Tax treaty with U.S. could come into play as early as next year
Province
U.S. Treasury Secretary Henry Paulson (left) shares a laugh with Finance Minister Jim Flaherty during their September meeting in Meech Lake, Que. Photograph by : Reuters
OTTAWA — Employees, private contractors and companies are facing some changes to rules relating to cross-border activity as early as next year, and at least one professional-services firm says it’s worth getting up to speed now on the changes, even if they don’t come into effect for another few years.
A new tax treaty that Finance Minister Jim Flaherty signed with the U.S. in September is to take effect in January. It could come into play as early as next year if the two governments get it passed through their legislative bodies by then, though meeting that timeline is unlikely at this point.
“Even though the protocol may not come into force for another year or two, [individuals and companies] have to get ready to start recording the information to become compliant with these rules,” said Kerry Gray, a partner with Ernst & Young’s human-capital practice.
Some of the new rules on the way may benefit workers and companies involved in cross-border activity, though others will add to the homework required and possibly result in more expenses.
Some cross-border workers will be able to save more on income taxes when it comes to rules concerning pension plans. For example, Canadians stationed in the U.S. for up to five years will be able to deduct RRSP contributions from U.S. tax returns.
The agreement is reciprocal in the sense that Americans working in Canada contributing to a U.S. plan will be able to do the same.
As well, cross-border commuters — such as Windsor, Ont., residents working in Detroit — contributing to a U.S. pension will be allowed, under the new rules, to deduct some of those contributions from their taxable income in Canada.
But on the other hand, workers based in Canada and paid by a Canadian employer can currently avoid paying U.S. income tax if they work less than 183 days in the U.S. during a calendar year. Under the new agreement, that will change to 183 days within a 12-month period.
“What it’s doing is it’s broadening the number of people that might be taxable in the other jurisdiction,” said Gray.
He added that companies, which avoid paying taxes in the neighbouring jurisdiction on projects that last less than 183 days in a calendar year will also have that allowance changed to within a 12-month period. But Gray said this requirement will not kick in until the third year of the agreement.
Independent contractors who do work in the neighbouring country, who get more than 50 per cent of their revenue in the other country, are facing a similar change in the 183-day rule before taxation requirements in the neighbouring country kick in, Gray said.
Gray said Ernst & Young is making an effort to inform affected parties of the coming changes because it represents potential business growth in the firm’s global-mobility unit and its affiliated law practice in the area of business immigration.
© The Vancouver Province 2007
