Legally reviewed by Joseph Mayo, Principal Attorney (Ontario and New York).
Most US companies start selling into Canada long before anyone asks a legal question. Orders arrive, a salesperson flies to Toronto, a contractor gets hired in Mississauga, and the first real question surfaces only when a Canadian customer withholds 15 percent of an invoice or a shipment stalls at the border. The rules that govern doing business in Canada are not hidden. They are just spread across a tax treaty, the Income Tax Regulations, the Canada Border Services Agency, and a provincial corporations statute, and each one starts counting at a different moment.
This guide covers the part US companies get wrong most often: the point at which cross-border activity stops being a sale and starts being a Canadian tax presence, and what has to be filed once it does. It assumes you already know whether you want a subsidiary or not. If the structure question is still open, our guide on how to start a business in both Canada and the US covers sequencing and entity setup, and this article picks up where that one stops.
Quick Answer
Doing business in Canada does not require a Canadian entity. What changes the analysis is a permanent establishment: a fixed place of business, a dependent agent who signs contracts, a construction project over 12 months, or services on the ground for 183 days or more. Once one exists, Canada taxes the profits attributed to it.
Can a US company operate in Canada without a Canadian entity?
Yes. Nothing in Canadian law requires a US corporation to incorporate a Canadian subsidiary before it sells to Canadian customers. The Canada-United States tax convention settles the income tax side directly. Article VII(1) provides that “the business profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein.”
Read that carefully, because two different tests are buried in one sentence. Canada’s domestic law can still say you are carrying on business in Canada. The treaty then overrides the tax result, but only if there is no permanent establishment. That gap between the two tests is where the filing obligations live, and it is the single most expensive misunderstanding in this area.
So the honest answer to whether you need a Canadian entity is that you probably do not need one for tax reasons alone. You may still need one for other reasons: a customer who will not contract with a foreign entity, a provincial licensing regime, a lease, or the simple practicality of paying Canadian staff. Those are commercial decisions, and our international business lawyer page explains how we work through them with clients on both sides of the border.
What counts as a permanent establishment in Canada?
Article V of the convention defines a permanent establishment as “a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.” Article V(2) then lists what the term “shall include especially”: 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 of natural resources.
Three further limbs catch companies that have no office in Canada at all.
Construction and installation. Under Article V(3), “a building site or construction or installation project constitutes a permanent establishment if, but only if, it lasts more than 12 months.” Note the wording. Twelve months exactly is not enough. More than twelve months is.
Dependent agents. Article V(5) deems a permanent establishment where a person acting on the company’s behalf “has, and habitually exercises in that State, an authority to conclude contracts in the name of the resident.” This is the older, pre-BEPS formulation, and it still governs here: the United States is not a signatory to the Multilateral Instrument, so the modernised agency test Canada applies in some of its other treaties does not apply to this one. A Canadian sales representative who negotiates but cannot bind the company is treated differently from one who signs.
Independent agents. Article V(7) is the relief valve. A company does not have a permanent establishment “merely because such resident carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.”
Article V(6) carves out activities that are preparatory or auxiliary even where a fixed place exists. Storage, display or delivery of goods; maintaining a stock of goods for storage, display, delivery or processing by another person; purchasing goods or collecting information; and advertising, supplying information or scientific research all fall outside the definition. The Fifth Protocol inserted the words “and 9” into the opening of Article V(6), which matters more than it looks: it means the preparatory and auxiliary carve-out overrides the services rule described next, not the other way around.
Does a services contract create a permanent establishment?
This is the limb that surprises people, because it does not require any fixed place of business in Canada at all.
Article V(9), added by the Fifth Protocol signed on September 21, 2007 and in force from December 15, 2008, deems a services permanent establishment in two situations. The first applies where “those services are performed in that other State by an individual who is present in that other State for a period or periods aggregating 183 days or more in any twelve-month period, and, during that period or periods, more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in that other State by that individual.”
The second applies where “the services are provided in that other State for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected project for customers who are either residents of that other State or who maintain a permanent establishment in that other State and the services are provided in respect of that permanent establishment.”
Four details decide real cases. The threshold is 183 days or more, not more than 183. The twelve-month period floats rather than tracking a calendar or fiscal year. The first limb is aimed at small enterprises, because it only bites where the Canadian work is more than half of gross active business revenue. The second limb has no revenue test at all, only the project and customer nexus, so a large US company running a long Canadian implementation can land inside it while a small one selling scattered engagements does not.
The Protocol also fixed a floor. Article 27(3)(c) states that no days of presence, services rendered, or gross active business revenues occurring before January 1, 2010 count toward the services test. That date is the safe backstop when reconstructing a day count from old records.
Branch or subsidiary: which one changes your Canadian tax position?
If a permanent establishment exists, the US company is taxed in Canada on the profits attributable to it. That is a branch, whether or not anyone called it one. The alternative is a Canadian subsidiary, which is a Canadian resident corporation taxed on its worldwide income.
The branch carries an extra layer. Section 219 of the Income Tax Act imposes a tax on non-resident corporations equal to “25% of the amount, if any, by which the total of” the corporation’s taxable income earned in Canada and certain adjustments exceeds specified deductions. Article X(6) of the convention caps that additional tax at 5 percent for a US-resident company, and subtracts, among other things, “five hundred thousand Canadian dollars ($500,000) or its equivalent in United States currency” from the base. That $500,000 allowance is cumulative rather than annual, and it is shared with associated companies carrying on the same or a similar business.
There is a corporate-governance difference too, and it cuts the opposite way from what most US clients expect.
| Federal (CBCA) subsidiary | Ontario (OBCA) subsidiary | Branch registered in Ontario | |
|---|---|---|---|
| Canadian-resident directors | At least 25 percent, or at least one where there are fewer than four directors (CBCA s. 105(3)) | None. The requirement was repealed effective July 5, 2021 | Not applicable |
| Ontario presence required | Registration if carrying on business in Ontario | Ontario corporation | Ontario agent for service (EPCA s. 19(1)) |
| Government filing fee | $200 online federal incorporation, plus $100 for express service | $300 Ontario incorporation | $330 extra-provincial licence |
| Taxed on | Worldwide income | Worldwide income | Profits attributable to the Canadian permanent establishment, plus branch tax |
Ontario’s repeal of its 25 percent resident-director rule, by section 5 of Schedule 1 to the Better for People, Smarter for Business Act, 2020, proclaimed in force for July 5, 2021, is the reason a wholly US-owned Ontario subsidiary is now simpler to run than a federal one. A federal corporation with a fully American board still cannot satisfy CBCA section 105(3). Our Ontario incorporation checklist sets out the steps, costs and timelines, and the guide to Ontario business structures compares the forms.
One warning specific to US owners: a US LLC is not a clean fit on the Canadian side, because Canada generally treats it as a corporation while the United States treats it as fiscally transparent. We deal with that mismatch separately in our guide to the LLC in Ontario question, and it should be settled before anything is filed.
What is Regulation 105 withholding, and how do you avoid the 15 percent hit?
This is the rule that generates the first angry phone call. Section 105 of the Income Tax Regulations reads: “Every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, shall deduct or withhold 15 per cent of such payment.”
Three points make it worse than it sounds.
It applies to anyone doing business in Canada, regardless of the treaty. The CRA is explicit in Information Circular IC75-6R2 that “Canada does not relinquish its right to Regulation 105 withholding through income tax treaties, only through the waiver process.” A US company with no permanent establishment, whose profits the treaty exempts entirely, still has 15 percent held back at source.
It is not a final tax. The CRA’s guidance for non-resident corporations states that the withholding “is a payment on account of the corporation’s potential tax liability to Canada. To pay any balance owing or to obtain a refund of any overpaid amounts, the corporation must file a T2 return with the CRA.” So the money comes back, eventually, through a Canadian return that the company may not otherwise have wanted to file.
The waiver has a lead time. A treaty-based waiver is applied for on Form R105. The CRA asks that applications “be submitted at least 30 days prior to the commencement of the services in Canada or 30 days prior to the initial payment for the related services,” and commits to processing properly documented submissions received inside that window. The CRA publishes no service standard for how long processing itself takes, so plan around the 30-day filing rule rather than a promised turnaround. There is no general de minimis exemption. The only simplified route, for self-employed non-resident artists and athletes earning no more than CAN$15,000 in the calendar year, is not available to corporations.
What if you send employees to Canada?
Regulation 105 does not apply to employment income. That falls under Regulation 102 and paragraph 153(1)(a) of the Act, and the CRA’s position is blunt: “any employer, including a non-resident employer, is required to withhold amounts on account of the income tax liability of an employee in Canada even if the employee is likely to be exempt from tax in Canada because of a tax treaty.”
The relief is the non-resident employer certification regime. A US employer applies on Form RC473, ideally at least 30 days before a qualifying employee starts work in Canada. Certification runs for up to two calendar years. It relieves the payroll withholding only for a “qualifying non-resident employee,” defined by the CRA as someone resident in a treaty country, exempt under the treaty, who “works in Canada for less than 45 days in the calendar year that includes the time of the payment or is present in Canada less than 90 days in any 12-month period that includes the time of the payment.”
Two traps sit inside that relief. Certification does not remove Canada Pension Plan or Employment Insurance obligations, which are assessed separately. And certification comes with a filing commitment: the employer agrees to file Canadian returns for the covered years, including Schedules 91 and 97 where it is a corporation carrying on business in Canada. Employees who do not qualify can still apply individually for a waiver on Form R102-R.
If the US company hires in Ontario rather than sending people north temporarily, Ontario employment law applies to those employees from day one. That includes the statutory ban on non-competes, which we cover in our article on the non-compete agreement Ontario rules, and the broader obligations described on our employment compliance page.
Which registrations does a US company actually need in Ontario?
Provincial registration runs on its own logic and has nothing to do with the tax treaty. A company can be outside the treaty definition of a permanent establishment and still be doing business in Canada for Ontario licensing purposes.
Under Ontario’s Extra-Provincial Corporations Act, a corporation incorporated outside Canada is a Class 3 corporation, and section 4(2) provides that “no extra-provincial corporation within class 3 shall carry on any of its business in Ontario without a licence under this Act to do so.” Section 1(2) says a corporation carries on business in Ontario if it “has a resident agent, representative, warehouse, office or place where it carries on its business in Ontario,” holds a non-security interest in Ontario real property, or “otherwise carries on its business in Ontario.”
The exclusion in section 1(2) is narrower than most US counsel assume. Section 1(3) provides only that a corporation does not carry on business in Ontario “by reason only that it takes orders for or buys or sells goods, wares and merchandise, or offers or sells services of any type, by use of travellers or through advertising or correspondence.” There is no bank-account carve-out and no independent-contractor carve-out in the Ontario Act. Those exceptions exist in some other provinces’ statutes, and importing them into an Ontario analysis is a mistake we see repeatedly.
Two consequences follow from getting this wrong. Section 20(1) makes it an offence, with a fine of up to $25,000 for a corporation and up to $2,000 for a director, officer or Ontario representative who authorised or acquiesced in it. More practically, section 21(1) provides that an unlicensed Class 3 corporation “is not capable of maintaining any action or any other proceeding in any court or tribunal in Ontario in respect of any contract made by it.” A company can cure the default and then sue, but discovering the problem at the moment you need to enforce a contract is not a good week. If enforcement is already on the horizon, our contract lawyer page explains how we approach it.
A licensed Class 3 corporation must also maintain, at all times, an Ontario-resident individual over 18 or an Ontario-head-office corporation as its agent for service under section 19(1). The initial extra-provincial licence fee published by Ontario is $330 online or by mail, with a five-business-day service standard online, and the extra-provincial initial return and annual return carry no fee.
Which number do I need: BN, OCN, GST/HST account, or EIN?
This is the question that generates the most confused email threads, because four different governments issue four different numbers and none of them replaces another.
| Number | Issued by | What it is | When a US company needs it |
|---|---|---|---|
| Business Number (BN) | Canada Revenue Agency | A unique nine-digit number identifying the business to federal programs | Whenever any federal program account is needed. A non-resident corporation registers through the CRA’s Non-Resident Business Registration form or Form RC1 |
| Program account | CRA or CBSA | The BN plus a two-letter identifier and four-digit reference, such as 123456789 RT 0001 | RT for GST/HST, RP for payroll, RC for corporate income tax, RM for import-export |
| Ontario Corporation Number (OCN) | Ontario, Central Production and Verification Services Branch | The unique number Ontario assigns to a corporation on its record | On Ontario incorporation or on extra-provincial licensing. It is a provincial registry number, not a tax number |
| EIN | US Internal Revenue Service | The US federal employer identification number | For US tax and payroll. It has no Canadian effect at all |
The RM import-export account deserves a note of its own. As of October 21, 2024, that program account is administered by the Canada Border Services Agency rather than the CRA, and a non-resident business must obtain its nine-digit BN from the CRA before it can register in the CBSA portal. Attempting it the other way round produces a registration error. If the US side of the numbering question is what is unclear, our article on whether sole proprietors need an EIN covers the American half.
GST/HST registration follows a separate threshold. The CRA requires registration where you are not a small supplier and you make taxable supplies in Canada, and a business stops being a small supplier once it exceeds $30,000 in taxable supplies. Exceed it in a single calendar quarter and the effective date of registration is “no later than the day of the supply that made you exceed $30,000,” with 29 days to register. Crucially for a US company, the CRA states that “you may be carrying on business in Canada even if you do not have a permanent establishment in Canada.” The GST/HST test and the income tax test are not the same test, and a company can be inside one and outside the other.
A non-resident registrant without a permanent establishment in Canada generally has to post security with the CRA. That security is 50 percent of estimated net tax in year one and 50 percent of actual net tax afterward, with a published minimum of $5,000 and a maximum of $1 million. It is waived where estimated Canadian supplies are $100,000 or less annually and annual net tax falls between $3,000 remittable and $3,000 refundable.
How does a US company sell into Canada as a non-resident importer?
Selling goods is the one form of doing business in Canada that carries its own separate registration track. A US company can be the importer of record on its own shipments without any Canadian establishment. CBSA Memorandum D17-1-21 states that “non-resident importers have the same obligations as any resident importer, owner or consignee of imported goods,” and that they “usually do not maintain a place of business in Canada but may forward records to a licensed customs broker.”
Three requirements now govern that route.
An RM account, obtained in the right order. CBSA states that a business importing commercial goods “need[s] to have an import-export program (RM) account,” and that “non-resident businesses must request their BN9 from the CRA before attempting to register their business in the portal.”
CARM registration. The CBSA Assessment and Revenue Management system “is the official system of record for the collection of duties and taxes for commercial goods imported into Canada,” and CBSA requires that a business account manager register the business in the CARM portal to continue transacting. A customs broker cannot register a client’s business on the client’s behalf.
Your own financial security, if you want Release Prior to Payment. This is the change that caught the most importers. Since October 21, 2024, an importer enrolling in RPP “must either obtain a written security agreement from a financial security provider or post financial security deposit themselves,” and although brokers can apply credits, they “cannot post a security deposit on behalf of their importer clients, nor can importers use their customs broker’s security.” CBSA calculates the amount from the highest monthly accounts receivable over the prior 12 months, with a minimum of $5,000 per importer program account and a maximum of $10 million. A written security agreement must cover at least 50 percent of the calculated amount.
Do not conflate that CBSA security with the CRA’s GST/HST security. They are different amounts, posted to different agencies, for different purposes, and a company selling goods into Canada can owe both.
The GST arithmetic at the border is where registration pays for itself. GST applies at 5 percent on imported goods, calculated on the customs value plus any duties. A registrant that is the importer of record pays the tax on import, claims an input tax credit to the extent the goods are used in commercial activities, and charges GST/HST on the resale. An unregistered importer also pays the tax on import but, in the CRA’s words, “cannot claim ITCs for the GST or the federal part of the HST you pay at the time of importation.” The unregistered non-resident importer simply eats the 5 percent as a cost of goods.
One further point for digital sellers. The simplified GST/HST registration created for the digital economy on July 1, 2021 is not available to a company supplying qualifying goods in Canada. The CRA’s own guidance is that such a business “is required to register for the GST/HST under the normal GST/HST regime.” Physical goods and inventory held in a Canadian warehouse take the normal route.
What must you file when doing business in Canada under treaty protection?
Filing is not optional merely because the tax is nil. The CRA states that “a non-resident corporation must file a T2 return with the Canada Revenue Agency (CRA) if the corporation carried on business in Canada or disposed of a taxable Canadian property (TCP) at any time in the tax year,” and that “this requirement applies even if any profit(s) or gain(s) realized are claimed by the corporation to be exempt from Canadian tax due to the provisions of a tax treaty.”
The treaty exemption is claimed on Schedule 91, Information Concerning Claims for Treaty-Based Exemptions. Schedule 97, Additional Information on Non-Resident Corporations in Canada, is required of all non-resident corporations that must file. Non-resident corporations are outside the mandatory electronic filing rule and file in Canadian funds.
The penalty is structured unusually, and it is easy to quote wrongly. Under subsection 162(2.1), a non-resident corporation that files late faces “the greater of” the ordinary late-filing penalty under subsection 162(1) or (2) and “an amount equal to the greater of $100 [or] $25 for each complete day that the return is late, up to a maximum of 100 days.” The ordinary penalty is 5 percent of the unpaid tax due on the filing deadline plus 1 percent per complete month, to a maximum of 12 months. A nil-tax company therefore has no percentage exposure, but it still faces the daily amount, which is what turns a forgotten treaty-based return into a real bill.
Corporate income tax rates, once Canada does have taxing rights, are published separately by each government. The CRA states that the basic Part I rate is 38 percent of taxable income, “28% after the federal tax abatement,” and that “after the general tax reduction, the net tax rate is 15%.” Ontario publishes its general rate as 11.5 percent, unchanged since July 1, 2011. Neither government publishes a combined figure; 26.5 percent is the arithmetic sum of the two published rates rather than an official number.
Two further compliance items sit outside the tax system. Federal corporations report individuals with significant control, and we cover the Canadian and US versions of that in our article on beneficial ownership reporting requirements. Companies moving controlled technology or technical data across the border should read our page on export control compliance before the first shipment, because those rules bind US exporters regardless of where the buyer sits.
Frequently Asked Questions
Does selling to Canadian customers by itself mean I am doing business in Canada?
Not for income tax purposes, in most cases. Article VII(1) of the treaty taxes business profits only in the company’s home state unless there is a permanent establishment in the other. Selling from the United States, shipping across the border and invoicing in US dollars does not create one. The analysis changes once you place people, premises, inventory under your control, or a contract-signing agent in Canada, or once a services engagement runs 183 days or more.
How long can a US employee work in Canada before there is a problem?
There are two separate clocks and they do not match. For the services permanent establishment under Article V(9), the threshold is 183 days or more in any twelve-month period. For payroll withholding relief under the non-resident employer certification regime, the employee must work in Canada fewer than 45 days in the calendar year or be present fewer than 90 days in any 12-month period. An employee can therefore be well inside the treaty threshold and still outside the payroll relief.
Can I get the 15 percent Regulation 105 withholding back?
Yes, but through a Canadian return rather than automatically. The CRA treats the withholding as a payment on account of the corporation’s potential Canadian tax liability, and a non-resident corporation must file a T2 return to obtain a refund of any overpaid amount. The alternative is to apply for a treaty-based waiver on Form R105 before the services begin, which the CRA asks to receive at least 30 days ahead.
Do I need to register extra-provincially in Ontario if I have no office there?
It depends on what else you have. The Extra-Provincial Corporations Act says a Class 3 corporation carries on business in Ontario if it has a resident agent, representative, warehouse, office or place of business there, holds an interest in Ontario real property, or otherwise carries on business in Ontario. Taking orders or selling goods or services by travellers, advertising or correspondence alone is excluded. Anything more permanent than that should be assessed against the statute rather than assumed.
Is a Canadian subsidiary better than a branch?
Neither is better in the abstract. A branch is taxed on the profits attributable to its Canadian permanent establishment and carries branch tax, capped by treaty at 5 percent after a cumulative $500,000 allowance. A subsidiary is a separate Canadian taxpayer with its own filings, its own directors and its own liability shield. The choice usually turns on whether early Canadian losses should flow back to the US parent, on customer and lender expectations, and on how long the Canadian operation is expected to last.
Do I need a Canadian-resident director?
Not for an Ontario corporation. Ontario repealed its 25 percent resident-Canadian director requirement effective July 5, 2021. A federal corporation under the Canada Business Corporations Act still requires at least 25 percent resident-Canadian directors, or at least one where there are fewer than four. That difference alone pushes many wholly US-owned Canadian subsidiaries toward an Ontario incorporation.
When do I have to register for GST/HST?
Once you are no longer a small supplier and you make taxable supplies in Canada. The small supplier threshold is $30,000. Exceed it in a single calendar quarter and your effective registration date is the day of the supply that took you over, with 29 days to register. A non-resident can be carrying on business in Canada for GST/HST purposes without having a permanent establishment for income tax purposes, so do not read one conclusion across to the other.
What happens if I import into Canada without registering for GST/HST?
You still pay the 5 percent GST at the border, but you cannot recover it. The CRA states that a non-registrant importer of record pays the tax on importation and cannot claim input tax credits for it. For a company importing regularly, that converts a recoverable tax into a permanent margin reduction, which is usually the strongest commercial argument for registering.
Conclusion
Doing business in Canada is less about a single decision than about knowing which line you are near. The treaty line is the permanent establishment: fixed place, dependent agent, 12-month construction project, or 183 days of services. The provincial line is Ontario’s licensing test, which counts a representative or a place of business and does not care about the treaty. The sales-tax line is $30,000 and uses its own definition of carrying on business. The customs line is the RM account, CARM registration and your own security.
None of those lines moves because the others did. The companies that get into trouble are usually the ones that cleared one test, assumed it settled the rest, and found out at audit or at the border that it did not. Checking all four before the first Canadian contract is signed costs very little. Reconstructing them afterward costs a great deal more.
How Mayo Law Can Help
Mayo Law is a cross-border firm with offices in Toronto and New York. Joseph Mayo, our principal attorney, is licensed in both Ontario and New York, which means the Canadian registration question and the US structuring question can be handled in one conversation rather than relayed between two firms. That is the practical reason clients doing business in Canada from the United States come to us.
For US companies expanding north, we advise on entity choice and Canadian structuring, extra-provincial licensing and agent-for-service arrangements, permanent establishment analysis and the documentation that supports it, Regulation 105 and Regulation 102 planning including waiver and certification applications, commercial contracts governed by Ontario law, and the immigration side when people need to move. Our cross-border business and immigration page and our business and corporate law practice page set out the scope in more detail, and our Toronto corporate lawyer page covers the Ontario side specifically. For tax questions that reach into personal residence rather than corporate presence, see our article on moving from Canada to the US tax implications.
Disclaimer
This article is provided for general information only and is not legal, tax or accounting advice. Reading it does not create a solicitor-client or attorney-client relationship with Mayo Law or with any of its lawyers. Tax rates, government fees, filing thresholds and administrative policies change, and the figures here are stated as of September 2026 from the official sources cited in the accompanying figures. You should obtain advice on your own facts before acting. Legal services are provided in Ontario by Mayo Law PC and in New York by Joseph Mayo PLLC.
