Tax Traps Abound — Advocate for Your Cross-Border Providers

Many staffing agencies employ workers from other countries. While the H-1B visa program gets the most attention, the TN Visa (NAFTA) brings many Canadians to work in the US.

While viewed as an exciting opportunity, such work arrangements are a minefield of tax regulations, from residency to disclosures to treaties. Many international workers have little knowledge of the US tax system and without expert cross-border tax advice, they can find themselves exposed to an unrelentless US tax net, complicated disclosures and potentially large penalties for inaccurate tax return declarations. And even if they use the services of tax professional, most are not well-versed in international tax.

We see this a lot in our practice where a provider working for a staffing firm had their taxes done by one person in the US and another in their home nation, and neither preparer bothered to ask about the other filing. The result is conflicting information on the returns that require amendments and additional tax payments.

Staffing firms facilitating this type of work scenario should at least be aware of the ramifications and perhaps provide a short list of suitable tax preparers before the work starts.

Let’s take a look at what such workers face.

Residency. Residency can follow an unconventional path when it involves a nation with which the US has a tax treaty. To illustrate, here are two scenarios:

  • Nancy is a nursing professional working a series of short-term contracts in the US. She has a spouse and kids still residing in Canada. If she spends more than 183 days in the US during the calendar year, she is a US tax resident under US law. However, because her spouse and kids still reside in Canada and there is no breakdown in the marriage, the tax treaty between Canada and the US overrides the US law and deems Nancy as a Canadian tax resident since she still has a permanent home in Canada.
  • Let’s say instead, Nancy is single but owns a home in Canada and rents it out. The treaty cannot override the residence in the US since she has abandoned her permanent home. She is taxed on her global income and assets as a US tax resident and is no longer a Canadian tax resident creating a situation where Canada Revenue Agency will assess capital gains taxes on her assets in Canada.

Disclosures. In tax circles, the marriage of Prince Harry and Meghan Markle created a popcorn-worthy drama. Under US law, whenever a US Citizen or US tax resident holds, has access or has signatory authority over foreign accounts that are collectively worth more than $10,000 USD at any point during the year, all those accounts are required to be disclosed in a filing called a Foreign Bank Account Report (FBAR). This means that because Markle is a US citizen, all financial accounts that she has access to including those as a royal would be subject to disclosure.

If a provider comes to the US and spends more than 183 days on US soil, they then become a US resident and are required to make this disclosure. A treaty override of this residency does not change the Foreign Bank Account Report requirement as the treaty only addresses income tax residence, not disclosure mandates.

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Putting it Together. Let’s say Nancy works in the US for nine months and returns to Canada and holds more than $10,000 USD in bank accounts and retirement savings in Canada. Her US preparer used the wrong form, filing her as a resident of the US, rather than using a non-resident form. They also did not ask about her foreign accounts nor did they ask about her Canadian earnings that she had in the other three months of the year. Meanwhile, the Canadian preparer did not ask about the US earnings. The mistakes were many:

  • The US resident return requires reporting of global income, not just the US income.
  • Since she has been in the US more than 183 days, she is subject to the bank account disclosures (FBAR).
  • Her state taxes are skewed, as some states require global income to compute the ratio of exemptions and allowances.
  • Her Canadian return underreports her income, as 9 months is not enough time for the Canadian Revenue Agency (CRA) to recognize a departure of one its residents. Since Canadian taxes are generally higher than the US, the tax reported to CRA is significantly less than required.
  • Since she filed as a US resident, all investment gains in Canada are taxable on the US return (and vice versa).

Let’s say also that Nancy has accounts in Canada that are considered foreign trusts in the US. Every country has its own tax rules about the structure of financial accounts — a savings account in one country can be a trust in another. If Nancy files as a resident of the US, she then is required to file disclosures and profit/loss statements for each of these “trusts.” For Canadians, a very popular account known as a Tax-Free Savings Account (TFSA), which is easily opened at a bank, is deemed a taxable foreign trust under US tax law.

Nancy’s tax returns were not just flawed. Because they were prepared in a way that created additional disclosure requirements (FBAR and Foreign Trust Statements) she is now subject to a minimum $20,000 penalty — $10,000 for the FBAR and $10,000 for the failure to file for the “foreign trust” (multiplied by the number of “trusts”).

Advocate for the Provider

Tax filing obligations are often overlooked when employing foreign workers in temporary and permanent contracts. Often, this issue is placed in the “let the worker figure it out” basket.

Staffing agencies should encourage providers to consult tax professionals well versed in international tax BEFORE commencing employment. It may be good to have a short list of tax preparers who have a track record of competence in this area.

An agency can earn a significant marketing advantage by advocating for the cross-border worker in areas that are new and confusing, like tax law — even if it is a princess!

Joseph Smith

Joseph Smith
Joseph Smith is founder and president of TravelTax and TravelTax Canada. He also is on the Tax Compliance Committee for NATHO. He can be reached at jsmith (at) traveltax (dot) com.

Joseph Smith

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