Self-Employed Across the Border: Where a Freelancer's Income Is Taxed, Who Withholds, and Which Social Security System Applies

A self-employed person who lives in one country and serves clients in the other is taxed on the business income by the country of residence, and by the other country only if the business has a fixed base or permanent establishment there. That is Article VII of the treaty, and it means a Toronto freelancer with US clients pays Canadian tax only, and a Miami consultant with Canadian clients pays US tax only, provided neither has an office or regular workplace across the border. The complications are the withholding each country's payers apply by default, the sales tax registration, and the social security question, which the totalization agreement settles by residence.

Key takeaways

• Article VII: business profits are taxable only in the residence country unless the business carries on through a permanent establishment (or, for individuals, a fixed base) in the other country; then the other country taxes the profits attributable to it.
• Withholding by default: Canadian payers withhold 15% under Regulation 105 on fees to a non-resident for services performed in Canada (waivable); US payers withhold 30% on fees to a foreign person for services performed in the US unless a W-8BEN or Form 8233 claims the treaty exemption. Services performed remotely from the home country are not subject to either.
• Sales tax: a Canadian freelancer registers for GST/HST above $30,000 of worldwide revenue but charges no GST/HST on services to non-resident clients (zero-rated exports); a US freelancer has no federal sales tax and state sales tax rarely applies to services.
• Social security: the totalization agreement assigns a self-employed person to the system of their country of residence; a Canadian resident pays CPP and no US self-employment tax; a US resident pays SE tax and no CPP. A US citizen resident in Canada attaches a statement to Schedule SE claiming the exemption.
• Deductions: the residence country's rules apply (T2125 in Canada, Schedule C in the US); home office, equipment, travel, and professional fees are deductible in both with different mechanics.

Where the income is taxed

Canadian resident, US clients, no US fixed base. The income is business income taxable in Canada on Form T2125 at marginal rates. Not US-taxable under Article VII. The US client should not withhold if it has a W-8BEN (or Form 8233 for an individual) on file; if it does withhold 30%, the freelancer files a 1040-NR with Form 8833 to claim the exemption and recover it. No US return is required if no withholding occurred, but a protective 1040-NR with Form 8833 is prudent when a 1042-S was issued.

US resident, Canadian clients, no Canadian fixed base. The income is business income taxable in the US on Schedule C (federal and state). Not Canadian-taxable under Article VII. The Canadian client must withhold 15% under Regulation 105 on services performed in Canada; services performed from the US are not subject to Regulation 105. If the freelancer travels to Canada to perform services, the client withholds unless the freelancer obtains a Regulation 105 waiver in advance based on the treaty exemption; otherwise the freelancer files a Canadian T1 (non-resident) to recover the withholding.

Fixed base. An office, a regularly available workspace at a client's premises, or a home office in the other country creates a fixed base. A Canadian freelancer who rents a Miami coworking desk for the winter and serves clients from it has a US fixed base; the income attributable to it is US-taxable on a 1040-NR, and Canada gives a foreign tax credit.

Withholding forms

• Canadian freelancer, US payer: Form W-8BEN (individual) or W-8BEN-E (corporation), citing Article VII, before the first payment. Some payers require Form 8233 for individuals performing services in the US. A US TIN (ITIN or EIN) is needed on the form.
• US freelancer, Canadian payer: no form stops Regulation 105 withholding on services performed in Canada; a waiver application (Form R105) to the CRA before the services, based on the treaty, does. For services performed from the US, no withholding applies and no form is needed, but the payer may ask for confirmation of non-residence.

Sales tax

A Canadian freelancer must register for GST/HST once worldwide taxable revenue exceeds $30,000 in four consecutive quarters. Services supplied to a non-resident client who is outside Canada are generally zero-rated (no tax charged, input tax credits still claimed), so the US client is not charged GST/HST. Quebec adds QST registration. A US freelancer has no federal sales tax; most states do not tax professional services, though some tax specific services (information services in Texas, digital services in several states).

Social security

The Canada-US totalization agreement covers self-employed people: a self-employed person resident in Canada is covered by CPP only, and a self-employed person resident in the US is covered by US Social Security only, regardless of where the clients are. A Canadian resident does not owe US self-employment tax on US-client income; a US citizen resident in Canada does not owe US self-employment tax on any of their self-employment income (they attach a statement to Schedule SE citing the agreement and Canadian coverage, or obtain a certificate of coverage from Service Canada). A US resident does not owe CPP on Canadian-client income.

Deductions and mechanics

Canada: Form T2125 reports gross revenue (in Canadian dollars at the transaction-date or average rate) and deducts business expenses, business-use-of-home, capital cost allowance, and half of meals and entertainment. The US: Schedule C reports gross receipts in US dollars and deducts expenses, the home office deduction, depreciation (with bonus and section 179 expensing), and half of meals. A US citizen in Canada reports the business on both, each under its own rules, with the foreign tax credit reconciling the tax.

Invoicing in the client's currency and holding the proceeds produces foreign exchange gains or losses on conversion, taxable in the residence country.

Worked example

A Toronto graphic designer bills $120,000 CAD equivalent a year: $80,000 to Canadian clients and $40,000 USD to US clients, all from her Toronto studio.

• Canada. All $120,000 (US fees converted) is business income on T2125; expenses deducted; CPP on net self-employment income. GST/HST registered; 13% charged to Canadian clients; zero-rated to US clients.
• US. No fixed base; Article VII exempts the US-client income. W-8BEN on file with each US client; no withholding; no 1099. If a client issued a 1042-S with withholding, a 1040-NR with Form 8833 recovers it.
• Social security. CPP only; no US SE tax.

Move her to Miami with the same clients: all $120,000 is US business income on Schedule C; SE tax applies; no CPP; Canadian clients performing no services in Canada owe no Regulation 105; no GST/HST registration (no Canadian supplies); the QBI deduction is available on the US business income.

Official sources

"The business profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein." — Canada-United States Tax Convention, Article VII(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

"Every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent of such payment." — Canada Revenue Agency, Required Withholding from Amounts Paid to Non-Residents Providing Services in Canada (IC75-6), https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic75-6/required-withholding-amounts-paid-non-residents-providing-services-canada.html

"The United States has entered into agreements, called 'totalization agreements,' with several nations for the purpose of avoiding double taxation of income with respect to social security taxes." — Internal Revenue Service, Totalization Agreements, https://www.irs.gov/individuals/international-taxpayers/totalization-agreements

Practitioner note

Freelancers cross the border in the invoices, not in person, and the tax follows residence. The two things that go wrong are the W-8BEN that was never sent to the US client (30% withheld) and the US citizen in Canada who pays self-employment tax on Schedule SE when the totalization agreement says CPP only. Both are refundable; both are avoidable.

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 Article VII analysis, the withholding form filings with each client, the GST/HST registration, and the residence-country return with the totalization position. See cross-border pricing or book a call.