CROSS BORDER RESOURCES

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In general, American business is subject to Canadian income tax if it earns business income from a business carried on in Canada

There is no clear definition of “carrying on business in Canada” in the Canadian Income Tax Act.  Historically, the deciding factors in determining where a business was carried on included the origin of the contract and the place where the profit-making activities arose. In determining where such activities arose, the courts have looked to factors such as where the services were performed, location of employees, location of bank accounts, the existence of an office, etc.

The Canadian Revenue Agency (CRA) has developed a list of 12 factors to consider when determining whether a non-resident is carrying on business in Canada for the purposes of Canadian sales tax:

• The place where agents or employees of the non-resident are located
• The place of delivery
• The place of payment
• The place where purchases are made or assets are acquired
• The place from which transactions are solicited
• The location of assets or an inventory of goods
• The place where the business contracts are made
• The location of a bank account
• The place where the non-resident’s name and business are listed in a directory
• The location of a branch or office
• The place where the service is performed
• and the place of manufacture or production

Although the threshold for carrying on business in Canada is relatively low, the US-Canada Tax Treaty provides relief to an American where a business is not carried on through a “permanent establishment” in Canada.

If there is no “permanent establishment” in Canada, then generally the US entity will not be taxable in Canada, even though they are still required to file a Canadian tax return.

In 2010-0381951E5, the CRA indicated that the determination of the existence of a permanent establishment is a question of fact, and stated that Article 5 of the OECD Model Tax Convention provides the appropriate framework for the determination of whether a permanent establishment exists.

Specifically:

• There must be a fixed place of business and;
• The non-resident must be carrying on its business wholly or partly through this fixed place of business.

Where a Canadian permanent establishment exists, the US entity will be taxed in Canada on the business profits attributable to that permanent establishment.

Need Help?

Contact us for a free consultation regarding your Canadian Corporate Taxes situation:

UHY Victor LLP Canada US Tax Team

crossbordertax@uhyvictor.com
(514) 282-0067

Additional resources:

• GST/HST when expanding into Canada 
• 2022 Cross Border Survival Guide

Disclaimer: UHY Victor assumes no responsibility or liability for any errors or omissions of this site. The information used in this site is provided for general guidance. This article is not a substitute for professional legal advice.