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Today's podcast is a live webinar presented by Evelyn Ackah, Immigration Lawyer, and Laura McLeman, CPA, CA, CPA (Illinois), of Citizen Abroad Tax Advisors.
Cross Border Business: Practical Immigration and Tax Solutions
The main aspects of NAFTA that apply to individuals, professionals and companies
Using NAFTA
- The preferred tool to facilitate cross-border movements between Canada and the United States is the North American Free Trade Agreement - NAFTA
- Used for temporary entry - not permanent
- NAFTA was established in 1994 to support economic and trade relationships between the United States, Canada and Mexico
- As part of NAFTA, three main nonimmigrant categories were created:
1) Business Visitors (B-1 Visa)
2) Professionals (TN Visa)
3) Intra-company transferees (L-1 Visa)
Benefits of HR and Leadership Training on Cross-Border Business Issues
- Create awareness of the rules for business leaders and HR
- Allows business to address the issue and make informed business decisions regarding risk vs actual cost
- Increases the compliance of employees who are taxable
- Informing employees of their responsibility
- Puts the risks on employee and reduces the employer’s risk if employees ignore and attempt to push the consequences to management
- Protects the Employer from significant tax, interest and/or penalties
- Address the issue instead of ignoring the issue
Evelyn Ackah:
My name is Evelyn Ackah. I'd like to thank you so much for joining us today, me and Laura for this webinar called Cross Border Business: Practical Immigration and Tax Solutions. By way of introduction, again I am Evelyn Ackah, the founder of Ackah Business Immigration Law, and I'm thrilled today to be joined by my co-presenter Laura McLeman, who will introduce herself in a few minutes.
Evelyn Ackah:
The plan today is to review cross border immigration law, and Laura will discuss cross border tax and provide solutions and strategies for both individuals and employers that send staff to the United States. Once both presentations are completed, we will have time to answer any questions that you may have. Laura, would you like to introduce yourself before I begin my deck?
Laura McLeman:
Sure. Welcome, everyone. Thank you for joining us, as Evelyn said. Hopefully you will find our presentation informative. I know I find Evelyn's slides to be... I'm almost a lawyer when I read them. We hope you'll find them informative. If you have any questions for us specifically after the presentation, I know I speak for both Evelyn and myself to feel free to contact us. We're generally happy to have a quick discussion to give you an idea of what we can do for you and your organization.
Evelyn Ackah:
Great. All right, so I'm hoping everybody can see my screen and we'll start the presentation now. Thank you very much. All right, so I'm going to be focusing on the immigration pieces I've indicated. A little bit of background about me for those who I don't know on the call on the webinar, this is me. And I started the firm now eight years ago, and I've been practicing law for 20 years and love immigration law and hope that we can provide some useful information to you.
A little bit more about Ackah Business Immigration Law. Our team is focused on ensuring that we smooth away to the United States and Canada for professionals as well as their families and skilled workers. And I just really like this silly picture about immigration especially now with all the talk about the wall.
All right. So the focus of our presentation today will be on NAFTA. And again, most of you know that NAFTA refers to the North American Free Trade Agreement. It was enacted in 1994. And I'm sure you hear lots about it on a regular basis now that it is being renegotiated between Canada and the United States. The main aspects of NAFTA that apply to you as individuals and professionals and companies are the three listed below: Business Visitor, B-1 Visa, Professionals, the TN Visa, the treaty NAFTA Visa, or the intercompany transfer, the L-1 Visa, and I will be discussing them all through this presentation. And Laura will be focusing on the impacts of entering the United States under one, two or three of these categories.
Evelyn Ackah:
So, many of you know that when you travel to the United States, we are actually getting almost virtual visas. Because we're Canadians, we take it for granted that we can enter the United States under a visa category without the same level of scrutiny generally that people from other countries have to deal with. So even though we go through Customs and Border at the airport, many people don't realize they're actually getting a type of visa. So the B-1 visa is for business visitors. The U.S. B-2 visa is for going on vacation.
So for instance, you want to go to Disneyland with your family. As a Canadian, you enter the CBP area at the airport. You're actually getting a visa without really knowing it, I think as Canadians. So we're going to focus on the business side today. The B-1 visa is intended for short term entry, meetings, internal training, business development, sales activity. This is actually referenced specifically in the NAFTA as one of the benefits for both Mexicans, Canadians entering the United States. And it works the same for Americans coming into Canada.
Evelyn Ackah:
I always recommend that employers ensure that all their employees have a travel letter when they cross the border. Now more than ever, I'm finding more and more that my clients are being questioned a little bit more vigorously, and it's always helpful to have a letter in hand just in case you need to produce it if you get extra questioning.
One of the key elements of NAFTA business visitor B-1 category is you cannot be getting paid. You cannot be receiving any compensation or financial benefit from the United States. You must remain on the Canadian payroll that you're on, and you cannot be engaged in work. Work is very much sometimes seen as a gray area. A lot of clients want to push the boundaries of work, but we'll definitely talk about what is considered work and what is considered businesses that are activity.
We always ensure that our clients are prepped when they go to the border. It's very important that they feel confident when they get there, that they're not nervous, that they tell the truth and that they understand that the U.S. CBP officers have significant discretion and significant power in terms of what could happen if they are refused, and they could possibly be barred if they're seen to be misrepresenting in any way.
Evelyn Ackah:
Here are some examples of legitimate business activities under the NAFTA B-1 visa category. You can go down and see your colleagues internally at the related entity perhaps, going down for meetings or training. You can attend conferences under this category, conventions. For instance, if you need to settle an estate, you can do that. You can negotiate contracts, and you can participate in some short term training. These are legitimate B-1 visa activities in the United States.
To be eligible for a NAFTA business visitor status, you must demonstrate that you are a Canadian citizen. So clearly, you need to have a valid passport when you get to the airport. And you need to understand the purpose of your activity in the United States. It has to be for qualified business activity that is legitimate. You cannot be working. And the business activities indicate they must be international in scope.
This usually means as a Canadian going down to the United States, you are involved in business activities. That already is an international transaction, you're crossing into the United States. The most important thing is you must not have the intention of entering the U.S. labor market, and your primary source of remuneration remains outside the United States.
Evelyn Ackah:
As a business visitor to the United States, we always recommend that you, as I said before, have a letter that supports your verbal submissions. You need to know what to say and you need to know what not to say. We always suggest that our clients always tell the truth, but you also make sure you don't use the word work. Work in immigration is literally a four letter word, meaning that it raises a lot of additional questions and probing and definitely will send you into secondary. So we recommend, do not say work. Instead, if you're going for meetings, indicate, "I'm going for business meetings. I'm going to see my colleagues. I'm going for training. I'm attending a conference." Do not say anything related to work because that initially leads to further questioning and scrutiny.
So these are the eligibility criteria for purposes of entering the United States. You must be working strictly speaking in Canada, and you must be a resident of Canada with the intention of going in for a short term and leaving after the short term entry that you have. You need to have enough funds to cover the expenses of your visit. So often what we do when we prepare NAFTA business visitor letters for our clients is we reference that absolutely, you will remain on the Canadian payroll and that your employer is responsible for any expenses you may incur in the United States.
If all of these criteria are in place, you may be eligible to enter the United States. Of course, assuming there's no inadmissibility, there's no criminality, there's no other reason for you not to be permitted entry.
Evelyn Ackah:
So what is your intention? This is a big factor when it comes to U.S. and Canadian immigration. You need to be able to satisfy the U.S. CBP that you have non-immigrant intention when you appear at the airport or the border. And you must present the proof to establish that you have non-immigrant intention. So for instance, you can't move out of your house and have all your worldly possessions with you in the car and say you're going as a business visitor. Clearly, they will see that you are abandoning your Canadian residence and will lead to significant questioning and likely refusal and be turned around. So you must maintain your residence in Canada and your employment and your family stays there and all of those indicators of non-immigrant intention.
People always ask me, "How long can I go as a visitor, as a business visitor?" Generally, we don't recommend you stay for the maximum six months. But that is generally the maximum you can have as a business visitor. If somebody is going down for that long period of time, we always recommend that they might even have some kind of training schedule. If there's a training component for that six months, have it outlined so that you can satisfy the officers of CBP you legitimately are not working. if something changes after you've entered the United States, and you do require an extension, extensions may be granted so long as you can continue to prove non-immigrant intention. That is the hurdle.
One of the things I highly recommend to all my clients, literally even if you're going down for family visits, even if you're going down for vacation, is I recommend that you apply for NEXUSPASS. It is really a valuable asset for Canadians to be able to expedite the border clearance process for those that are considered low risk and pre-approved. It's $50. It is most valuable $50 I've ever spent for me and my family to get into the expedited line. And unfortunately, it is only for Canadian citizens or U.S. citizens who come to Canada. You cannot obtain the NEXUSPASS if you are a permanent resident. So you must be a citizen. And then I would do the process. It takes sometimes up to six months because of the volume of applications and you need to have an in-person interview.
Evelyn Ackah:
So now I'm going to start moving away from the NAFTA business visitor category and focus on actual work permit categories under NAFTA. So one of the ones we use the most is the NAFTA professional, the TN Visa category, the treaty NAFTA category. This is a visa that is very much used by professionals. It is renewable extensively indefinitely, but generally three year terms at a time and you must meet the educational or experience criteria.
So a lot of times people refer to the TN as the professional visa category. It allows one to work in the United States. It allows you to live in the United States. It allows you to bring your family with you into the United States. However, spouses cannot work under the TN Visa, under their own TD visa, which is the dependent visa.
Generally, the NAFTA professional lists above 66 plus professions, which includes kind of old fashioned professions such as engineer, lawyer, nurse, teacher. It doesn't really reflect newer professions in the high tech industry, for instance things like even manager, director or vice president. These titles are not eligible NAFTA professional positions. Because they reference a lot of old school professional designations, I do hope things will change after the NAFTA negotiations.
To qualify for TN Visa, you must show that you have the necessary credentials. And NAFTA requires a degree for almost every one of the 66 plus professions. And you must be performing at the professional level activities while you're in the United States. As I indicated earlier, almost every one of the professions requires a bachelor's degree or more. There are very few exceptions to that rule. One of them is management consultant. You do not need a degree for that. You need to have at least five years or more experience in the area that you're consulting on, plus references and a consulting agreement to qualify as a consultant.
Evelyn Ackah:
The scientific technician/technologist category, this is another one that does not require a bachelor's degree. Instead, you need to be working in collaboration or under the purview of a degreed professional. So for instance, if you're working with an engineer who has a degree and you are a technician/technologist, you are eligible to apply for a TN and you need to meet all the requirements. Two-year diploma is usually required for the technician/technologist and also the technical publications writer and the medical lab technologist, these are positions that do not need degrees, but every single one of the other ones requires a bachelor's degree.
I've indicated here the TN definitions of the bachelor's degree. Generally it's a three year or more program and you need to obtain the degree and you need to be able to show the degree when you get to the airport. U.S. immigration, even more so than Canadian immigration, requires most of the time original documents. So I reference clients all the time, take it off the wall, bring the degree with you the day you make your application because they want to see an original and they can absolutely ask to see that original or your application will be refused.
Evelyn Ackah:
When we talk about post-secondary diplomas and certificates, they're defined as two years or more secondary education that become that you gain a diploma in at the end of it all. So the TN visas are generally not dual intention. So when you go in as a TN visa holder, you must be aware that your intention must remain as a non-immigrant. You cannot go in as a TN visa holder with the intention of becoming a citizen of the United States. When you enter, you're entering as a nonimmigrant for that three-year term. However, there are ways to move your status from TN over the period of years to green card, and perhaps, to U.S. citizenship and become naturalized but it takes many, many years. And it's not a direct route to green card status. People need to be aware of that.
So one of the interesting categories under the TN, as I've mentioned already, is the management consultant category. This is one where you are not seen to be an employee. You are a consultant. You're providing services that are arm's length, and that are directed toward improving the managerial, operating and economic performance of the business. And you would be advising the management or leadership of that organization.
I don't recommend generally to get a three year consulting TN visa because it definitely appears more like an employee engagement. However, you can get a year, possibly two years. And as long as your engagement continues, you can renew it as necessary and as the consulting agreement required, so you can get a renewal of the consulting agreement to also extend your TN as a consultant. But you need to be aware that over time, U.S. immigration sees you back and forth every year, or every time you travel for purposes of providing your engagement services, you will be under more scrutiny at each entry over time.
Evelyn Ackah:
All right, the NAFTA intra-company transferee. This is a category for those people who are able to transfer to the United States as either an L-1A visa holder or an L-1B. L-1A is an executive and managerial level, or L-1B, which is the specialized knowledge category. In order to qualify for this, besides the entities, the corporate entities having to be related, you must have worked for the entity in Canada for a minimum of 12 months in the preceding three years, so that you could transfer to the related corporate entity in the United States in either again, an executive managerial level position or as a specialized knowledge worker.
If you are eligible for the L-1B, you will obtain five years total. Initially, it's three years at a time, and then you'll get a two-year renewal, up to five years as a specialized knowledge worker. If you're a managerial or executive, the maximum term will be seven years, with initial three years and then two, two-year extensions. Non-NAFTA intra-company transfer would reply to those who are not American or not Mexican. So for instance, if you're transferring somebody from your German location to the United States, they don't qualify under NAFTA, and they will have to qualify on their own through the standard L-1 category. They're not eligible to be processed at the airport. This is one of the main advantages for Canadians using NAFTA.
Okay, I have a few practical pointers to discuss now about going to the border. And yes, everybody will be eligible. You will receive the slides at the end of this presentation, when we send you as well, a survey to let us know how we did today. We always tell people to tell the truth. You need to make sure you're prepared when you go to the border. Ensure you have proper supporting documentation and know that if you are searched, U.S. immigration can review your mobile phone, they can review your laptop, so you want to make sure that there's nothing with you that is inconsistent to what you're saying at the airport. If something looks like it's going off the rails, never insist that you get approval. If it's looking like it's going to be a refusal, please ask instead to see if you can withdraw the application and come back with more information and more documents to satisfy them. It's always better to have a withdrawal than a refusal. And also, because these are professional applications, whether you're B-1 or TN or an L, make sure you also look the part of a professional.
Evelyn Ackah:
Appearance is important, I say this all the time. When you're doing an application at the border, watch out for issues related to criminality. If you know you have had a previous conviction or a prior refusal related to a conviction, you need to ensure you clear that up before you go back. You don't want to appear to be showing up when you know that you are essentially inadmissible, and it looks like you're trying to sneak into the country. That doesn't help your case at all.
If there are any entry visa requirements, you need to know ahead of time. So for instance, permanent residents of Canada need visas before they can enter the United States. So even as a business visitor, you as a permanent resident need to be processed at the U.S. consulate in your city to get that B-1 visa put into your passport before you can enter the United States.
Be aware of changes to the law. Things happen very quickly in immigration. And if you're not sure, speak to a professional who can assist you. So this is just a little bit about what we do here at Ackah Business Immigration Law. I'm not going to read it all. But I just want to thank you so much for your time. Thank you for participating in this and I will be passing on the slides to Laura, who will focus on the tax elements. And then at the end, she and I will both accept and entertain any questions you may have, either typing them out or we will unmute you, and have a discussion about tax and immigration. Thank you very much. Laura?
Laura McLeman:
Evelyn, I have some questions, but we can leave those to the end regarding some of the interesting points on crossing the border. But I am actually going to take this one step further and just up the excitement level of this webinar and talk about tax. Primarily, actually first, I should, I don't know that I have control of the slides at this point. But primarily, I'm going to talk about, I should introduce myself. So Evelyn, can you switch the slide? I don't think I have control.
My name is Laura McLeman. I've been doing cross border tax and expatriate tax, helping people meet their expatriate tax filing requirements for more than 20 years. I am both a U.S. certified public accountant and a chartered professional accountant here in Canada. My partners and I, we have offices in Vancouver, Calgary, and Ottawa. We've been advising mid to large-sized companies on their payroll and personal income tax obligations of their employees for about the same amount of time, if not longer than 20 years.
Laura McLeman:
For those of you who aren't aware of the issues with respect to cross border employees, I'll first go into that. And then we'll come to the point of where we have some solutions for you.
What I will talk about today is in line with what Evelyn went through, really the focus of this presentation is to talk about those people that you don't normally as perhaps a key stakeholder holder in your organization, being in human resource, global mobility or probably taxation, in small to mid-sized companies, we find there's one person that does it all. We're going to talk about the frequent business travelers. Generally, rule of thumb in my world is that individuals who spend less than 30 days in the U.S., they're typically not a project employee. They are going down for those meetings and for the intentions that Evelyn went through with respect to a B-1 business visa, visitor.
Short term temporary assignment, I'm not going to go too much into this because I feel like companies have already got this well handled, if they are assigning employees on that L-1A or the TN Visa, and they're setting up the proper payroll and setting up the proper controls and income tax disclosures for those short term temporary assignees. We're not going to talk about long term temporary assignment or permanent assignment today. Those again are separate issues, relocations.
But in talking about our business travelers and our short term travelers, we are going to, hopefully some of our solutions will help you identify those stealth travelers. I think there are less of stealth travelers in the world than there once was. Those are individuals who just seem to have free rein. Generally, they seem to be in business development and they cross the border at will, whether they have the proper immigration or tax situation in place.
Laura McLeman:
So some of our solutions will hopefully assist you in getting there to identify these stealth travelers and comply with your frequent business travelers. So why should we talk about this now? We hear this a lot. In fact, I just did someone on one sessions last week with some frequent business travelers and as I sat down with them to have them fill in waivers and get ITINs for U.S. filing, and they're employees of a Canadian company, their comments to me were, "I've been doing this for 10 years just like this. So why are we doing this now?"
And the answer to that simply is their company has decided it's now time to comply. The environment that is right now really encourages compliance. And I think the likelihood, not that it should be a decision factor, but it is. I'm not ignorant to that fact. The likelihood of getting caught has increased with the digital era. But there's also a frequent increase in cross border travelers. As Evelyn said, it's very easy as Canadians for us to cross over to say we're going for business meetings, at least for most of my clients.
So there is an increase in that cross border travel. In addition, in the tax world, there is heightened sensitivity to cross border travel. Governments want their share. I don't know of many governments that are saying, "Hey, we're in a positive budget situation. We have more money than we need." They want their share. And you can see this in the Amazons and Googles of the world where they're doing business out of Ireland. And now governments in the EU are very upset because they feel that Ireland and these companies have cheated them out of their tax.
Laura McLeman:
That Action 7 is an OECD sort of tax treaty reference, and this is the base erosion and profit shifting action coming out of a global organization that's really focusing on key employees and the activities of key employees in other countries. And these key employees often in our world would be referred to as frequent business travelers and what the BEPS Action 7 is really pointing towards. And I think it's a few years out before everything is full oversight and implemented is really, these frequent business travelers can create real corporate tax issues for organizations. Of course, voluntarily complying versus complying in response to audit or review, again, like I said, there's a lot of digitization, if that's the word of records. People now have to give a passport when they cross the border, whereas eight years ago, that wasn't required. Sometimes they didn't even ask you for proof of identification. And now it's required always.
So there's constant tracking of travelers crossing the Canada U.S. border. And it will only become a period of time before that information starts to get shared between different government agencies once they figure out the privacy rules. And of course, there is more information regarding your obligations. It's harder to argue for people that are responsible for this disclosure to argue that they didn't know.
So 10 years ago, what did this look like? We had CanCo going with a U.S. customer or a company or a U.S. project. And we wanted, people were crossing the border.
Laura McLeman:
So 10 years ago with CanCo and I'm good. Yeah, we had one traveler, perhaps crossing the border. This is far less dramatic if I can control it. Whereas now, we have a situation of if we can, there we go. We have key execs and sales teams, project managers, engineers, installers crossing the border, and we have far more volume crossing. And on top of that, we've got more oversight happening at the border. The border guards are questioning these travelers more, and they're tracking the travelers more. So in my belief, we should be tracking our travelers more.
Again, why now? These are just some key headlines that have reached mainstream media. The rise of tax shaming. I was actually at a conference in 2013, where 1,500 tax colleagues, imagine how exciting that was, and I discussed the morality of paying tax even though you can exempt yourself from paying that tax under tax laws. There is more focus on governments getting their fair share of tax.
So what does that mean? What does that mean for you as an organization with cross border travelers? It means that you need to be aware of your obligations. When you have individuals crossing the border, there's payroll tax obligations, there's obligations for your individual employees to report their activity, their earnings in the U.S. on U.S. tax returns. There can be implications from a corporate tax perspective created by these cross border travelers. And so why should you pay attention? There's lots of penalties for failure to comply and doing this on on a voluntary basis or complying properly can also help the organization plan around all of these items and reduce that burden that can fall on the corporation, fall on the employee or fall on yourselves as individuals who are stakeholders in this area.
The impact on corporate reputation, bad publicity. We've seen this a bit with some executives crossing the border and it more comes from an immigration standpoint. But generally, when we deal with executives who are frequent business travelers, the last thing they want to worry about is being caught or being offside from a tax perspective. So perhaps it's less of an impact on the corporate reputation but more an impact on the reputation of the individuals who are to help those executives comply.
Laura McLeman:
One or the other, because a large portion of the individuals that we deal with and similar to Evelyn, I think is we deal with project-driven companies, companies that are doing business cross border, and they're sending individuals down to work on specific projects. If you're not complying proactively, and you're not costing out the price of the U.S. tax implications of your individuals that you're sending down to service U.S. clients, you can get caught off guard. We're dealing with a client right now that had a large U.S. contract and inadvertently triggered a permanent establishment in the U.S. with B-1 visitors, with frequent business travelers. It's an unusual situation, but this is what happened, and the cost to comply for those travelers was not factored into the cost of the overall project. Luckily, it was a lucrative project. But for those working on smaller margins, if you are a project manager sending employees cross border, this can impact your performance and the performance of your company.
From a payroll tax perspective, what's the obligations of an employer with these business travelers, these B-1 travelers that maybe spend 10, 15 days in the United States in a year? The requirement as an employer is to really, first of all, understand where those employees are working, determine the amount of taxable income they've earned within the U.S.
Now, when I get to this point, most employers will say to me, they're not working because they've been counseled by Evelyn to say, you're not working. These B-1 visitors have not been working in the U.S. They're just going on meetings or they're just on training. Well, from a tax perspective, the minute there's boots on ground in the U.S. by a Canadian employee, and that employee's performing services or performing something in the way of their job and getting paid for it, that is taxable reportable income in the United States. And there generally is a requirement to withhold and remit U.S. federal and/or state income tax, or you need to obtain a waiver of that requirement to withhold and remit.
So, employers are required to determine, as I mentioned, you have all these obligations. And at the end of the day, you're also required to report any wages earned by a frequent business traveler to the IRS and the state, either on Form W-2 or 1042-S. There's very few exceptions to the withholding requirement.
Laura McLeman:
One of the biggest exceptions that many of you might breathe easy because you have very short term frequent business travelers would be on where the individual is an employee of the Canadian Corporation. They're only present in the U.S. for less than 90 days in the year total, not 90 working days, just total and the pay relating to their services in the U.S. doesn't exceed 3,000 U.S. Now don't get too excited because if you have an employee with $100,000 U.S. of income, so say about 130,000 Canadian, if they spend eight days in the U.S., they're out of this exception.
All is not lost. They actually could, in most cases, the individuals that Evelyn was referring to, provided they're paid by their Canadian company, they are likely not taxable in the U.S. under the Canada U.S. tax treaty. However, just because they're not ultimately liable for U.S. tax, it's not relieving you as an employer from the withholding and remittance requirement of federal U.S. tax and in many cases, state tax. The employee is also still required to file a U.S. tax return, get a U.S. ID number. If they only have a B-1 visa, they would get a U.S. tax ID number versus a social security number. The employer would still be required to report wages to the IRS. And there's just a significant administrative burden.
I will say the first year is the most difficult year for applying for a waiver under the treaty. And in most cases, this is where we start to work with employers to help them comply. Most employers sit here on this slide and sit in this world where the employee qualifies for an exemption, the treaty exemption but nothing's been done. And the reason nothing's been done is because it's a fairly exhaustive paper-pushing process, and employees generally do not like to comply with... generally, Canadian employees don't like to hear that they have to provide information to the IRS just to file a zero return.
Laura McLeman:
It's at this stage that we get involved and we will generally work with the employer and the employee to get through that first year and explain why the process is important to not only the employer but also to the employee. Corporate tax, I'm not going to talk in too much detail about because that's really not the focus. But ultimately, one of the larger successes that we do have when we talk about compliance here is we talk to the ultimate end goal, which is the employee generally carries the requirement to disclose this income to the United States.
So regardless of what the employer decides to do, should you decide not to prepare a W-2 or a 1042-S or get the appropriate waivers or withhold and remit tax, the requirement for an employee to file a U.S. tax return is still there. So I'm sure most of you have encountered the case where someone's been 25 days in the United States on primarily business meetings and training, and you've indicated to them that they do need to file an income tax return. When the employer is not complying, the employee feels that there's no requirement for them to comply as well. But the individual requirement and the individual liability to file a return still sits with the employee. As well, just because an individual is treaty exempt doesn't mean that the states will follow the same methodology or the treaty.
So the worldwide ERC is Employee Relocation Council. They publish a magazine. Within that magazine, they had done a survey with respect to business travel. Obviously, you can see this is one of the key focuses of mobility right now is how do we track all our business travelers now that people are moving all over the place and generally, the world's opened up for a lot of employees from various countries.
Laura McLeman:
One of the challenges for the tax or human resource or global mobility groups is how do we track these people? And then how do we comply and how do we comply efficiently? I'm sure all of you have encountered yes, okay we can comply, but it's almost impossible when you try to determine 100% compliance happens.
I think part of that problem is because there's very limited, up to this point, there's been very limited tracking tools that work well for the individuals that are interested in this sort of data. Before we go down the path of tracking your employees, the first thing you have to decide however, is whether you do want to track your employees. You will get a lot of information should you use, for example, the tracking software specifically built for business travelers. You will get that information. So before you get that information, decide what you're going to do with it.
But most organizations are using data from employee expense reports and company travel providers. These largely come in the form of a large Excel spreadsheet showing dates of bookings of tickets in and out of country. I understand that compliance at that point is overwhelming, because quite often, it's up to the individual, the tax department or HR or global mobility, to review all these documents and determine whether there's an issue or not, and then how will you move forward.
Laura McLeman:
So generally, on top of that, all the challenges of tracking, we have the cost of compliance, and you really have to weigh that against the cost of noncompliance. So an estimate of cost of compliance just in first year, let's say you decide you want to comply for your business travelers, estimated employee time involving the business traveler and the group in charge of making sure they comply, we put it at about five and a half to six hours per employee just to determine their tracking, their travel records go through it, determine whether there is a compliance issue. And then if you choose to use a third party to assist with your payroll reporting waivers, ITIN applications, filing of a tax return, you can see the costs can really add up. Now for my Americans who are on the call, this is in Canadian dollars as an estimate, so it might not be that expensive.
The following years however, these costs of compliance can be reduced significantly. In this situation, we're not even implementing any technology to improve your cost of improved compliance. So, payroll reporting, you can outsource your payroll reporting. If you've got a good cross border payroll group, that may become more efficient once you build up your population. You're dealing with employees less, there's less convincing. You only need to apply for an ID number once so the fees from a third party are reduced and the amount of time required to track these individual travelers is reduced.
Compare this to the cost of noncompliance, which would generally be borne by the corporation. Penalties for failure to withhold U.S. tax for those employees for whom waivers weren't applied for, failure to file the form 1042-S assuming that a waiver was filed and you didn't prepare the reporting form, similar to the failure to file a W-2 information form, failure to disclose income on an income tax return even if that income is ultimately exempt from tax under a treaty. There's company exposure to U.S. tax if you're not tracking your cross border population, how many days in on which project and the activities they're performing. Exposure to U.S. tax with U.S. tax reform might not be that terrible anymore, but it's still a real concern.
So you have all of those, that exposure plus the original cost of compliance because you're going to be forced to do all the compliance we talked about previously, applying for waivers, getting ID numbers, filing tax returns. In addition, in a very sort of mobile environment where employees are switching employers a lot more, you may be required to remit tax. Let's say an audit occurs two years after the fact. You may be required to remit tax that should have been withheld. And if the employees have left, even if that tax should be refunded under treaty, recovery of that withheld tax may not be possible.
Laura McLeman:
So what do we recommend to get started? Identify your key mobile employees, educate them on the key activities that create potential U.S. tax issues. Honestly, the worst discussion is that first discussion, because generally you're sitting around a table of executives, and you're explaining the problem to the people who are creating the problem. The executives are generally the ones that are frequent business travelers and the ones that are considered key mobile employees.
Understanding starting from a current exposure, whether you decide to comply for 2017 or not, helps you to get your corporate cross border tax plan into place for these frequent business travelers, and then put a plan in place to prospectively track your employee movement. I'm a huge believer in technology. There's some great travel tracking apps out there that you can provide to employees. They do come with a cost, but ultimately it reduces the burden on you, the individual who has other things to do than pour overtime codes and expense reports. Estimate your employee time in the U.S. at the beginning of a project for project-driven companies. I honestly think this is the best selling feature if you believe that cross border compliance should be important to your organization if you're project-driven because you need to start considering the compliance costs as part of the project costs. And ultimately, consider assignment of those Canadian employees who are doing business in the U.S. for your organization who can create corporate tax issues for you. The more information you'll have, the better decisions that can be made.
I've gone through this I think significantly. I will say just because a remittance isn't made or a tax form isn't filed, that does not exempt the employee from having any sort of responsibility with reporting the income on an individual return. Employers making a choice to not disclose the income in the United States for an employee that is taxable in the United States should really inform the employee that they do have some requirements themselves whether the employer complies or not.
Laura McLeman:
Obviously, I've gone through all these problems, these issues. I think the focus primarily is on immigration with these frequent business travelers, and they do create immigration issues. But I do think it's not long before tax issues start to become a very big reality in terms of getting caught and questioned at the border. It creates, I'm not going to lie, this compliance for business travelers creates far more work than anyone's ever been doing before for tracking travelers, and that's why I think technology really does help in this matter and should be employed in almost every instance.
We can help. We do presentations. We do hand-holding. We do individual one on one meetings. We assist in getting ITINs and preparing waivers for employees. Like I said, the first year is the worst year. And generally, what we found with clients once they become compliant after that first year, and there's lots of headaches, I kind of tell it as it is, that everything becomes a little bit easier, and there's actually long term, better open planning that can be done. I think that would be the end.
Laura McLeman:
What can we do? I already mentioned that. Our experience is in the midsize cross border area. And if you have any questions, do contact me after the webinar or ask them now. I think we have some time. We went a little bit over time.
Evelyn Ackah:
Yeah, I think we have some questions.
Laura McLeman:
Okay, great.
Evelyn Ackah:
One of the questions is Colleen is asking if we've seen a tightening of TN visas in the most recent administration, and I started typing a response and I thought I would just answer it. So anecdotally, we do hear from clients that there is a different tone from U.S. CBP. It seems much more military and much more less friendly. And they do have the ability now more than ever to share information with Canadian immigration and they are, so you should assume that they have access to everything. If they ask you a question, you just tell the truth because they usually already know the answer. And there's more instances of people's cellphones being taken, you have to give up the password. And they have the ability to check and see. Again, I think if you qualify and have a degree and have all your ducks in a row, and have original documents and have worked with somebody who knows how to prep you, you'll be fine. That hasn't changed. But there just seems to be more of a suspicious nature right now dealing with U.S. immigration given the current administration, and then the same person has a question for you, Laura. What are the obligations of individual management consultants with regards to payroll and corporate tax?
Laura McLeman:
Okay, so assuming individual management consultants, there's two, everything about what I've said about employers and employees, if you're an incorporated management consultant, all of that would apply. So, first and foremost, your company would have some forms to fill in for the U.S. customers to alleviate you from any withholding at a corporate level. But then, if you are the employee of your company, you're then required to obtain from that employee and I can answer one of the other questions I have here, to obtain from your employee a waiver. And that waiver specifically I was asked is form 8233, which essentially is used by employees of Canadian companies to identify the amount of their income that will be exempt from U.S. tax.
Laura McLeman:
In order to file that 8233, and you can file it as an independent management consultant or as an employee of your management consulting company, you would have to obtain a U.S. ID number. That form actually has to be filed with the IRS, a specific withholding unit, and they will reject the form if there's no U.S. ID number on it. So generally, we get involved and we will assist with the application of an ID number with the waiver. And we recommend it because it alleviates your requirement as an employer to withhold any U.S. payroll tax. Our experience with the IRS is they are not quick to refund any non-resident income tax at this point. It's very difficult for non-resident employees who have had tax withheld either on 1042-S or a W-2 to obtain that refund on a timely basis.
Laura McLeman:
The same is true vice versa with Americans coming up to Canada, by the way.
Evelyn Ackah:
Are there any other questions? Laura, I think you said you had some questions for me.
Laura McLeman:
Yeah, there was one other question was whether a tax return was required if that waiver that I just mentioned is obtained. In most cases, yes. If the income exceeds the U.S. personal exemption which is $4,050 for 2017, then a tax return generally is required.
Laura McLeman:
And it should be noted that in 2018, there is no longer a personal exemption. So from dollar one, a U.S. tax return is required. And you're required to disclose the fact that you are taking a treaty position in the United States. So yes, the answer is a tax return is required if a waiver is obtained for an employee.
Evelyn Ackah:
Is there anything else from any of our attendees before you all log off? I'm just going to put our pictures back up. Do you want to do the same? Any immigration questions for me? If not, we will wrap it up and thank you so much for joining us. Oh, I see another one. If you are an engineer in business development, what should be the appropriate title?
Evelyn Ackah:
Very good question. Well, really for me, if you were my client, I would say that you should get a TN Visa, because it would eliminate a lot of the questions every time you are doing business development. What happens is the more they see you, the more they just assume you are working. And so the hassle will come. And because in order to do your job in business development, you need to have an engineering background to sell those services. So I think that it goes to the foundation of your role is your engineering degree. That's what I would do if I were you. I hope that's helpful. And if you have more questions, just feel free to give me a call anytime and we can work on it more and then it says more questions. Should "engineer" be required in the actual title? I would, I would probably call you an engineering business developer or engineering consultant or something in that realm because it just makes it easier for them to make that bridge between the business development and the engineering component of your job. You're welcome.
Laura McLeman:
Evelyn, I have a question.
Evelyn Ackah:
Sure.
Laura McLeman:
We hear a lot, so we deal a lot with companies that are transitioning their B-1 employees to either... well, in this case, it was an L-1A, and they use that 30 days as a rule of thumb, because generally, the more frequent these individuals are crossing on a B-1, it seems to get more uncomfortable at the border for them. Is that true?
Evelyn Ackah:
I think it is true. I hear this regularly too. I mean, every time you enter the B-1, you have to satisfy U.S. CBP that you truly are a business visitor. And as I said, I say this to most of my clients. The more you travel, the more the probing will occur. They will really start probing, "Really, you were just here last week for five days.", and they can see every entry you make. So they can see a pattern of travel. So I just generally say, "If you're not getting hassled, and if everything is going smoothly, again if you have a NEXUSPASS, life is much easier as a business visitor to when you truly are doing business activity. But if you start getting pulled into secondary on a regular basis and you qualify for an L-1, and the company supports it, I would do that just to avoid the hassle." It's truly just an ease and a comfort that you know you'll get in without any problems.
Evelyn Ackah:
Okay. I think that's it. There's another one. It's all about you. The question may be out of scope. Does the tax treaty apply to corporate income, i.e. Canadian subsidiary in the U.S.?
Laura McLeman:
Canadian subsidiary in the U.S. A U.S. subsidiary of a Canadian company, absolutely there is tax treaty provisions for cross border income for a company in Canada doing business in the U.S. There are corporate tax treaty articles that will alleviate your obligations in the U.S. The tax treaty waivers are available. There are W-8BENEs. You can contact me after the call. It's a little bit out of scope for the business travelers. I will say though individuals, if you're in a service-oriented business, the amount of employees crossing into the U.S. and doing business on connected projects in the U.S. can create taxation for a Canadian company in the U.S.
Evelyn Ackah:
Great. I think that's it. We'd like to thank you so much for participating and joining us today. As I indicated, I will be making sure everybody gets a copy of the deck with our contacts as well, and it's also been recorded so anybody who missed will be able to listen in and watch the deck at their convenience. Thank you so much, Laura for joining.
Laura McLeman:
Thanks, Evelyn.
Evelyn Ackah:
And I look forward to more interesting webinars. If you have any topics, those of you that are here that you would like to hear more about on the immigration and tax side, please drop us a note. We'd love to be able to provide more knowledge and information. Thank you and have a great day.
Laura McLeman:
Thanks all.
Evelyn Ackah:
Bye.
Laura McLeman:
Bye bye.
