Taxation of US Employees working in Canada

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Article Archives >> Employer and Employee Issues

(Monday, December 28, 2009)

If a US company operates in Canada does it have to file a Canadian tax return? If an employee of a US company performs duties in Canada, does the employee have to file a Canadian tax return?

Maybe. If the US company has a “Permanent Establishment” in Canada, it has to file a Canadian tax return and pay Canadian taxes on income earned in Canada. A permanent establishment is very broadly defined in the Income Tax Act. The definition for individuals and corporations is very similar, IE;

A fixed place of business of the corporation, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, and where the corporation does not have any fixed place of business it means the principal place in which the corporation's business is conducted.

Where a corporation carries on business through an employee or agent, established in a particular place, who has general authority to contract for his employer or principal or who has a stock of merchandise owned by his employer or principal from which he regularly fills orders which he receives, the corporation shall be deemed to have a permanent establishment in that place.

An insurance corporation is deemed to have a permanent establishment in each province and country in which the corporation is registered or licensed to do business.

Where a corporation, otherwise having a permanent establishment in Canada, owns land in a province, such land shall be deemed to be a permanent establishment.

Where a corporation uses substantial machinery or equipment in a particular place at any time in a taxation year it shall be deemed to have a permanent establishment in that place.

If an employee is a resident of Canada, either because they live in Canada or because they are deemed to be a Canadian resident because they stay in Canada for 183 days or more in a year, they must file a Canadian tax return and pay tax on their worldwide income. However, if the employee is a US resident, and was only in Canada for a short time in the year, they may still have to pay Canadian taxes and file a Canadian tax return if they earned Canadian employment income. If the employer had a permanent establishment in Canada, the employee will be required to pay taxes on the employment income earned in Canada even though they are a non-resident.

The fact that an employer has a website hosted on a server in Canada will not, in itself, cause the employer to have a permanent establishment in Canada. Other connecting factors will determine whether or not the business has a place of business in Canada.

Consult your tax accountant if you think you may be caught by the rules discussed above – failing to file the required tax return can result in penalties and interest.