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Income tax implications of U.S. resident or company doing business in Canada

  • An American resident is not taxed in Canada on business profits arising from Canadian operations unless the American individual or company is "carrying on business in Canada". This is a definition under Canadian tax law which includes many types of operations including production, mining, manufacturing, packing and construction within Canada. In addition, the definition includes soliciting orders or offering anything for sale in Canada through an agent (but not an independent agent acting on his own behalf), and also includes someone who provides services in Canada even if not physically present in Canada.
  • Nevertheless, the Canada/US Tax Treaty states that business profits of a U.S. business are taxed in Canada only if the business has a "permanent establishment" in Canada. A permanent establishment includes an office, branch or factory. In addition, if the U.S. business engages a Canadian individual or business to negotiate and finalize contracts on its behalf on an on-going basis, the Canadian individual or business is considered a permanent establishment. Furthermore, if the U.S. business has at least one employee who remains in Canada for more than half the year working on the same project or connected projects with a Canadian resident customer, then the U.S. business is deemed to have a permanent establishment in Canada.
  • On the other hand, certain fixed places of business are not considered a permanent establishment if used strictly for certain activities. Some examples are: storage, display, purchase or delivery of goods, collection of information or advertising.
  • Any payment received by non-resident for services provided in Canada is subject to a 15% withholding tax. In many cases, part of all of the tax withheld can be refunded by filing a T2 Canadian corporate income tax return.
  • A non-resident must file a Canadian Treaty-based income tax return if carrying on business in Canada without a permanent establishment. The return would be either a T1 personal tax return or a T2 corporate tax return including Schedules 91 and 97.
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Income tax implications of U.S. resident or company doing business in Canada | Simkover and Associates Chartered Accountants

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