The U.S. has entered into tax treaties with many countries in an effort to reduce or eliminate double taxation. The U.S. – Canada Income Tax Treaty is of special interest due to the proximity of this neighboring country. This treaty was signed in 1980 and has since been amended by five protocols.
Income from personal services while working in the other country as a nonresident may be exempt from the other country’s income tax if one of the exemptions in the treaty is met. For example, Article XV states that personal services performed by an employee working in the other country is exempt if the total payment is under $10,000 (special rules apply to public entertainers). If earnings exceed $10,000, the income may be exempt if the nonresident is present in the other country for less than 183 days in any 12-month period and the payment is not received by or on behalf of a resident of that country or borne by a permanent establishment in that country.
Income from self-employment, treated as business profits in Article VII, is taxed by the U.S. or Canada if attributable to a permanent establishment in that country. The business profits apply to each country based on what the permanent establishment might be expected to make as a separate entity. Article V of the treaty discusses what it takes to have a permanent establishment. Canada has added a new clause that will need to be reviewed by any U.S. providers engaging in Canada.
Under Article XVIII, pensions and annuities paid to a resident of one country from a source in the nonresident country are taxed by the nonresident country, but are limited to 15% of the gross amount of the pension, or the taxable amount if an annuity. The amount included as income in the resident country is limited to the amount that would be income in the other country if the taxpayer was a resident of that other country.
Please remember, if taking advantage of any provisions within a treaty, you must disclose that position on Form 8833 and attach it to your U.S. income tax return.
Jill Helm, CPA