Marie, a Canadian citizen and independent tax consultant, earns $100,000 while working in the U.S. for 215 days in a year. She uses hotel rooms as her temporary office space and does not have a fixed office location in the U.S.
1. How is the income of a Canadian independent consultant taxed in the U.S. if they do not have a fixed office? As a Canadian working temporarily in the U.S. and using hotel rooms as my workspace, am I subject to U.S. income tax on earnings of $100,000 under ARTICLE XIV of the U.S.-Canada Tax Treaty?
2. What defines a ‘fixed base’ for tax purposes under the U.S.-Canada Tax Treaty? I often travel for work in the U.S. and use temporary accommodations as my workspace. Can you explain what conditions would classify my working arrangement as having a ‘fixed base’ in the U.S., potentially affecting my tax obligations?
3. Can you provide references to the Internal Revenue Code that apply to non-resident consultants working in the U.S.? I need accurate and current legal information on how my earnings as a Canadian consultant, working without a permanent office in the U.S., are treated under U.S. tax laws.
EXPERTS ANSWER:
- Taxation of Income Without a Fixed Office in the U.S.: Under Article XIV of the U.S.-Canada Tax Treaty, Canadian independent consultants like Marie who work temporarily in the U.S. without a fixed office are generally exempt from U.S. income tax on their earnings. This exemption applies because Marie does not have a permanent office or other fixed base in the U.S., using hotel rooms instead as temporary workspaces. Despite her significant presence in the U.S. (215 days a year), and even if her activities generate effectively connected income (ECI), the lack of a fixed base means that her income of $100,000 is not subjected to U.S. taxes due to the treaty protections.
- Definition and Impact of a ‘Fixed Base’: A ‘fixed base’ in the context of the U.S.-Canada Tax Treaty refers to a fixed location of business through which the individual performs his or her business activities. This could be an office, a workshop, or any other location where the consultant regularly and continuously conducts business. In the absence of such a fixed base, like Marie’s use of hotel rooms for temporary work, the U.S. does not have the right under the treaty to tax her professional income. This ensures that taxation does not apply in cases where the business presence is transient and not tied to a specific location.
- Internal Revenue Code References for Non-resident Consultants: The relevant sections of the Internal Revenue Code for non-resident consultants are primarily IRC § 871(b) for individuals, which deals with the taxation of non-resident alien individuals’ income that is effectively connected with a U.S. trade or business. However, the treaty exemption overrides this provision under the circumstances described for Marie, where no fixed base is established.
For Canadian consultants working in the U.S., understanding the nuances of tax obligations under the U.S.-Canada Tax Treaty is crucial to ensure proper compliance and avoid unnecessary taxation.
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