Canadian Taxation of Business Profits falls under Article V of the Canada – US Tax Treaty.
Generally, US corporation or a Self-Employed Person carries on business in Canada will owe Canadian tax only if it has permanent establishment in Canada.
Determining Canadian tax treatment is a two step approach.
Permanent Establishment includes:
• Place of management
• Branch or office
• Factory or workshop
• Mine, oil or gas well or other place of extraction of natural resources.
• Management or employees in with authority to conclude contracts in the name of Canadian company.
• Individual spends in the United States 183 days or more in any twelve-month period and during that period more than 50% of gross active business revenue of the enterprise consists of revenue derived from the services performed in the United States. NEW!
• Services provided in the United States for 183 days or more in any twelve-month period in respect to the same or connected projects for US resident or another foreign company with permanent establishment in the United States. NEW!
Permanent Establishment excludes:
• Facility for storage, display and delivery of goods or merchandise
• Maintenance of stock for storage, display and delivery of goods or merchandise
• Maintenance of stock of goods or merchandise for purpose of processing by another person
• Purchase of goods or merchandise for Canadian
• Advertising, supply of information, scientific research which have preparatory character for Canadian.
• Carrying business through an independent broker or an agent.
FILING REQUIREMENTS – US CORPORATION IN CANADA
If US corporation carries on business in Canada and has no permanent establishment in the Canada it has no US tax liability under treaty protection. However, US corporation has to file certain tax returns with Canada Revenue Agency in order to notify them of tax treaty position.
Failure to file these returns will result in loosing tax treaty protection and penalties up to $2,500!
Tax returns to be filed:
In the United States:
1. 1120 – US Corporate Income tax return. Report world income.
2. US state corporate income tax returns, if applicable
In Canada:
1. T2 – Canadian Corporate return including Schedule 91.
If US corporation has permanent establishment in Canada it is liable for Canadian income taxes.
Tax returns to be filed:
In the United States:
1. 1120 – US Corporate Income tax return. Report world income. Form 1118 to claim Foreign Taxes paid in Canada
2. US state corporate income tax returns, if applicable
In Canada:
1. T2 – Canadian Corporate return. Report revenue and expenses attributable to permanent establishment in Canada.
FILING REQUIREMENTS – US SELF-EMPLOYED PERSON IN THE CANADA
If US self-employed person carries on business in Canada and has no permanent establishment in Canada he has no Canadian tax liability under treaty protection.
Tax returns to be filed:
In the United States:
1. 1040– US Income Tax Return. Report world income.
In Canada:
1. R 105 – Regulation 105 Waiver application – to avoid Canadian withholding tax
2. If withholding taxes were withheld – file T1 to obtain refund.
If US self-employed person has permanent establishment in Canada he is liable for Canadian income taxes.
Tax returns to be filed:
In the United States:
1. 1040 – US Income Tax Return. Report world income. Form 1116 to claim Foreign Taxes paid in Canada
In Canada:
1. T1 – Individual Income Tax Return. Report revenue and expenses attributable to permanent establishment in Canada.
Information provided is very high level. Each case is different and should be carefully assessed.
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