Under the U.S.-Canada Treaty, and also the U.S. and OECD Model treaties, a Canadian corporation becomes taxable in the United States only where its activities in the United States give rise to a permanent establishment.

A permanent establishment is generally defined to include either a fixed place of business (e.g., an office, branch, place of management, factory, etc.) or a dependent agent who habitually exercises the authority to conclude contracts on behalf of the corporation in the United States.

The Fifth Protocol to the U.S.-Canada Treaty which includes a clause that became effective January 1, 2010 provides that a Canadian corporation may be deemed to have a U.S. permanent establishment if it either:

• performs services in the United States through an individual present in the United States for an aggregate of 183 days or more in any given twelve-month period and certain other conditions are met, or
• provides services in the United States for an aggregate of 183 days or more in any given twelve-month period with respect to the same or connected project for U.S. customers.

If a Canadian corporation has or is deemed to have a permanent establishment in the United States, the Canadian corporation will be subject to U.S. tax return filing obligations and will be required to pay U.S. tax on business profits attributable to that permanent establishment.

If profits of a permanent establishment that are taxed by the United States are also taxed in Canada and foreign tax credits are unavailable to offset the full amount of the U.S. tax payable, double taxation on the U.S. source income of the Canadian resident may result. Moreover, if a Canadian corporation fails to file a U.S. tax return because it believes its U.S. activities do not constitute a permanent establishment, that Canadian corporation (if it is later found to have had a U.S. permanent establishment during taxable periods for which a U.S. return was not filed) may be denied the ability to subsequently claim any deductions against income attributed to its U.S. permanent establishment.

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