Similar to the U.S. rules, Canada may tax personal services provided in Canada by U.S. persons who are not residents of Canada income tax purposes. The provisions governing this are regulations 102, 105 and section 115 of the Income Tax Act (‘ITA”).
The treaty-employment income
Article XV of the Canada/U.S. tax treaty may exempt from Canadian taxation, personal services that is employment income where the income is not more than $10K earned in the source country (ie., Canada) or more than 10K if the remuneration paid by the U.S. employer that does not have a permanent establishment in Canada and the individual is not present in Canada more than 183 days in the 12-month period ending in the calendar year. If the treaty does not apply, a Canadian tax return is filed under Section 115 of the Act to tax on a combined federal and provincial graduated tax rate on the income sourced to Canada.
The treaty-self-employment income
Article V of the treaty may exempt independent personal services (i.e., self-employment income) if the individual (i.e., the proprietor) does not carry on business in Canada through a permanent establishment (“PE”) situated therein.
The self-employed
Under the treaty, the taxation of independent personal services provided in Canada depends if the proprietor has a PE situated in Canada. If it were not for the “deemed PE” provision in Article V, paragraph 9, most unincorporated businesses of this nature would not generally have a PE in Canada. On a simplistic basis, if the individual is physically in Canada for more than 183 days in a 12-month period ending in the calendar year and more than 50% of the gross business revenues consist of income derived from services provided in Canada, then there is a deemed PE and therefore no treaty exemption.
Where the individual has a PE in Canada without considering this deeming service provision, the combined tax rate outlined earlier would apply. However, where the deeming provision is applicable, CRA has said that the otherwise provincial tax rate applicable to income in a tax bracket would not apply. This is because the definition of PE within the provinces would not apply. This makes sense in that the provinces like individual U.S. states generally and do not have to follow treaty provisions.
As the business income from independent personal services is not allocated to a PE, it is taxed as income not earned in a province with an additional federal surtax of 48% times the federal tax as opposed to the provincial marginal tax rate on that income.
For the self-employed individual, the savings on filing with an Ontario PE or without it depends on the tax bracket you are in. For example, using 2016 tax rates, there is a savings of about $953 with no Ontario PE on $50,000 of business income as opposed to as savings of only $35 on $100,000 of business income. The savings is greater at lower tax brackets. Note that the savings noted here take into CPP contributions that are payable the business income if no exemption is claimed under the Canada/U.S. social security agreement.

Corporations sending employees to Canada
The Article V service provider deeming PE provision could also apply to a treat a U.S. corporation (“USCO”) to have a PE in Canada by virtue of sending employees to Canada to work on a project. If this were the case, a corporate T2 return would be filed to allocate business profits derived in Canada under Article V & VII of the treaty with corporate tax payable at 26.5% as a non-resident corporation.
If the deeming provision is not applicable, say because the two-part test is not met, this does not mean that USCO is not carrying on business in Canada, and if it is carrying on business in Canada, does USCO have a PE in Canada? Here, the facts surrounding what the nature of the services are and other factors will determine if USCO is carrying on business with or without a PE in Canada.
Generally, it is wise to file a nil corporate T2 return and claim treaty exemption if USCO may be considered to be carrying on business in Canada under the Act. If a T2 return is not filed, there could be a  $2,500 annual penalty for not filing the T2 return even where there is no tax  payable.
CRA has commented that the mere sending employees to Canada to provide services does not in itself cause USCO to be carrying on business in Canada.  Sending employees to Canada  such as  to  the Waterloo, Ontario region is  not unusual for IT / software development companies.

On October 3, 2016 changes were announced to the computation of the available principal residence exemption. Changes were made to properties held by individuals and to properties held by trusts. Discussion below is limited to the changes affecting individuals. Changes to trust is more complex and may be addressed in another BLOG.

Simply put, the PRE is a formula that exempts all or a portion of the otherwise computed gain on the disposition. The numerator is representative of the number of taxation years in which one may designate the property as their principal residence, “PLUS 1”. The “PLUS 1” is there to allow for designation where you buy and sell in the same taxation year. Either the taxpayer, the taxpayer’s spouse or child may inhabit the property for the PR designation to be allowed. You cannot designate the property for a taxation year in which you were not a resident of Canada for tax purposes. The denominator is the number of years you owned the property.

For a non-resident who purchases a property situated in Canada for his child to inhabit, the PRE is available to the non-resident but only for 1 divided by the number of year he owned the property because the non-resident is not a resident of Canada. This means that if the property was owned for 4 years, then ¼ of the gain would be exempt. The longer the period of ownership, the lower is the exempt portion.

Effective for taxation years after October 3, 2016, the “PLUS 1” is only available to taxpayers who were resident in Canada during the year they purchased the property and non-resident purchasers of property acquired before October 3, 2016 are not grandfathered.

What happens if the taxpayer moves to the United States?

If the property is sold after departure to the U.S., the Canada/U.S. tax treaty in Article XIII, paragraph 6 provides for a bump-up to fair market value for U.S. tax purposes as the capital gain is subject to U.S. taxation. IRS Form 8833 treaty based disclosure should be filed with your U.S. 1040 return to support this position.

If a taxpayer moves to the United States but has not sold the property before ceasing residency in Canada, the “PLUS 1”, is available when filing the application for clearance (CRA form T2062/T2062A), but note the taxpayer cannot designate the PR for taxation years on completion of CRA Form T2091 (IND) in which he is residing in the United States.

What is often missed on departure to the United States?

If the property is converted to a rental either before or after departure, this is a “change in use” and requires reporting of the deemed disposition on a tax return and possibly the filing of the application for clearance. If the change in use occurs prior to departure, the reporting is on the T1 return filed for the year of departure. If the “change is use” is after departure, the reporting is on a T1 return filed under Section 115 of the Income Tax Act and the filing of the T2062.  As a non-resident of Canada, by not filing the T2062 clearance application within 10 days after the deemed disposition, a late filing penalty up to $2,500 will apply.  The change in use steps up the basis for Canada equal to that fair market value used as a basis for a future sale.

If a “no change in use election is filed, there is no disposition reportable, no T2062 required to be filed and no capital gain nor increase in basis. Future capital gains are from the original purchase price plus any capital additions to the property. However capital cost allowance cannot be claimed on the net rental income if a section 216 election to file a special rental T1 return to report net rental income with taxation at graduated rates as opposed to the flat 25% Section 212 non-residence tax on the gross rental.

Prior to 2016, it was CRA’s administrative practice that the disposition of your principal residence was not reportable where the entire gain is exempt. There have been a few court cases where the administrative practice was not upheld because CRA Form T2091 was not filed.

Effective for the 2016 taxation year, all dispositions of a principal residence need to be reported even though the entire gain may be exempt from taxation. Schedule 3 of the T1 return has a simplified portion of the schedule where proceeds of sale and the acquisition and sale dates are entered. CRA Form T2091 (IND) does not need to be completed or filed where the entire gain is exempt.

Reporting also needs to be reported for dispositions that include deemed dispositions arising on death (regardless if there is a spousal rollover) or for a change in use which would occur when the property is converted to rental use and the S45(2) no change in use election is not filed. The foregoing dispositions result in deemed proceeds of disposition equivalent to the fair market value of the property with a corresponding increase in basis for subsequent dispositions.

The principal residence exemption will only be available if the disposition is reported. If it is not reported, a late-filed election by amending the return but with a penalty of $100 per month the reporting is late. In such cases, it may be wise to file the T2091 (IND) with the submission. The maximum penalty is $8,000 pursuant to subsection 220(3.5) of the Income Tax Act. CRA has stated that for 2016, they may apply the penalty in excessive cases.

For donations of $200 or less, the federal refundable tax credit is 15%. For donations more than $200, the federal refundable tax credit is representative of the top marginal tax rate of 29% even if you were not in that marginal tax bracket.

With the introduction of the top federal marginal rate of 33% on taxable income over $200,000, it was presumed that the refundable tax rate on donations more than $200 would be 33%.

The federal tax credit for donations more than $200 will only be at 33% if your taxable income is over $200,000.

Provincial refundable tax credits (that vary by province of residence) are added to the foregoing federal refundable tax credits.

Combined Federal & Ontario refundable tax credits

• First $200 of donations- 20.05%
• Donations more than $200 where taxable income is under $200,000-40.10%
• Donations more than $200 where taxable income is over $200,000-44.16%

As you may be aware of there is a federal tax withholding requirement on the sale of U.S. real estate by non-U.S. persons. This does not exempt the vendor from filing a U.S. tax return to report the sale and paying any tax payable or requesting a refund for excess federal tax withholding.

There are certain exemptions from the withholding such as if the purchase price is under $300K and the buyer is using the property as their home. For this exemption to be valid, the IRS regulations governing this provision must be followed with a certification from the purchaser to protect from penalties on the failure to withhold.

Without qualifying for any of the specific legislative FIRPTA withholding exemptions, the tax withholding can be reduced to what the estimate tax would be on the capital gain that is reported on the tax return, but only, by filing IRS form 8288-B application for a withholding certificate by the closing date of the sale with the FIRPTA office of the IRS.

The application requires copies of your sale agreement and your purchase agreement with a schedule supporting the adjusted basis and tax computation. If the property was rental, you need to update your financial information to the date of sale to properly compute the tax. Most renters have “passive activity loss” carry forwards that can be utilized in the computation of the tax payable.

If this is done and accepted you can have the withholding tax in your hands sooner than waiting for a refund upon filing the U.S. tax return next year. It usually takes 90 days for the IRS to respond to the 8288-B applicant.

Generally it makes sense not to file application for sales occurring late in the year as one could file the tax return as early as late January in most years and get the refund in due course. Presently it is taking up to 6 months for refunds from filing the non-resident tax returns because the NR returns must be paper-filed and the department appears to be over-loaded with these returns. Therefore, the 8288-B applications should be considered for all cases where there is significant withholding tax.

If you don’t have an ITIN as an individual vendor, you need to apply with the IRS Form W-7 by sending the ITIN application to the ITIN office with your 8288-B application. To speed things up at the FIRPTA office, it is advisable to also send copy of the 8288-B application to the FIRPTA office at the same time, indicating that you have sent in the ITIN application.