply?

Thanks.


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## james4beach (Nov 15, 2012)

Guban said:


> I am confused about your references to FATCA. I am under the impression that this is a reporting obligation of Canadian banks, and are not the responsibility of individuals.


FATCA legislation brought in various new things (see this IRS link that explains it). One thing it created is Form 8938 for individual tax filers. Another consequence is the extortion of -- er sorry -- obligations for foreign banks. They're all part of FATCA.

You're right that both 8938 and FBAR are simple to fill out. My problem with them isn't the complexity but the intrusiveness of the USA overstepping its bounds.



> As to filing a 1040 vs 1040NR, I was unaware that if you become resident in the US, you would necessarily give up your residence in Canada, and be forced to do a deemed disposition of your securities.


I'm not crystal clear on this either. Does anyone know? What happens if Canada and US both treat you as a tax resident with your 'tax home' there?

Generally I've heard that peple filing a 1040 (resident in US) will give up Canadian tax residency and file departure taxes. I'm not totally sure why. Clearly it's more work to file a full return for all worldwide income to both USA and Canada. All bank interest, stocks, etc. would have to be reported to the US and they don't recognize many of those things -- I imagine that would be ugly.



> BTW, ETFs based outside of the US are looked at as PFICs, so get rid of them too.


Yes. Same with Canadian mutual funds. Even some stocks like CEF are classified as PFICs. You should get rid of all of these things if you exceed the substantial presence test. Alternatively, the RRSP is the only place you can shelter them.


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## james4beach (Nov 15, 2012)

Guban said:


> Having Canadian mutual funds or ETFs outside your RRSP will still force you to file an 8621.


Right. You should sell all mutual funds and ETFs except those you can stuff into your RRSP.

TFSAs require these long 3520/3520A forms but if you remain a US nonresident -- by filing 8833 treaty exemption -- you don't pay tax on them. You still have to file these reports though.



> How much are we looking at for the services


Accountants with cross-border expertise quoted me between $200 and $350 per hour. Make sure you interview and _quiz_ them. They should know all the terms we've been discussing. Total cost will really depend on how complex your taxes are. This is why I'm working hard to sell ETFs, close TFSA and simplify my accounts so that I reduce the paperwork. (I'm keeping one TFSA by the way, containing bonds).



> What if we look on the flip side where a company has a Canadian entity and the employee is paid in CAD


I don't know, sorry


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## tmlinfinity (Sep 17, 2014)

Hi James,

Just reading one of your previous posts. 

I was told that FATCA and FBAR filings were required if you are a resident alien or actual US person.

Why do NRAs still need to file the forms still?

Do the $10k penalties get invoked even for NRAs?


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## james4beach (Nov 15, 2012)

To clarify this let me define two different things:
*NRA*literal*: you haven't exceeded substantial presence test, not a US Person, ever
*NRA*treaty*: you may have been a US Person but then invoked the tax treaty tie-breaker (8833) to retain NRA status



> Why do NRAs still need to file the forms still?


NRA*literal do not need to file FATCA/FBAR. For instance if you just visit the US briefly, you never exceed substantial presence and are NRA*literal. No reporting requirements.

It's the NRA*treaty people who still need to file the forms. Here's one legal resource that explains this. "Becoming a nonresident alien by using the income tax treaty does not make you a nonresident alien for all purposes of U.S. tax compliance. Making the election under an income tax treaty makes you a nonresident alien for the purpose of computing your U.S. income tax liability. But all other provisions of U.S. tax law will continue to apply to you as if you are a U.S. resident"

Fun, right? What they're saying is that NRA*treaty people (like me) are freed from the tax liability, but not freed from all the reporting requirements. So NRA*treaty people still have to file all of the various forms.

The penalties, I don't know much about those but I imagine they're most seriously enforced in cases where the person is dodging taxes. In our case we if slip up and forget to report an account, we're not evading taxes -- we wouldn't pay tax on these accounts anyway, as NRAs.


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## james4beach (Nov 15, 2012)

I buried a link in my last post, but it's a really good resource including how one becomes NRA*treaty
Hodgen.com: Form 8938 can apply to nonresident aliens


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