Overview
This ruling addresses when a U.S. corporation becomes taxable in Canada because it is considered to be:
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carrying on business in Canada, or
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having a Permanent Establishment (PE) under the Canada–U.S. Tax Treaty.
CRA explains how the domestic rules (ITA 2(3), 253) operate together with Treaty Article V, and clarifies when a U.S. company must file a Canadian tax return, pay Part I tax, and recognize Canadian-source business income.
1. Carrying on Business in Canada
(Relevant: ITA 2(3), 248(1), 253)
CRA states that a non-resident corporation is taxable in Canada if it is carrying on business in Canada, even without a permanent establishment.
Key points:
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ITA 253 deems certain activities to be “carrying on business,” such as:
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soliciting orders or offering services into Canada
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maintaining an agent in Canada
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acts performed by a dependent person on behalf of the non-resident
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“Business” under ITA 248(1) is interpreted broadly.
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Even minimal activity can trigger Canadian tax liability unless Treaty protection applies.
2. Permanent Establishment (PE) Tests
(Relevant: Article V of the Canada–U.S. Tax Treaty)
CRA analyzes various PE tests:
Fixed Place of Business (Art. V(1))
A U.S. corporation has a PE in Canada if it has a fixed place of business such as:
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an office
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a factory
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a workshop
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a place of management
Dependent Agent PE (Art. V(5))
A PE exists if a person in Canada:
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habitually exercises authority to conclude contracts
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or plays the principal role leading to contract conclusion
Independent Agent Exception (Art. V(6))
No PE if the Canadian agent is:
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legally independent, and
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acting in the ordinary course of their business.
Subsidiary is NOT Automatically a PE (Art. V(7))
A Canadian subsidiary does not automatically create a PE for the U.S. parent.
Service PE / Construction PE (Art. V(2), V(3))
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Construction/installation projects lasting 12 months create a PE.
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Certain service activities may trigger PE depending on duration and presence.
3. Tax Liability of the U.S. Corporation
(Relevant: ITA 115(1)(a))
Once a PE exists, the U.S. corporation is taxable in Canada on:
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business profits attributable to the PE, determined under Treaty Article VII
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income earned from activities carried on in Canada
CRA notes:
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Attributable income includes revenue connected to Canadian operations.
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Expenses reasonably connected to the PE may be deductible.
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Transfer pricing principles apply for cross-border allocation of profits.
If no PE exists, but the company is still considered to be carrying on business in Canada under domestic law, it must file a return, but Treaty may exempt tax.
4. Filing Requirements for a U.S. Corporation
(Relevant: ITA 115, 150; Treaty Article V & VII)
CRA clarifies:
A U.S. corporation carrying on business in Canada must file a T2 non-resident return, even if:
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It has no PE, and
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No tax is ultimately payable under the Treaty.
Exemption from tax ≠ exemption from filing.
If a PE exists:
The corporation must:
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file a T2 return
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report business profits attributable to the PE
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calculate Part I tax
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maintain proper Canadian tax records
If no PE exists:
The return must still be filed to claim the Treaty exemption.
5. Practical Interpretation from CRA
CRA emphasizes:
Determining a PE is a factual test based on commercial reality.
The presence of employees, agents, or contracts in Canada often determines the result.
A U.S. corporation can have taxable business activity even without physical presence, if its activities fall within ITA 253.
The specific ruling files analyze cases involving:
Dependent agents
Contract negotiation in Canada
Cross-border service delivery
U.S. corporations with Canadian clients but no physical office
Subsidiary vs parent functions
Whether Canadian activities exceed preparatory/auxiliary thresholds
Key Takeaways
- A U.S. corporation may be considered to be carrying on business in Canada under domestic rules even without a PE.
- A Permanent Establishment triggers Canadian taxation of business profits attributable to the PE.
- A Canadian subsidiary does not automatically create a PE.
- Agents in Canada can create a PE if they habitually conclude contracts.
- A U.S. corporation must file a Canadian return if it carries on business here, even if Treaty exempts tax.
- Tax liability depends on both ITA and Treaty Article V factual tests.
Disclaimer
This page summarizes CRA technical interpretations from the uploaded documents. These interpretations may not represent current CRA policy. This information is for general educational purposes only and is not tax or legal advice.
Redaction Notice
All names, phone numbers, office locations, signatures, and confidential identifiers from the original CRA documents have been removed to protect privacy and comply with publishing guidelines.
