Canada and US Sourcing Rules – Inbound Taxation
Canada and US Sourcing Rules – Inbound Taxation: Effectively Connected Income (ECI). Exclude your U.S. Source business income if you are a Non-Resident Alien for tax purposes.
Generally, the due date of the of your U.S. Non-Resident alien Income Tax Return will be April 15th. The form you would file be 1040NR (US Non-Resident Alien Income Tax Return)
So from the business you are conducting, the portion of the trade/business income that is effectively connected to the US would be taxable for U.S. purposes. To Determine the source of the income is based on the type of activity you are doing, the U.S. Taxes sources for non-resident aliens are the following:
| Summary of Source Rules for Income of Nonresident Aliens | |
| Item of Income | Factor Determining Source |
| Salaries, wages, other compensation | Where services performed |
| Business income: Personal services |
Where services performed |
| Business income: Sale of inventory -purchased |
Where sold |
| Business income: Sale of inventory -produced |
Where produced (Allocation may be necessary) |
| Interest | Residence of payer |
| Dividends | Whether a U.S. or foreign corporation* |
| Rents | Location of property |
| Royalties: Natural resources |
Location of property |
| Royalties: Patents, copyrights, etc. |
Where property is used |
| Sale of real property | Location of property |
| Sale of personal property | Seller’s tax home (but see Personal Property, in Chapter 2 of Publication 519, for exceptions) |
| Pensions | Where services were performed that earned the pension |
| Scholarships – Fellowships | Generally, the residence of the payer |
| Sale of natural resources | Allocation based on fair market value of product at export terminal. For more information, see IRC section 1.863–1(b) of the regulation |
Therefore, if you are conducting services solely in Canada then it would not be taxable to US but in Canada. Now if the income is sourced in the United States, then you would need to file a 1040NR and report income on that return. Furthermore, let’s just say you do have a income that is effectively connected in the U.S. then there is a US-CANADA Tax Treaty , that describes this concept called “permanent establishment”, and if you don’t have permanent establishment in the US then the income would be solely be taxable in Canada (your resident country).
Permanent establishment is described as the following: permanent establishment generally mean a fixed place of business, such as a place of management, a branch, an office, a factory, a warehouse, or a mining site, through which an enterprise carries on its business.
Therefore per the IRS:
Income that residents of Canada receive for personal services as independent contractors or self-employed individuals is subject to the provisions of Article VII (Business Profits) of the treaty. Under that provision, business profits are exempt from U.S. income tax unless the individual has a permanent establishment in the United States. If they have a permanent establishment in the United States, they are taxed on the profit attributable to the permanent establishment. Under Article V (Permanent Establishment), you may be considered to provide services through a permanent establishment in the United States even if you do not have a fixed place of business.
Income that residents of Canada receive for personal services performed as employees (dependent personal services) in the United States is exempt from U.S. tax if it is not more than $10,000 for the year. If the income is more than $10,000 for the year, it is exempt only if:
- The residents are present in the United States for no more than 183 days in any 12-month period beginning or ending in the tax year, and
- The income is not paid by, or on behalf of, a U.S. resident, and is not borne by a permanent establishment in the United States.
Public entertainers (such as theater, motion picture, radio, or television artists, musicians, or athletes) from Canada who derive more than $15,000 in gross receipts, including reimbursed expenses, from their entertainment activities in the United States during the calendar year are subject to U.S. tax. However, this article does not apply to athletes participating in team sports in leagues with regularly scheduled games in both Canada and the United States.
Conclusion:
– Business income services is sourced on where the service is performed. If all your work is performed in Canada, then you don’t have a Federal US tax requirement based on that income
– If your business income is effectively connected to the US and you don’t have a permanent establishment, then we can claim a treaty claim on your 1040NR to exclude the income.
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