Do Canadians working remotely from Canada for a US company pay US tax?

Why work done from Canada is not taxed by the US

Both countries source employment income to the place where the services are performed, not to the employer's address or the bank the pay comes from. Under Article XV of the Canada-US tax treaty, salary earned by a Canadian resident is taxable only in Canada unless the employment is exercised in the United States. Typing on a laptop in Brampton is employment exercised in Canada, however American the company logo on the pay stub.

That changes the moment you work from inside the US. Because your employer is a US resident, the treaty's 183-day exemption is not available to you, and the only remaining shelter is the small-earnings rule: US-source wages of US$10,000 or less in the year stay exempt. Above that, the wages for your US workdays are US-taxable, reported on a Form 1040-NR, and credited against your Canadian tax. Occasional onboarding trips rarely cross the threshold; a pattern of one week a month usually does. Keep a workday log with locations, since it is the only evidence that matters.

A US employer may also create a Canadian permanent establishment by having you here, especially if you sign contracts on its behalf. That is the employer's problem rather than yours, but it explains why many US companies prefer one of the structures below over simply adding you to their US payroll.

Four ways a US company can pay a Canadian resident, and what each means for you

How you are paid decides your paperwork more than anything else. The common structures, from cleanest to most exposed:

• Canadian payroll run by the US employer. The company registers a Canadian payroll account, withholds income tax, CPP and EI, and issues a T4. You file an ordinary Canadian return. This is the correct treatment and the least work for you.
• Employer of record. A Canadian EOR or PEO becomes your legal employer, runs the payroll and handles Employment Standards Act compliance, while the US company pays the EOR. From your side it looks identical to a Canadian job.
• Independent contractor. You invoice the company and report business income on Form T2125. You give the client a W-8BEN so it has proof you are a non-US person; since the services are performed in Canada, no US withholding or 1099 should follow. You cover both halves of CPP yourself and pay Canadian tax by instalment.
• Through your own corporation. Same invoicing, but the corporation earns the income. With one client, set hours and no staff, the CRA may treat it as a personal services business, which strips the small business deduction and most expense claims. We set out the tests in what is a personal services business.

Whether you can be a contractor at all depends on the working relationship, not the label. If the company controls your hours, supplies your equipment and treats you as staff, the CRA's classification tests point to employment regardless of the contract. The employer-side view of these choices is in how a US company can hire a Canadian employee or contractor.

GST/HST and CPP: the Canadian details contractors miss

Contractors and incorporated consultants have two extra obligations. The first is GST/HST. Once your worldwide taxable sales pass $30,000 in four consecutive quarters you must register, but services supplied to a non-resident client that is outside Canada are generally zero-rated: you charge 0%, file returns showing the sales, and still claim input tax credits on your own expenses. Registering early is often worthwhile for exactly that reason. The mechanics are in do I charge GST/HST on sales to US customers.

The second is CPP. Contractors pay both the employee and employer portions through their T1. Employees paid directly from a US payroll with no Canadian withholding can elect to make CPP contributions on that foreign employment income using Form CPT20; without the election, years of work earn no CPP credits. EI is not available in that situation. Either way, because nothing is withheld at source, the CRA will expect quarterly instalments once your balance owing exceeds $3,000 in two of three years.

When the US employer withholds anyway: how to get it back

US companies with no Canadian setup often put a Canadian hire on their US payroll and issue a W-2 with federal, state and FICA withholding, as if the person lived in the US. None of that tax is owed on Canadian workdays, and each piece is recovered differently:

• Federal income tax comes back by filing a Form 1040-NR that reports the wages as foreign-source and claims a refund of the withholding, with a treaty disclosure attached.
• State income tax requires a nonresident return in that state, since states do not follow the treaty automatically. Some refund quickly; some ask for proof of where you worked.
• Social Security and Medicare (FICA) should never have been withheld, because the Canada-US social security agreement covers you under CPP for work performed in Canada. Ask the employer to refund it first; if it will not, file Form 843 with the IRS. See do I pay into both CPP and US Social Security for the coverage rules.

Meanwhile the CRA still wants its full share of the salary, and it will not credit US tax that was never legally owed. Recovering the withholding and correcting the payroll for the following year are both time-limited, so start in the same tax season the first W-2 arrives.

How we set up remote workers with US employers

Most of our remote-work clients come to us in one of two states: a W-2 with tax withheld that should not have been, or an offer letter asking whether to go employee or contractor. In both cases we start with the day count and the working relationship, recommend the payroll or contractor structure that fits, register for GST/HST and instalments where needed, and, where the US side has already withheld, prepare the 1040-NR, state and Form 843 claims to recover it. Our cross-border tax services team handles the Canadian return and the US refund claims together so the two never contradict each other.

Source: CRA — Form CPT20, Election to Pay Canada Pension Plan Contributions; IRS — About Form 843, Claim for Refund and Request for Abatement.