Canada-US Treaty exemption for Businesses
Canada-US Treaty exemption for Businesses
To determine, if an income earned through business (sole proprietorship, corporations, etc.) is taxable in the U.S. or not, we need to look into Canada-US income tax treaty.
Under the treaty, the business is not subject to tax in the U.S. if the business has no permanent establishment (PE) in the U.S. However, you still have U.S. filing requirements.
The rules are exactly the same for U.S. taxpayers doing the business in Canada.
Determination of Permanent establishment (PE)
Article V of the Canada-U.S. income tax treaty defines the permanent establishment. The wording of Article V from the Canada-U.S. treaty is copied below.
Permanent Establishment1
1. For the purposes of the Canada-U.S. tax convention, the term “permanent establishment” means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.
2. The term “permanent establishment” shall include especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop; and
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
3. A building site or construction or installation project constitutes a permanent establishment if, but only if, it lasts more than 12 months.
4. The use of an installation or drilling rig or ship in a Contracting State to explore for or exploit natural resources constitutes a permanent establishment if, but only if, such use is for more than three months in any twelve-month period.
5. A person acting in a Contracting State on behalf of a resident of the other Contracting State-other than an agent of an independent status to whom paragraph 7 applies-shall be deemed to be a permanent establishment in the first-mentioned State if such person has, and habitually exercises in that State, an authority to conclude contracts in the name of the resident.
6. Notwithstanding the provisions of paragraphs 1, 2 and 5, the term “permanent establishment” shall be deemed not to include a fixed place of business used solely for, or a person referred to in paragraph 5 engaged solely in, one or more of the following activities:
(a) the use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the resident;
(b) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display or delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;
(d) the purchase of goods or merchandise, or the collection of information, for the resident; and
(e) advertising, the supply of information, scientific research or similar activities which have a preparatory or auxiliary character, for the resident.
7. A resident of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
8. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not constitute either company a permanent establishment of the other.
9. For the purposes of the Convention, the provisions of this Article shall be applied in determining whether any person has a permanent establishment in any State.
Services Permanent Establishment Article V, paragraph 9
Under paragraph 9 of Article V, if you, or your enterprise, provide services in the U.S., you may be treated as providing them through a permanent establishment in U.S. even if you do not have a fixed base in U.S. from which you operate. This rule applies, however, only if:
You are present in U.S. for more than 183 days in a 12-month period, and, during that period or periods, more than 50 percent of your gross active business revenues consist of income derived from your services performed in U.S.; or
Your enterprise provides services in U.S. for an aggregate of 183 days or more in any 12-month period with respect to the same or connected project for customers who are either residents of U.S. or who maintain a permanent establishment in U.S. and your services are provided in respect of that permanent establishment.
These rule applies to tax years beginning after January 1, 2010.
1 citing, Canada-U.S. Income Tax Convention, https://www.fin.gc.ca/treaties-conventions/usa_-eng.asp