Canadian entrepreneurs often ask a critical question when they begin working in the United States: “Do I have a permanent establishment (PE) in the US?”. The answer lies in Article V of the Canada-US Tax Treaty, which defines when a Canadian company is considered to have a Permanent Establishment in the US – and therefore when US income tax may apply.
What is a Permanent Establishment?
A Permanent Establishment means a fixed place of business in the United States. If your Canadian business meets this definition, the income earned from US activities may be taxable by the IRS. Without a PE, your cross-border income generally remains taxable only in Canada.
Understanding whether you have a Permanent Establishment Impacts:
- US and Canadian tax liability
- IRS and CRA filing obligations
- Compliance costs and reporting complexity
Key Criteria Under Article V
Article V of the Canada-US Tax Treaty provides several ways a PE can arise:
- Fixed place of business – An office, branch, factory, workshop, farm, etc.
- Construction or installation projects – A construction site or installation project lasting more than 12 months
- Dependent agents – An individual or company in the US who regularly concludes contracts on your behalf
Activities That Do Not Create a PE
Certain limited activities are excluded. For example, the following generally do not trigger a US Permanent Establishment:
- Storing goods or inventory
- Conducting market research
- Performing preliminary or auxiliary business activities
These exceptions ensure that companies with only a minor or incidental presence in the US are not automatically taxed there.
Practical Examples
- Engineering firm – A Canadian engineering company on an eight-month highway project in the US typically avoids PE status. If the project extends beyond 12 months, it likely creates a PE.
- Consultant – A Toronto consultant who occasionally uses a New York co-working space may be fine. But renting a dedicated office and meeting US clients regularly could establish a PE.
- US employee with authority – Hiring an employee who can sign contracts on behalf of the Canadian company often creates a PE – even without leased office space.
Why PE Matters for Canadian Businesses
Failing to recognize a US Permanent Establishment can lead to:
- Unexpected IRS filings
- Double taxation without proper planning
- Penalties and interest for late or missed compliance
Understanding these rules enables Canadian entrepreneurs, consultants, and service providers to operate confidently and avoid surprises.
Take Action Before Expanding
If you’re doing business across the Canada-US border, now is the time to evaluate whether your activities create a Permanent Establishment in the US. Strategic planning – such as structuring contracts, limiting project duration, or clarifying agent roles – can save significant tax, time, and expense.
Need guidance on Canada-US cross border tax? Our team helps Canadian businesses review their US presence and design efficient tax strategies. Contact us to discuss your situation and reduce risk before the IRS comes calling.