Canadian Corporation Selling to the US: Must It File?

Does selling to US customers mean my Canadian corporation files a US return?

No. A Canadian corporation does not file Form 1120-F merely because customers live in the US. The IRS filing test instead turns on US trade or business activity, certain US-source income whose tax was not fully withheld, a refund claim, or a required treaty disclosure.

These are federal income tax results. A state can impose its own income, franchise or sales tax duties; the treaty does not settle state obligations. US inventory and state taxes addresses stock held in the US. A Canadian corporation's T2 filing remains a separate question.

What makes a Canadian corporation engaged in a US trade or business?

Work done in the US can make a Canadian corporation engaged in a US trade or business even without a US company or office. The IRS says a foreign corporation performing services in the US for any period is generally engaged in a US trade or business; other activities depend on their continuity and the facts (IRS filing guidance).

Review who travels to the US and what each person does there. US employees, a branch, and people who regularly negotiate or fulfill sales there matter. An agent's or contractor's US work can matter too; their title alone does not decide the result. Keep travel dates, work descriptions, contracts, and records of where orders are accepted. The source and tax treatment of service income are covered in when foreign owners owe US tax.

US warehouse stock or fulfilment also calls for a separate trade-or-business review; see US inventory and state taxes for the warehouse and state questions.

A US trade or business is a lower bar than a treaty permanent establishment. The Form 1120-F instructions require a return for a foreign corporation engaged in a US trade or business even if a treaty exempts its business income.

When does the corporation have a US permanent establishment?

The Canada–US treaty generally calls a US permanent establishment a fixed place through which the Canadian corporation carries on business. It also treats a person who habitually concludes contracts in the corporation's name in the US as a permanent establishment, unless the independent-agent rule applies (treaty Article V).

The services rules can create a permanent establishment without an office. One applies when an individual performs services in the US for at least 183 days in any twelve-month period and more than 50% of the corporation's gross active business revenue in that period comes from that individual's US services. The other applies when the corporation provides US services for the same or connected project for 183 days or more in any twelve-month period to a US resident, or to a customer with a US permanent establishment for which the services are provided (treaty Article V(9)). Count rolling twelve-month periods, including periods crossing a tax year.

Treaty access also depends on residence and the limitation-on-benefits article. Canadian incorporation alone does not prove every treaty condition.

With no permanent establishment, do we still file Forms 1120-F and 8833?

Yes, if the Canadian corporation conducted a US trade or business and relies on the treaty to exclude business profits from US federal tax. File Form 1120-F to show the treaty exclusion and attach Form 8833 to disclose the no-permanent-establishment position (IRS instructions; treaty-disclosure regulation).

Complete Form 1120-F item W(1) on page 2 and attach Form 8833, which identifies the treaty article, the US tax rule it changes, the limitation-on-benefits basis, and the income and facts involved (IRS instructions; IRS form). If the corporation has no US trade or business and no other filing trigger, it does not file these forms merely to prove the absence of a permanent establishment. If US tax was withheld, a Form 1120-F refund claim is a separate reason to file; see recovering US tax withheld.

Why file a protective Form 1120-F?

A protective Form 1120-F preserves the Canadian corporation's ability to claim deductions and credits if the IRS later finds taxable US business income. It is useful when US activity is limited or the corporation believes treaty protection applies but the facts could be challenged (IRS instructions; 26 CFR 1.882-4).

Check the protective-return box on page 1, complete its items A–G and the required page 2 questions, and attach Form 8833 when asserting a treaty exemption. An authorized corporate officer signs the return (IRS instructions). A protective return does not replace a full return when the corporation knows it has taxable US income. Without a timely, accurate return, most deductions and credits against effectively connected income can be lost, so the IRS may assess tax on a much larger base than net profit.

When is Form 1120-F due, and can it be extended?

The due date depends on whether the Canadian corporation maintains a US office or place of business, not simply on whether it has US customers or a treaty permanent establishment. The Form 1120-F instructions set these general deadlines:

Special rules apply to some short years and June year ends, and a weekend or legal holiday moves the deadline to the next business day. A corporation with a US office can generally use the automatic extension under regulation 1.6081-5 to file and pay by the 15th day of the sixth month, with a statement attached to its return. For more time to file, it checks Form 7004 line 4 by that date for a further 4-month extension. A corporation without a US office checks Form 7004 line 2 by the 15th day of the sixth month, which generally grants a 6-month filing extension. Form 7004 does not extend the time to pay tax (IRS instructions; Form 7004 instructions).

Does the corporation need an EIN, and does Form 5472 apply?

A Canadian corporation filing Form 1120-F needs its own US employer identification number, or EIN. If it has none, apply using Form SS-4; an applicant with no US residence, principal business place, office or agency cannot use the online EIN application (Form 1120-F instructions; Form SS-4 instructions). A client's EIN is not the corporation's EIN.

Form 5472 is a separate related-party information return, not an automatic result of Canadian ownership. A foreign corporation engaged in a US trade or business may need it for reportable transactions with a related party. The Form 5472 instructions include an exception when the corporation has no US permanent establishment and timely files Form 8833. Another applies only if both parties are non-US persons and their transactions will not generate, in any tax year, US-source or effectively connected income, or an expense, loss or deduction allocable to that income. Check each transaction and exception before concluding no Form 5472 is due.

Which Form W-8BEN-E do we give US clients?

A Canadian corporation generally gives a requesting US payer Form W-8BEN-E to certify foreign entity status; it gives the form to the payer, not the IRS. The corporation must complete the entity classification and other applicable parts accurately, because Form W-8BEN-E does not itself establish that the corporation owes no US tax (IRS instructions).

For an owner-managed company, the Article XXIX A ownership and base-erosion test considers both who owns the shares and deductible payments to nonqualifying persons. Check another available test if that one fails; Canadian incorporation alone does not qualify the company. If a change makes the W-8BEN-E incorrect, notify the payer within 30 days and provide updated documentation (IRS instructions). A completed W-8BEN-E is not a substitute for Form 1120-F or Form 8833 when those filings are required. If a client withheld tax, follow US tax withheld on payments to Canadians.

What if the corporation does have a US permanent establishment?

The Canadian corporation generally files a full Form 1120-F and reports profits attributable to its US permanent establishment. The treaty lets the US tax those profits and allows expenses attributable to the establishment; the IRS instructions apply a 21% federal corporate rate to taxable effectively connected income (treaty Article VII).

The corporation must also check branch profits tax, withholding, and any Form 5472 duty. Canadian tax remains separate; section 126 may allow a foreign business-income tax credit within its limits. The calculation of US effectively connected income belongs in when foreign owners owe US tax.

What are the penalties, and how do we fix missed years?

Late Form 1120-F filing can trigger a penalty on unpaid tax and, more seriously, loss of deductions and credits against US business income. The IRS instructions state a general late-return penalty of 5% of unpaid tax for each month or part month, up to 25%. A separate minimum can apply when a return is more than 60 days late; reasonable cause may remove the penalty. A required Form 8833 omitted by a corporation may bring a US$10,000 penalty per failure (IRS Form 8833). A required Form 5472 not filed or supported by records can bring a US$25,000 penalty, with more if the failure continues after IRS notice (IRS instructions).

For most deduction and credit purposes, 26 CFR 1.882-4 allows a first required return, or a return after an immediately preceding filed year, within 18 months of its ordinary due date. After a missing preceding year, an IRS notice can cut that period short. A waiver is possible only on facts showing reasonable, good-faith failure; knowingly skipping a required return does not qualify.

Reconstruct each missed year separately: US sales and income, staff and contractor workdays, contracts, US premises and inventory, related-party transactions, tax withheld, prior returns, and any IRS notice. Then determine for each year whether a full or protective Form 1120-F and Form 8833 or 5472 was required. File missing returns promptly and preserve the evidence for any reasonable-cause or waiver request. Several missed years or an IRS notice warrant cross-border tax help.

Example

Illustrative only; all money is US dollars. A Canadian corporation earns US$200,000 from US customers and spends US$40,000 serving them. Its employee works at a US-resident client's office for five days; the rest of the work and contract decisions occur in Canada. Assume the corporation meets the treaty's residence and limitation-on-benefits rules, has no US office or dependent agent, and the brief visit creates a US trade or business but no US permanent establishment.

The corporation files Form 1120-F and attaches Form 8833 to claim that its business profits are not taxable by the US under the treaty. A protective filing preserves deductions if the IRS later disputes the facts. US$200,000 minus US$40,000 is US$160,000, but that difference is not automatically US taxable profit; the treaty question comes first. If the corporation instead provides services on the same project for 190 days in a rolling twelve-month period for that US-resident client, Article V(9)(b) deems it to have a US permanent establishment. It then reports the profits attributable to that establishment on Form 1120-F; the US$160,000 difference alone does not measure those profits. The corporation also files its Canadian T2.

Different for you?

• Choosing a structure before selling: compare a Canadian corporation, US LLC and US corporation in US business for a Canadian resident.
• Your corporation owns a US LLC: see Canadian owner of a US LLC.
• You keep stock in US warehouses: review US inventory and state taxes.
• You sell without US stock and need a sales-tax answer: see foreign sellers and US sales tax.
• You need the Canadian side of the return: see filing your corporation's T2 and GST/HST registration.
• You have US staff, contracts concluded in the US, several missed years or an IRS notice: gather sales by year, US workdays, contract records, W-8BEN-E copies and any EIN, then seek cross-border tax help.