Self employment income

Tax Topics
1

Hello I have taken on a client that is a permeant resident in Ontario. She is a US citizen and is self employed though Market America. Her prior accountant was filing a 2125 and converting her US sales income into CAD and reporting it. A T2203 was created to show her income was 100% from USA. Looking at previous tax returns she has never paid self employment CCP and only paid health care. On the FTC summary he put the USA income and taxes paid. My question is how to I or where do I select not to pay self employment CPP. Please help

2

Does she have a ‘permanent establishment’ in the US, or is the ‘customer’ simply in the US and the work is performed in Canada?

3

My understanding of the Canadian CPP rules (which might be wrong) is that she can’t elect out of it for work done in Canada. It sounds like the previous Canadian accountant filed it wrong and I am very surprised that the CRA didn’t question this. I know that the self employment form in the US has a box to tick if the income is exempt from US social security taxes on self employment income under a tax treaty so I have always reported CPP on self employment income in Canada for my US citizens and exempt on the US side. If there is a way to do it it would be under the US Canada Tax Treaty or the US Canada Totalization agreement but I’d think with her (I assume) performing the services in Canada she can’t get out of it under the treaty. If she was doing the work in the US and wanted to exempt it from CPP then I suspect it would have to be done something like what the prior accountant did because I have never seen a box in tax cycle that is the equivalent to the one in the US software.

4

USA established business in the USA
She commutes to the USA from Canada

Tim Boufford
timboufford@cogeco.ca

5

she has an office in the USA? in that case, yes, or is she a ‘1099 employee’, and works at her customer’s establishment?

Article V

Permanent Establishment

  1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.

  2. The term “permanent establishment” shall include especially:

  • (a) a place of management;
    (b) a branch;
    (c) an office;
    (d) a factory;
    (e) a workshop; and
    (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

  1. A building site or construction or installation project constitutes a permanent establishment if, but only if, it lasts more than 12 months.

  2. The use of an installation or drilling rig or ship in a Contracting State to explore for or exploit natural resources constitutes a permanent establishment if, but only if, such use is for more than three months in any twelve-month period.

  3. A person acting in a Contracting State on behalf of a resident of the other Contracting State-other than an agent of an independent status to whom paragraph 7 applies-shall be deemed to be a permanent establishment in the first-mentioned State if such person has, and habitually exercises in that State, an authority to conclude contracts in the name of the resident.

  4. Notwithstanding the provisions of paragraphs 1, 2 and 5, the term “permanent establishment” shall be deemed not to include a fixed place of business used solely for, or a person referred to in paragraph 5 engaged solely in, one or more of the following activities:

  • (a) the use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the resident;
  • (b) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display or delivery;
  • (c) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;
  • (d) the purchase of goods or merchandise, or the collection of information, for the resident; and
  • (e) advertising, the supply of information, scientific research or similar activities which have a preparatory or auxiliary character, for the resident.

  1. A resident of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.

  2. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not constitute either company a permanent establishment of the other.

  3. For the purposes of the Convention, the provisions of this Article shall be applied in determining whether any person has a permanent establishment in any State.

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6

However, if Market America is like most other multi level marketing outfits, she is more likely than not to be working from home… meaning, it is Canadian business income, and Canada has first right of taxation, and she is subject to CPP, not FICA.

7

She gets a 1099 from Market America. She has an address in the states where they product get ships. All sales are in the USA as they are not available in Canada

Tim Boufford
timboufford@cogeco.ca

8

Is this an address or a mail box? Or the address of Market America, of which she is a ‘1099 employee’?

Does not matter where the customers are. What matters if she actually has a ‘permanent establishment’ in the USA, which is not the address of her ‘customer’, or ‘1099 employer’, but her own address.

9

Thanks. Is there where I can pay you for your service and reach out to your office.

Tim Boufford
timboufford@cogeco.ca

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