Foreign Corporation Carrying on Business in Canada
A licensed Ontario CPA on the threshold question, and why almost everyone conflates two entirely separate tests. Carrying on business in Canada is what triggers your filing obligation. A permanent establishment is what decides whether Canada can tax you. They are not the same test, they are not the same bar, and the gap between them is where most foreign companies actually sit.
Quick Answer
Two tests, doing two different jobs. Carrying on business in Canada is a domestic law concept that triggers your Canadian filing obligation. It has no single definition: the ordinary meaning comes from case law, and section 253 then deems certain activities to count, including merely soliciting orders in Canada through an agent, whether the contract closes here or abroad. A permanent establishment is a treaty concept that decides whether Canada can tax your profits, and its bar is considerably higher: a fixed place of business, a dependent agent habitually concluding contracts, a construction project over 12 months, or one of the treaty's 183-day service tests. Most foreign companies sit in the gap: carrying on business, no permanent establishment. That means no Canadian tax and a Canadian return.
Two Tests, and Almost Everyone Runs Them Together
Ask a foreign company whether it carries on business in Canada and you will usually get an answer about offices. No office, no business, no filing. That reasoning conflates two entirely separate concepts, and the conflation is understandable because both sound like they are asking the same thing. They are not. Carrying on business in Canada comes from Canadian domestic law and it answers one question: does this corporation have a Canadian filing obligation? Permanent establishment comes from the treaty between Canada and your country and it answers a different question: assuming Canada has a claim, can it actually tax your business profits? The first is the door. The second is the bill. You can walk through the door without ever getting a bill, and that is not an edge case, it is the ordinary position for a great many foreign companies operating in Canada. What it produces is the outcome nobody expects: no Canadian tax whatsoever, and a Canadian return that must still be filed. See our non-resident corporation registration and compliance service.
The Two Tests Side by Side
Different sources, different bars, different consequences.
| Carrying On Business in Canada | Permanent Establishment | |
|---|---|---|
| Where it comes from | Canadian domestic law | The treaty between Canada and your country |
| What it decides | Whether you must file | Whether Canada can tax your business profits |
| The bar | Low. Solicitation through an agent can meet it | Higher. Generally needs a fixed place, an agent, or time |
| Defined? | No single definition. Case law plus the section 253 extended meaning | Defined in the treaty, with a list and exceptions |
| Does an office matter? | Not required at all | A fixed place of business is the central concept |
| Typical foreign company | Yes, often surprisingly | No |
| Result of that combination | A Canadian return is required | No Canadian tax on the business profits |
The Bar Is Lower Than You Think
The Income Tax Act does not define the ordinary meaning of carrying on business. Canadian courts have generally taken it to be the place where a corporation's operations take place and from which its profits arise, which is a facts test rather than a checklist. But section 253 then adds an extended meaning, and this is where foreign companies get caught, because it deems activities to be carrying on business in Canada whether or not the ordinary meaning would have reached them. Under it, a non-resident is deemed to be carrying on business in Canada if it produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs anything in Canada, in whole or in part, whether or not it exports that thing without selling it first. Or if it solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is completed inside Canada, outside Canada, or partly in each. Or if it disposes of certain Canadian resource property, timber resource property, or an interest in Canadian land in the course of a business. Read the solicitation limb again slowly, because it is the one that matters. Merely soliciting orders through an agent is enough. The sale closing in your home country does not save you. The goods shipping from abroad does not save you. Having no office, no premises and no Canadian entity does not save you. If you have a salesperson travelling to Canada to see Canadian customers, you are very likely within the extended meaning already.
| Section 253 Deems You to Be Carrying On Business If You... | What It Reaches |
|---|---|
| Produce, grow, mine, create, manufacture, fabricate, improve, pack, preserve or construct anything in Canada | In whole or in part. Applies whether or not you export the thing without selling it first. |
| Solicit orders or offer anything for sale in Canada through an agent or servant | Whether the contract is completed inside Canada, outside Canada, or partly in each. No premises needed. |
| Dispose of certain Canadian resource or timber resource property | Where it is part of a business rather than a capital transaction. |
| Dispose of an interest in Canadian land in the course of a business | Speculating or dealing, as distinct from holding on capital account. |
The word solely is doing enormous work in the treaty's exceptions. A warehouse used solely for storage, display or delivery of your merchandise is a specific treaty exception, as is a fixed place used solely for advertising or supplying information where the activity is preparatory or auxiliary. Both exceptions are real and both are narrower than they first appear, for two reasons. First, they address the treaty test, not the domestic one, so they say nothing about whether you are carrying on business in Canada. Second, activities accumulate. A warehouse that also becomes a place where orders are taken, or an information office where someone starts negotiating, has quietly stopped being solely anything. Please review what actually happens at the site rather than what it was set up to do.
What It Takes to Create a Permanent Establishment
The treaty bar is genuinely higher, which is why the gap exists. Under most treaties a permanent establishment is a fixed place of business through which the business is wholly or partly carried on, and it expressly includes a place of management, a branch, an office, a factory, a workshop, and a mine, oil or gas well, quarry or other place of extraction. Beyond premises, three other routes matter.
| Route | The Test | What Catches People |
|---|---|---|
| Fixed place of business | Premises through which the business is carried on | Space available to you counts, not just space you lease. |
| Dependent agent | Someone in Canada who habitually exercises authority to conclude contracts for you | No premises needed at all. An independent agent in the ordinary course of their own business generally does not count. |
| Construction or installation | A building site or project lasting more than 12 months | The actual duration decides it, not the planned one. Overruns arrive uninvited. |
| Services, individual test | An individual present in Canada 183 days or more in a 12-month period, where more than 50% of the enterprise's gross active business revenue is from services performed in Canada | One individual must personally reach the days. Several people collectively reaching it does not count. |
| Services, project test | Services provided in Canada 183 days or more in a 12-month period for the same or a connected project, for Canadian-resident customers | Counts days the enterprise provided services. Several people present on one day count as one day. |
| Connected projects | Projects forming a coherent whole, commercially and geographically | Judged from the enterprise's point of view. Splitting one job into contracts is what this addresses. |
These tests are won and lost on records. Two of the routes above are day counts and one is a duration. That makes them administrative rather than conceptual: who was in Canada, on which days, on what project, doing what. Foreign companies that track border crossings, individuals, projects and activities contemporaneously are in a completely different position from those reconstructing it from calendars and expense claims after the CRA asks. If your people spend meaningful time in Canada, the record is the defence, and it has to exist before the question arrives.
The GST/HST Test Is a Different Test Again
This is the trap almost nobody sees coming, and it deserves its own heading. The GST/HST legislation does not contain the extended definition of carrying on business found in the Income Tax Act, and it defines business differently in the first place. The consequence is stated plainly by the CRA: a non-resident considered to be carrying on business in Canada for income tax purposes is not necessarily considered to be carrying on business in Canada for GST/HST purposes, and the reverse is equally true. So there are three separate analyses here, not one. You might be carrying on business for income tax and have no GST/HST registration requirement. You might have a GST/HST obligation with no income tax exposure at all. You might have both, or neither. Reaching a conclusion on one and letting it carry over to the other is a mistake we see regularly, and it is an easy one to make because the phrase is identical in both places. It is worth checking each on its own terms. See our GST/HST registration.
The Fact Patterns That Actually Arrive
Where real foreign companies land, and why.
- The travelling salesperson. Someone flies in for a week a month to see Canadian customers. Contracts are signed at head office abroad. Section 253 solicitation limb: carrying on business. Probably no permanent establishment. A return is required.
- The Canadian distributor. Whether they are a dependent agent turns on what they actually do, not on the word distributor. An independent business selling other companies' products alongside yours is a different case from one existing to conclude your contracts.
- The public warehouse. Storage, display or delivery only is a treaty exception, and it says nothing about the domestic test. Watch for the site quietly acquiring other functions.
- The project that ran long. Twelve months is a bright line and projects overrun. The clock does not care what the contract originally said.
- The consultant with one big Canadian client. Both service tests are in play, and the 50% revenue condition on the individual test is easy to meet for a small enterprise.
- Manufacturing a component here. Section 253 catches producing or improving anything in Canada in whole or in part, whether or not you export it before selling.
So What Happens Once You Are Through the Door
The point of establishing which side of each test you fall on is that it tells you what to do next, and this page deliberately stops at the threshold. Where you are carrying on business in Canada, a Canadian corporate return is required, and the treaty exemption that protects your profits from tax does not remove it. What that return involves, the schedules that make the treaty claim, the 15% your Canadian customer is required to withhold from payments for services rendered here, how the return is the only mechanism that recovers it, branch tax, and the late-filing penalty written specifically for treaty-exempt corporations with no tax payable, are all set out in our Canadian corporate tax for foreign companies guide. For structuring the Canadian presence properly rather than discovering it, see our international tax planning and structuring and, where the United States is involved, our Canada US cross-border tax planning. Where returns are already outstanding, our voluntary disclosures program page covers that route, and the ongoing compliance itself sits with our non-resident tax returns service.
Case Study: No Office, No Employees, Still Filing
A foreign manufacturer sold equipment to Canadian buyers. It had no Canadian office, no Canadian staff, no Canadian entity and no Canadian bank account. Every contract was negotiated and signed at head office abroad, and every unit shipped from a plant outside Canada. On that basis the company had concluded, reasonably enough, that it had nothing to do with the Canadian tax system. What it also had was a regional sales representative who flew into Canada roughly one week each month to visit customers and solicit orders. That activity sat squarely within the extended meaning: soliciting orders in Canada through an agent or servant is deemed to be carrying on business here, and it applies expressly whether the contract is completed inside or outside Canada. The company was carrying on business in Canada and had been for years. It almost certainly had no permanent establishment, so the treaty protected its profits and there was no Canadian tax to pay. The returns, however, were required and had never been filed. We established the position on both tests, prepared the outstanding treaty-based returns, and set up the record-keeping so the day counts would be defensible going forward. The figures here are illustrative of the work we do, not a specific client file. Non-Resident Corporation Services →
Establish the Position Before the CRA Does
We assess both tests on your actual facts, tell you which side of each you fall on, and set up the records that make the answer defensible. At flat-fee pricing including HST.
Threshold Assessment
Carrying on business, permanent establishment, and GST/HST assessed separately on your facts, because they are separate questions.
Treaty-Based Returns
Where you are through the door but protected by the treaty, we prepare and file the return that says so, properly and on time.
Records That Hold Up
Day counts, projects and presence tracked before the question arrives, not reconstructed from calendars afterwards.
Frequently Asked Questions: Carrying on Business in Canada
One Test Opens the Door. The Other Decides the Bill.
Gondaliya CPA assesses both tests on your facts, files the returns where they are required, and sets up records that hold up. Flat fee, including HST. 1300+ five-star reviews.