Cross-Border Telecommuting

Look Before You Leap

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When contemplating cross border telecommuting, whether between countries such as Canada and the United States, or just between States or Provinces; it's important to realize there are differences in the manner with which each country collects taxes.

Under the Canadian system, taxes are based on residency not citizenship.

If you have been in Canada more than 183 days your income, no matter the source, is taxable in Canada. There are exceptions for government employees.

In the United States taxes are based upon where you perform the work and citizenship. So based on citizenship the U.S. can tax its citizens in Canada. Where you perform the work relates to tax issues on state levels.

There is a tax treaty in place between Canada and the United States which sets out the circumstances for who has claim on income taxes and who must pay the respective country. There are provisions to prevent double taxation.

Different scenarios that may arise for cross-border telecommuters:

Q. I am a US government employee whose spouse has been transferred temporarily to Canada or is studying in Canada. I was telecommuting part-time and now to avoid traffic delays at border crossings, have been approved for full-time telecommuting. Will I have to pay Canadian income tax on my earnings?

A. Simply put - no. Under the Canada - United States Tax Treaty, government employees are not required to pay taxes to Canada. Article XIX states that "remuneration, other than a pension, paid by a Contracting State or political subdivision or local authority thereof to a citizen of that State in respect of services rendered in the discharge of functions of a governmental nature shall be taxable only in that State."

Q. My partner has been transferred to Canada for a work project or to study and my employer will allow me to continue my job in a telecommuting capacity. I will on occasion make trips to the office for meetings or other work reasons. Do I have to pay Canadian income taxes? We still maintain a residence in the United States and return on weekends and holidays.

A. As this person is not a government employee this situation is a little trickier. As Canadian taxes are based on residency, you will need to prove that you are not a resident of Canada. One key is that you will be making trips to the home office and that will reinforce that you are not a resident. Keeping a residence in the States and returning at regular intervals is also wise. There is a form you must complete that will be used by Revenue Canada to determine your residency status. The form is "Determination of Residency NR 74" that you can download and review to see what is looked for.

Q. I am a Canadian working as an independent contractor in a telecommuting capacity for an American company. All my work is done in Canada; do I have to pay the IRS?

A. No. Since the American tax system is based on where the work is performed, you would not pay any taxes in the States. Be advised though that if you ever travel to the States, even for one day for work related matters you may become liable for tax payment in the States. You do need to declare your income in Canada on your taxes, remembering to convert it to Canadian funds.

Q. I am a Canadian and living in the United States. My employer is in Canada and I can use telecommuting to keep my job. Who do I pay my taxes to?

A. Unless you intend to give up your Canadian citizenship, you will still need to pay Canadian taxes on your income. You may also have to pay state income taxes, check with the state you are in, since not all states have income taxes.

Dealing with taxes on cross-border telecommuting is not easy and can be very confusing. Before you begin any cross border telecommuting venture, find out all you can about the tax implications for your specific situation. Contact a tax professional or local tax office and explain your situation.

You want to know exactly what tax implications you may face prior to your telecommuting arrangement starting.