Book Consultation

Gondaliya CPA

Treaty Article V  ·  Schedule 91  ·  Free Checker

Permanent Establishment Risk Checker

A foreign corporation with Canadian customers usually owes no Canadian tax. One remote hire, one agent who can sign, or 183 days of on-site work changes that. Test the position against the treaty, find out which return is due, and see what the back years look like.

Fixed place and agent tests
183-day services PE
Treaty-based T2 or full T2
Back-filing exposure

Step 1 — Physical Presence in Canada

None at all

None at all
Warehouse used only for storage
Leased office or workshop
A place of management or branch

A place at your disposal, owned or leased


Employees or contractors, however they are labelled

None

None
Storage and delivery only
Orders are filled from the stock

Third-party fulfilment counts as held by you

Step 2 — Activity Carried On in Canada

Days present in Canada performing services

Nobody can bind the company

Nobody can bind the company
Negotiates but head office signs
Habitually concludes contracts here
An independent broker or distributor

What happens in practice, not what the contract says


Twelve months is the treaty threshold

Step 3 — Treaty and Numbers

United States

United States
United Kingdom
India
Germany
A country with no Canadian treaty

Only the US treaty has the 183-day services article


In Canadian dollars


Per cent, used for the first services PE limb

Step 4 — Margin and Filing History

Per cent, used to estimate Canadian tax


Drives the back-filing exposure

Nothing filed

Nothing filed
Treaty-based T2 with Schedule 91
Full T2 with Canadian tax paid

A return is required even where no tax is owing

Permanent Establishment Risk
—
—

—
risk score out of 100

Risk Band

—

Return Required

—

Canadian Tax If a PE Exists

—

Back-Filing Exposure

—

Each Test Under Article V

TestWhat the Treaty SaysYour FactsPoints

What Has to Be Filed

ObligationApplies BecauseDeadline and Penalty

Tax and Back-Filing Exposure

ItemBasisAmount

Points That Decide This

    What to Do Next

    —

    Disclaimer: Under subsection 2(3) and section 115 of the Income Tax Act a non-resident corporation carrying on business in Canada is taxable on its income from that business, and section 253 extends the meaning of carrying on business in Canada. Where a treaty applies, Article V generally defines a permanent establishment as a fixed place of business through which the business of the enterprise is wholly or partly carried on, with exceptions for facilities used solely for storage, display or delivery, for a stock of goods maintained solely for those purposes, and for activities of a preparatory or auxiliary character. A person acting on behalf of an enterprise who habitually exercises authority to conclude contracts in its name generally creates a permanent establishment, unless that person is an independent agent acting in the ordinary course of business. Under the Canada-United States treaty a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months, and Article V(9) added by the Fifth Protocol deems services to be provided through a permanent establishment where an individual is present in Canada for 183 days or more in any twelve-month period and more than 50% of the gross active business revenues of the enterprise in that period consist of income from those services, or where services are provided for 183 days or more in any twelve-month period in respect of the same or a connected project for customers resident in Canada. A non-resident corporation that carries on business in Canada must file a T2 even where a treaty exempts the income, in which case Schedule 91 is filed and the penalty for failing to file is $25 a day to a maximum of $2,500 under subsection 162(7). Regulation 105 requires 15% withholding on fees for services rendered in Canada by a non-resident regardless of whether a permanent establishment exists. Branch tax under Part XIV is 25%, reduced to 5% with a lifetime exemption of $500,000 under the Canada-United States treaty. Canadian tax is modelled at 26.5%, being 15% federal plus 11.5% Ontario. This page is general information, not tax advice, and the score is an indicator rather than a determination.

    Two Separate Questions, Asked in Order

    Foreign corporations tend to treat this as one question. It is two, and they have different answers.

    1. Are you carrying on business in Canada under domestic law? If so, a T2 is required. Section 253 extends this well beyond what most people expect, catching a non-resident who solicits orders or offers anything for sale in Canada through an agent or employee.
    2. Do you have a permanent establishment under the treaty? If not, the treaty exempts the business profits from Canadian tax. The return is still due, filed on a treaty-based footing with Schedule 91 attached.

    No tax owing does not mean no return due. The most common mistake on these files is a foreign corporation concluding correctly that the treaty protects it and then filing nothing. The penalty for the missing treaty-based return is $25 a day to a maximum of $2,500 per year, and it applies to a return that would have shown no tax at all.

    The Fixed Place Test and What It Excludes

    A permanent establishment is a fixed place of business through which the business is carried on, with a specific carve-out for activities that are preparatory or auxiliary. That carve-out is what protects most warehousing arrangements.

    ArrangementTreaty TreatmentPE
    Warehouse used solely for storage, display or deliveryExpressly excludedNo
    Third-party fulfilment centre holding your stockUsually storage and delivery onlyGenerally no
    Stock from which an agent regularly fills ordersBeyond storage and deliveryLikely
    Leased office with staff serving customersFixed place, business carried on through itYes
    Employee’s own home with no company controlUsually not at the enterprise’s disposalFact dependent
    Home office the company pays for and directsArguably at the enterprise’s disposalHigher risk
    Construction project lasting 12 months or lessBelow the treaty thresholdNo
    Construction project lasting more than 12 monthsDeemed a permanent establishmentYes

    A Remote Hire Is Not Automatically a PE

    This is the question that comes up most often now, and the answer is more forgiving than most people assume. An employee working from their own home in Canada, using their own space, without authority to commit the company to anything, is usually not a place of business at the enterprise’s disposal.

    What moves the position is control and authority. If the company pays for the space, directs how it is used, stores inventory or equipment there, holds the lease, or gives the person the ability to close deals, the analysis changes quickly. The employment paperwork is also not the test, because a contractor with the same authority creates the same exposure as an employee.

    Payroll is a separate question and it does not wait for the PE analysis. A person performing employment duties in Canada generally requires Canadian payroll withholding and a business number regardless of whether the employer has a permanent establishment, and Regulation 102 applies from the first pay period.

    The Dependent Agent Test Looks at Practice

    A person acting on behalf of the enterprise who habitually exercises authority to conclude contracts in its name creates a permanent establishment, unless that person is an independent agent acting in the ordinary course of their own business. The word doing the work is habitually, and the test is what happens rather than what the contract says.

    A salesperson who negotiates everything, agrees price and terms, and sends the paperwork to head office for a signature that is never withheld is exercising authority in substance. A genuine distributor buying and reselling on its own account is not an agent at all. Between those two sits most of the real disagreement.

    The 183-Day Services Test

    The Canada-United States treaty contains a services article that has no equivalent in most other Canadian treaties. Under Article V(9) an enterprise is deemed to provide services through a permanent establishment where either of two limbs is met.

    • An individual is present in Canada for 183 days or more in any twelve-month period, and more than fifty per cent of the enterprise’s gross active business revenues during that period come from the services performed in Canada by that individual.
    • Services are provided for 183 days or more in any twelve-month period in respect of the same or a connected project for customers who are resident in Canada or who maintain a permanent establishment in Canada.

    The second limb is the one that catches consulting and engineering firms, because it counts days of service by the enterprise rather than by one person. Three consultants on site for sixty-one days each on the same project reach 183. The twelve-month window also rolls, so it does not reset at a fiscal year end.

    Regulation 105 applies whether or not there is a permanent establishment. A Canadian payer must withhold fifteen per cent from fees for services rendered in Canada by a non-resident. It is a withholding, not a tax, and it is recovered by filing the Canadian return, but a foreign corporation that has filed nothing has no way to get it back.

    What Happens If a PE Exists

    Business profits attributable to the permanent establishment become taxable in Canada. On an Ontario footing that is roughly twenty-six and a half per cent, being fifteen per cent federal and eleven and a half per cent provincial. The small business deduction is generally unavailable, since it is limited to Canadian-controlled private corporations.

    Branch tax then applies under Part XIV at twenty-five per cent on after-tax profits not reinvested in Canada, standing in for the withholding that would have applied to a dividend from a Canadian subsidiary. The Canada-United States treaty reduces it to five per cent and provides a lifetime exemption for the first five hundred thousand dollars of cumulative branch profits.

    OutcomeReturnTaxPenalty for Not Filing
    No business in Canada at allNoneNoneNone
    Carrying on business, treaty exemptTreaty-based T2 with Schedule 91None$25 a day, max $2,500 a year
    Permanent establishment existsFull T2 and provincial allocationAbout 26.5% plus branch tax5% plus 1% a month on the balance

    Fixing Back Years

    Where several years have gone unfiled, the sequence matters. Quantify the exposure first, decide whether a permanent establishment actually existed in each year rather than assuming the worst, and then choose the route. The Voluntary Disclosures Program can relieve penalties and part of the interest, but it is generally only available before the CRA makes contact about the issue, so filing the back years in the ordinary way can close the option.

    Where the treaty protects the income and only the returns are missing, the exposure is usually penalties alone and the fix is straightforward. Where a permanent establishment existed, tax, branch tax, interest and penalties compound across every year at once.

    What This Checker Does Not Cover

    • The attribution of profits to the permanent establishment, which is a transfer pricing exercise rather than a share of total revenue
    • GST/HST registration, which follows carrying on business in Canada and not the treaty test at all
    • Provincial permanent establishments under Regulation 400, which decide which province taxes the income
    • Withholding on payments other than services, including rents, royalties and management fees under Part XIII
    • Treaties other than those listed, each of which has its own Article V wording and thresholds
    • Whether a Canadian subsidiary would be a better structure than a branch, which is usually the real question once a PE exists

    The score is an indicator, not a determination. Our service for foreign corporations carrying on business in Canada covers the Article V analysis, the treaty-based or full T2, the Regulation 105 waivers and the back-year remediation.

    Frequently Asked Questions

    Common questions from foreign corporations with Canadian activity.

    Do I have a permanent establishment in Canada?
    You do if you have a fixed place of business here through which the business is carried on, or an agent who habitually concludes contracts in your name, or a construction project lasting more than twelve months, or, under the United States treaty, services meeting the 183-day test. Selling to Canadian customers from abroad, with no presence, does not create one.

    Does a remote employee in Canada create a permanent establishment?
    Not on its own. An employee working from their own home, with no authority to bind the company and no company-controlled space, is usually not a place of business at the enterprise’s disposal. It changes if the company pays for or directs the space, stores inventory or equipment there, or the person can close deals. Canadian payroll withholding applies either way.

    Does inventory in a Canadian warehouse create one?
    Generally not where the stock is held solely for storage, display or delivery, which the treaty expressly excludes and which covers most third-party fulfilment arrangements. The exclusion stops applying where an agent regularly fills orders from that stock or where other business activity is carried on at the location.

    What is the 183-day services PE test?
    Article V(9) of the Canada-United States treaty deems a permanent establishment where an individual is present in Canada 183 days or more in any twelve-month period and more than half the enterprise’s gross active business revenue in that period comes from those services, or where services are provided for 183 days or more in any twelve-month period on the same or a connected project for Canadian customers. The second limb counts enterprise days, so several people on one project add up.

    Do I have to file a T2 if the treaty exempts me?
    Yes. A non-resident corporation carrying on business in Canada files a T2 even where a treaty exempts the profits, attaching Schedule 91 to claim the exemption. The penalty for not filing is $25 a day to a maximum of $2,500 per year, and it applies to a return that would have shown no tax.

    What is Regulation 105 withholding?
    A fifteen per cent withholding that a Canadian payer must take from fees for services rendered in Canada by a non-resident, whether or not a permanent establishment exists. It is a prepayment rather than a final tax, recovered by filing the Canadian return. A waiver can be applied for in advance where the treaty will exempt the income.

    What does a Canadian permanent establishment actually cost?
    Roughly twenty-six and a half per cent on the profits attributable to it in Ontario, being fifteen per cent federal and eleven and a half per cent provincial, with no small business deduction. Branch tax under Part XIV then applies at twenty-five per cent on after-tax profits not reinvested in Canada, reduced to five per cent with a $500,000 lifetime exemption under the United States treaty.

    We have been operating here for years with no filings. What now?
    Quantify the exposure before filing anything. Establish whether a permanent establishment actually existed in each year rather than assuming it did, then decide the route. The Voluntary Disclosures Program can relieve penalties and part of the interest, but it is generally only available before the CRA makes contact, so filing in the ordinary way first can close that door.

    Settle the Position Before the CRA Raises It

    Send us the Canadian contracts, the agent arrangements and the days spent on site. We will run the Article V analysis properly, file the treaty-based or full T2, apply for Regulation 105 waivers and deal with any back years through the right route.

    Registered CPA Ontario — Firm ID 61330051
    Dual CPA Canada and USA
    1300+ Five-Star Reviews
    Fixed Fee, Including HST


    Scroll to Top