You may have heard a “183 day rule” term floating around in the accounting world. For those of you considering working at a client site in the US, you should take heed.
Filing US Income Tax Returns
Canadian incorporated IT contractors who are physically present in the US for 183 days or more are required to pay US corporate income tax. In other words, you must file US Federal and US State corporate income tax returns for your company, as well as US Federal/State personal income tax returns for yourself as an individual. As a result you may potentially lose out on tax savings as a Canadian corporation.
But…what if I’m already paying Canadian taxes?
Luckily, double taxation can be avoided such that any US personal or corporate income taxes you pay will be eligible for a credit on your Canadian personal or corporate taxes – known as “foreign income tax credit”.
Tax Implications
The main consequence is simple: spend 183 days or more in the US and you will no longer be eligible to claim the low Canadian small business corporate tax rate of 15%. However, the degree to which this affects you depends on your long term tax strategy.
For instance, if you leave a large portion of corporate income within your company by minimizing expenses and withdrawals, you will be affected severely by the 183 day rule. In contrast, if you have high corporate expenses and withdrawals resulting in little to no corporate income inside the company, you will not be as affected by the 183 day rule.
Preliminary Solutions & Strategies
Lucky for you, taking on a US client is still possible without falling prey to the rule. There are several ways to do this:
- Minimize US physical days
- Consider finding US work that can be done remotely from your Canadian home. Got cases of weekly travel? Fly down on Mondays instead of Sundays, and go home on Thursdays instead of Fridays.
- Maximize Canadian physical based revenue
- Create separate invoices for all work physically done in Canada, and try to maximize the number of Canadian based hours
- You may also consider increasing Canadian based revenue by charging a higher hourly rate for work done from Canada, i.e. $150/hour for work done from Canada vs. $75/hour for work physically done in the US.
For more information on this issue, sign up for a free consultation or give us a ring at 1-800-465-7532.
