Remote Work Across the Canada-US Border: The Employer's Problem, the Employee's Problem, and the Immigration Problem Nobody Mentions

Remote work across the border has one rule that everything else follows from: employment income is sourced to the country where the work is physically performed. An employee who lives in Vancouver and works for a Seattle company is earning Canadian-source income, taxable in Canada, whatever the payroll system says. An employee who lives in Florida and works for a Toronto company is earning US-source income, taxable in the US. The employer has to run payroll in the employee's country, the employee's home office can be the employer's permanent establishment, and in the US direction, a Canadian working remotely from the US without work authorization has an immigration problem before a tax one.

Key takeaways

• Sourcing: wages are sourced to where the work is done. A remote employee's wages are sourced to the country of the home office. The employer's location is irrelevant to sourcing (though it matters for the Article XV exemption and the permanent establishment analysis).
• Employer obligations: the employer must register for payroll in the employee's country and withhold, remit, and report there: a CRA payroll account, CPP, EI, and T4 for an employee in Canada; an EIN, federal and state withholding, FICA, and a W-2 for an employee in the US. An employer of record or a local subsidiary is the usual solution.
• Permanent establishment: a remote employee's home office used regularly for the employer's business can be a fixed place of business of the employer in the other country, exposing the employer's attributable profits to tax there. The risk is higher for employees who deal with customers or conclude contracts.
• State tax: a US remote employee is taxed by the state of residence; some states (New York, Connecticut, Delaware, Nebraska, Pennsylvania) apply a convenience-of-the-employer rule that also taxes remote wages of a state-based employer's employee.
• Work authorization: a Canadian citizen may not work for any employer, including a Canadian one, while physically in the US on visitor status; remote work from the US requires a status that permits it. The reverse (an American working remotely from Canada for a US employer) generally requires a Canadian work permit unless an exemption applies.

The employee's tax

Canadian resident, US employer. All wages are Canadian-source (work performed in Canada). Taxable in Canada on the T1 at Canadian rates with CPP and EI. Not US-taxable: the employee is a non-resident alien with no US-source income (unless they travel to the US for work, in which case those days are US-source and Article XV applies). The US employer should not withhold US federal or state tax or FICA on a Canadian-resident employee's Canadian workdays; a US employer that does creates a refund problem (1040-NR to recover). The totalization agreement assigns the employee to CPP.

US resident, Canadian employer. All wages are US-source (work performed in the US). Taxable in the US on the 1040 at federal and state rates with FICA. Not Canadian-taxable: the employee is a non-resident of Canada with no Canadian-source income (unless they travel to Canada for work). The Canadian employer should not withhold Canadian tax, CPP, or EI; if it does, the employee files a Canadian non-resident return to recover it. The totalization agreement assigns the employee to Social Security.

Hybrid. An employee who splits time between the countries sources wages by working days; Article XV may exempt the non-resident country's share if under 183 days and the employer is not resident there.

The employer's obligations

Canadian employer with a US remote employee. Register with the IRS for an EIN; register with the state for withholding and unemployment insurance; withhold federal and state income tax and the employee's share of FICA; pay the employer's share of FICA and FUTA; carry workers' compensation; issue a W-2. States also impose labour law obligations. The alternative is a US employer of record (which becomes the legal employer and runs the payroll) or a US subsidiary.

US employer with a Canadian remote employee. Open a CRA business number and payroll account; withhold federal and provincial income tax using the employee's TD1; withhold and match CPP; withhold EI and pay 1.4 times the employee's premium; remit on schedule; issue a T4; comply with provincial employment standards (which apply to the employee regardless of the employer's location). Quebec adds Revenu Québec, QPP, and QPIP. The alternative is a Canadian professional employer organization or subsidiary.

Permanent establishment

Under Article V, a fixed place of business through which the enterprise's business is carried on is a permanent establishment. The OECD and both tax authorities have taken the position that a home office can be a PE when the employer requires or expects the employee to work from home and the home office is used regularly for the business. A single remote employee doing back-office work is a modest risk; a remote salesperson concluding contracts is a dependent-agent PE under Article V(5) regardless of the home office. The consequence is corporate: the employer's profits attributable to the PE are taxable in the other country (Form 1120-F or a Canadian T2 with Schedule 97), with branch profits tax.

State tax

The state of residence taxes the remote employee's wages. Five states apply a convenience-of-the-employer rule: an employee of a New York-based employer who works remotely from another state (or from Canada) for their own convenience is treated as working in New York, and New York taxes the wages. A Canadian resident working remotely for a New York employer can face New York non-resident tax on all wages under this rule; the treaty does not bind New York. The rule does not apply where the employer requires the remote location.

Work authorization

A Canadian citizen entering the US as a visitor (B-2 or visa-free) is not authorized to work in the US, and working remotely for a Canadian employer from a US location is work in the US for immigration purposes. The practical enforcement is limited, but the risk is real at the border and in any later immigration application. A Canadian who wants to work remotely from the US needs a status that permits employment (TN or H-1B through a US employer, L-1 through the Canadian employer's US affiliate, or a green card). An American working remotely from Canada for a US employer generally needs a Canadian work permit; short business visits are exempt, but ongoing remote employment from a Canadian residence is not a business visit.

Worked example

A Seattle software company employs an engineer who moves to Vancouver and works from home.

• Employee. Wages Canadian-source; taxable in Canada; not US-taxable; CPP and EI apply; the engineer needs a Canadian work permit or permanent residence to work from Canada.
• Employer. Register for a CRA payroll account, withhold Canadian tax, CPP, and EI, issue a T4, comply with BC employment standards; or engage a Canadian PEO. Stop US withholding and FICA on this employee.
• PE. The engineer's home office is a possible fixed-place PE; the company documents that the location is the employee's choice, limits the engineer's authority to conclude contracts, and monitors.
• Washington. No state income tax; no convenience rule.

Reverse it (a Toronto company's engineer moves to Austin): US-source wages; the Toronto company registers for US payroll or uses a US EOR; the engineer needs US work authorization (a TN through the company's US entity, or a green card); Texas has no income tax and no convenience rule.

Official sources

"Subject to the provisions of Articles XVIII (Pensions and Annuities) and XIX (Government Service), salaries, wages and other remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State." — Canada-United States Tax Convention, Article XV(1), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

"Non-resident employer certification removes the requirement for non-resident employers to withhold and remit tax when they pay employment income to qualifying non-resident employees." — Canada Revenue Agency, Non-resident employer certification, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rendering-services-canada/non-resident-employer-certification.html

"The Agreements help fill gaps in benefit coverage for workers who divide their careers between the United States and an Agreement country." — Social Security Administration, Totalization Agreement with Canada, https://www.ssa.gov/international/Agreement_Pamphlets/canada.html

Practitioner note

The employer's obligations follow the employee's chair, and most cross-border remote arrangements we see started with the employee moving and the employer finding out later. The fix is an employer of record in the employee's country from the first payroll, a PE review before the employee takes on customer-facing work, and, in the US direction, an immigration answer before the tax one.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the remote work sourcing and payroll analysis, the employer-of-record or subsidiary structuring, and the permanent establishment review for cross-border remote employment. See cross-border pricing or book a call.