14.3.1 [a] U.S Taxation of Canadian Residents on Personal Services Income
Under the Code, non-resident aliens who earn income in the U.S. are subject to federal income tax on the portion of their income derived from services performed in the U.S.
14.3.1 [b] U.S Source Rules
Non-resident aliens who earn income in the U.S. are subject to federal income tax on the portion of their income derived from services performed in the United States. Accordingly, in the case of compensation for personal services performed partly within and partly without the U.S. by an independent contractor, the part performed within the U.S. is determined on the basis that most correctly reflects the proper source of that compensation under the relevant facts and circumstances.
14.3.1 [c] Withholding and Compliance
A non-resident alien individual who performs personal services in the U.S. is generally subject to 30 per cent withholding. This rule applies regardless of the place of payment.
A non-resident alien individual may use Form 8233 (Exemption from Withholding on Compensation for Independent [and Certain Dependent] Personal Services of a Non-Resident Alien Individual) to claim a tax treaty exemption from withholding under section 1441 on some or all compensation paid for independent personal services.
14.3.1 [d] Independent Contractor vs. Employee
The determination of whether an individual is a common law employee or an independent contractor is a question of fact to be decided based on the particulars of any given relationship. Generally, an employment relationship exists when the individual or entity for whom services are performed has the right, whether or not such right is actually exercised, to control and direct both the results of the service provider’s work, and the means by which those results are accomplished.
14.3.1 [e] Exclusion for Citizens and U.S. Residents Living Abroad
Section 911 (a) of the Code allows qualified citizens and residents of the U.S. living abroad to elect to exclude (within statutory limits) from gross income the foreign earned income and housing cost amounts of such individuals.
Foreign earned income is defined in the statute as amounts received “from sources within a foreign country” for services performed by the taxpayer. To qualify for the exclusion under section 911, a U.S. citizen or resident working abroad must have a tax home in a foreign country and satisfy either the bona fide residence test or the physical presence test. Procedures for making a valid election are contained in the regulations.
The elections must be made on Form 2555 or on a comparable form, and must be filed with the income tax return or with amended return within time prescribed by the regulations.
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell
