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Thread: Paying taxes on money not made?!?

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    Veteran Member Theresa's Avatar
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    Default Paying taxes on money not made?!?

    I don't know how many people will be able to help me on this topic, but I decided to ask anyway b/c I really don't know what to do.

    I live in Buffalo but work in Fort Erie, Ontario, and in order to do this I need a work visa. To get a visa, you have to first visit the club you are interested in working at, have them fill out a contract, then bring it to immigration and they process it and give you a visa. One line of the contract is: Amount payable to dancers. When I got my first contract, the manager wrote in NIL on this line, stating that I don't get paid. So now there is a new manager at my club and I asked her to fill out a new contract for me, and in the Amount payable to dancer's line she wrote in $300 per week. I asked her if she could write NIL because I don't get paid and I didn't want to be held responsible for paying taxes on money that I don't get. She told me that her boss (the mgr. at the club down the road) told her to do it that way and I would'nt be able to get a visa if she didn't write in an amount (uh, I did LAST year). I just don't want to get in trouble for tax evasion b/c $300 per week equals out to $15,600 per year that I might be expected to pay on even though I am not bringing it home.

    So should I go talk to the manager of the other club (my manager's boss) and explain to him the situation, just give immigration the contract that my manager wrote, or just work in Buffalo (which I really would rather not do). The manager who wrote my first contract has since got fired and I miss him. :-/

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    Banned Melonie's Avatar
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    Default Re: Paying taxes on money not made?!?

    This is a delicate piece of business because by filing for a work visa with a declared "employer" and a declared amount of income, you will be subject to paying income taxes to a foreign country. Besides the fact that Canada may expect you to report much more in tip income than the declared $300 base pay (which as you say doesn't really exist), a large amount of foreign income is going to greatly complicate your IRS and NY State tax return. I really don't know enough details about the tax ramifications of living in one country but working in another country to give you any specific recommendations, but I can tell you that it will definitely be messy from a tax standpoint. You'll want to make absolutely sure that you don't get taxed twice (once by Canada and then again by the IRS and NY State) on the same earnings! It might be worth spending $50 to have a consultation with a Canadian CPA about this issue before you set any official paperwork in motion.

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    God/dess Zofia's Avatar
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    Default Re: Paying taxes on money not made?!?

    You have three issues, one of them is easy, the other two are more difficult.

    First the easy one. The US has a tax treaty with Canada, so you don't get double taxed. It's probably worth it to go to a CPA in Buffalo to do your taxes with Canadian source income.

    The not so easy issue is your visa declaration. Neither Canada, nor the US is going to treat the $300 as definitive of your income. Only a W-2 or 1099 can do that. The problem is that the visa form is evidence and if the Canadian authorities get around to comparing your visa application with your tax status and find a bid discrepancy they my want to audit you. The solution is somewhat cumbersome. Keep good records of your income and expenses. Prepare your tax returns for the US, Canada, NY and Ontario as accurately as possible and hope that you don't get audited. If you do, you'll be prepared to explain everything to the auditor, if you have good records.

    Your worst issue is with Canadian Immigration. In essence your application contains a misrepresentation. Next year, that could be a problem if you get audited. The Canadians will want to know why you didn't work according to the contract. It is always better to tell the government the truth. If the truth is going to present problems it is better to say nothing. I would go to your manager or her manager and get the application changed to "nil". That seems to be truthful and acceptable to the Canadians.

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    Banned Melonie's Avatar
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    Default Re: Paying taxes on money not made?!?

    Zofia, there is also another potential issue. Right now with the IRS and states there is a personal exemption available for individuals earning foreign income, and a tax credit available for persons who have paid foreign taxes. Proposed legislation is in the works which would reduce the foreign income tax rates on US corporations, but eliminate the personal tax exemption for individuals. Therefore, not knowing how this legislation will turn out, but having its effects retroactive from say January 2005 for the entire 2004 tax year's earnings, it's not safe to assume that double taxation isn't a possibility.

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    God/dess Zofia's Avatar
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    Default Re: Paying taxes on money not made?!?

    Zofia, there is also another potential issue. Right now with the IRS and states there is a personal exemption available for individuals earning foreign income, and a tax credit available for persons who have paid foreign taxes. Proposed legislation is in the works which would reduce the foreign income tax rates on US corporations, but eliminate the personal tax exemption for individuals.
    Melonie, as I understand it, this legislation does not apply to the tax treaty contries, only those that do not have treaties with us. The reason is to persuade those non-treaty nations to negotiate tax treaties with us.

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