Under the US – Canada tax treaty you will not be required to pay tax in the US on your US source income as long as you do not have a “permanent establishment” in the US. A permanent establishment is defined in Article V of the treaty as:
2. The term “permanent establishment” shall include especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop; and
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
If you don’t have a place of business in the US that meets any of these definitions you’ll probably be ok. However I usually like to file a “protective return” with the IRS to ensure that the treaty disclosure has been filed. You would report your US source earnings on an 1120-F tax return and take a “treaty deduction” for the same amount using a form 8833. Also note that you’ll have to obtain a employer identification number from the IRS in order to file the appropriate returns.
You’ll also have to consider any possible State tax issues that may arise as a result of State nexus.
Hope that helps and feel free to give me a call if you have any further questions.
Phil Hogan, CA