Who this is for
- Canadian corporations sending employees who live in Canada to temporary US client or job sites
- Canadian-resident employees doing part of their work in the US
Not covered here
- Immigration or work authorization
- Detailed US state payroll registration
- Detailed employee or corporate return preparation
Do employees owe US tax for a few weeks of work?
US-work pay can be taxed from day one. Treaty Articles XV and XXIX offer federal relief to Canadian residents but preserve US taxation of its citizens.
| US-work pay and presence | When the treaty exempts the pay from US federal tax |
|---|---|
| Pay is at most $10,000 in the year | The pay qualifies under Article XV's amount test, regardless of the employer's US permanent establishment. |
| Pay exceeds $10,000 | The employee is present in the US no more than 183 days in any 12-month period beginning or ending in the relevant fiscal year; the pay is not paid by or for a US resident and is not borne by the employer's US permanent establishment. |
Count pay for US duties, not the whole Canadian salary. For ordinary salary, allocate by US workdays over all paid workdays; some benefits differ. Count all US presence days, including nonworking days. A client's payment of the company's invoice does not alone make it the wage payer; check whether a US branch or affiliate pays or bears the cost. See Working across the border for personal returns.
A longer stay can make an employee US-resident under domestic law. If also Canadian-resident, apply Article IV's residence tie-breaker before claiming Article XV.
Do we need US payroll or federal withholding for those days?
US-work wages of a nonresident employee of a foreign employer generally require federal withholding and reporting. Canadian payroll deductions do not remove that duty.
| Situation | Federal payroll treatment to check |
|---|---|
| Eligible nonresident employee claims a treaty withholding exemption | Obtain Form 8233 with a US SSN or ITIN, or a pending SS-5 or W-7 copy. The employee completes Part II and signs Part III; the employer reviews the claim, signs Part IV if supported, and sends it to the IRS within 5 days. Wait at least 10 days after mailing before stopping withholding. Withhold if eligibility is doubtful or changes, or if the IRS objects. Treaty-exempt wages generally go on Form 1042-S; state wages may still need Form W-2 (IRS). |
| Employee cannot claim an exemption | Withhold on taxable US-work wages using the nonresident employee rules and obtain Form W-4 (IRS). |
Plan Form 8233 before the first US payday. A Canadian certificate of coverage documents a qualifying exemption from US Social Security and Medicare. Check state withholding and unemployment separately.
Do states follow the treaty or tax from day one?
The treaty's wage exemption covers federal tax; states can tax in-state work. New York can tax nonresidents' New York work pay and requires employers transacting business there to withhold on it (withholding rules).
Under New York's 14-day policy, a qualifying employer is not penalized for failing to withhold, but the wages remain taxable. If workdays exceed the limit or the assignment changes, withholding starts on subsequent New York wages. Form 8233 does not settle state tax. New York says treaty-exempt corporate income can face its franchise tax when state nexus rules apply. See Employees in another state for registration.
When do employee visits create a permanent establishment?
First check whether the corporation qualifies for treaty benefits under Article XXIX A. Canadian incorporation alone does not settle this. The treaty's Article V has several permanent-establishment tests:
| Activity | Permanent-establishment trigger |
|---|---|
| Fixed place | Business carried on through it can create a permanent establishment, unless an Article V(6) exception applies. |
| Dependent representative | Habitually concluding contracts in the corporation's name can create a permanent establishment; an independent agent acting in the ordinary course generally does not. |
| Building site, construction or installation project | The project lasts more than 12 months. |
| Services without another permanent establishment | An individual performs US services and is present for at least 183 days in any 12-month period, while those services produce more than 50% of the corporation's gross active business revenue during the presence periods; or the corporation provides US services for at least 183 days in any 12-month period on the same or connected project for qualifying US customers. |
For the project test, count a day of US services once, even with several employees; exclude days without services. It covers US-resident customers or another customer's US permanent establishment when the services concern it. Article VII permits US federal tax on profit attributable to the company's US permanent establishment.
Filing can start earlier than tax. The IRS says US services can create a US trade or business before a permanent establishment exists. Form 1120-F may then be required even without US federal profit tax. It is generally due the 15th day of the sixth month after year-end without a US office, or the 15th day of the fourth month after year-end with one. See Canadian corporation US tax return for the filing decision and treaty disclosure.
Do Canadian income tax, CPP and EI deductions continue?
Canadian deductions often continue on a temporary US assignment, but each has its own rule. CRA's employment-outside-Canada guidance says Canadian income tax may still need to be deducted; an employee expecting a Canadian foreign tax credit can request a letter of authority to reduce deductions.
| Deduction | Canadian rule to check |
|---|---|
| CPP | Deduct if the employee usually reports to the employer's Canadian place of business, or is Canadian-resident and paid from that place. |
| EI | Deduct if the employer is in Canada, the employee ordinarily lives there, the work would otherwise be insurable, and the work is not insured where performed. |
For a worker normally covered in Canada and sent to the US by the same employer, the social security agreement can keep CPP coverage for an assignment expected to last no more than 60 months. It does not decide EI. For Québec employees, check QPP and QPIP and request the Québec–US certificate.
Unremitted withholding can reach individuals. Under IRC §6672, a responsible officer or director who willfully fails to pay US withheld tax can owe a penalty equal to it; collection generally runs 10 years after assessment. Under Income Tax Act §227.1, Canadian directors can owe unremitted income-tax deductions, subject to statutory recovery conditions, due diligence and proceedings begun within 2 years after they cease to be directors.
What records of US days should we keep?
Record each employee's presence days, workdays, location, project, customer and pay. Keep timesheets, payroll, assignments, invoices, cost recharges, Form 8233 and coverage certificates.
Track project days across employees and years.
Example
Illustrative figures; all money is US dollars.
Technician: 20 days in Michigan
A Canadian treaty resident who is not a US citizen earns US$8,000 for 20 workdays in Michigan. If that is all their US-work pay for the calendar year, the treaty amount test exempts it from US federal income tax. To stop federal withholding, the eligible employee gives the employer Form 8233; the employer checks Michigan payroll. Canadian income tax and CPP generally continue if CRA's conditions hold; EI depends on US insurability.
Engineer: 190 days on one US project
An engineer provides services on 190 days within 12 months for one US-resident customer's connected project. Assuming the corporation qualifies for treaty benefits, it meets the treaty's services permanent-establishment test. It files Form 1120-F and calculates US tax on profit attributable to that establishment. The employee's pay needs its own treaty and withholding analysis.
Employee: 20 days in New York
An employee works 20 days in New York and earns US$8,000 for that work. The treaty amount test may remove federal income tax, but New York can tax the work pay. At 20 days, the employer cannot use New York's 14-day policy; if it transacts business there, it withholds on New York wages even with Form 8233.
Different for you?
- The employee lives in one country and regularly works in the other: see Hiring an employee across the border.
- You need state payroll registration: see Employees in another state.
- Your company has a US permanent establishment or a treaty-protected US trade: see Canadian corporation US tax return.
- The employee needs to file a personal return: see Working across the border.
- Past US project years were not filed: see Missed US returns for a Canadian corporation.
- Several states, related companies or cost recharges are involved: get cross-border tax help before deciding where to withhold and file.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Canada–US treaty employment income limit in the country where work is performed Article XV(2)(a): remuneration for employment exercised in the other country does not exceed this amount in that other country's currency, applied per calendar year (Treasury Technical Explanation of the Fifth Protocol); separate from the alternative 183-day test | $10,000 | Department of Finance Canada: Canada–US tax convention, Article XV(2)(a) Checked |
| Canada-US treaty employment short-stay day limit Measured within a rolling twelve-month period starting or ending in the relevant tax year | 183 days | Canada-US income tax convention, Article XV Checked |
| Canada-US treaty employment short-stay measurement period Period starts or ends in the relevant tax year | 12-month period | Canada-US income tax convention, Article XV Checked |
| Employer deadline to forward an accepted Form 8233 to the IRS Within 5 days of accepting the employee's Form 8233, the withholding agent forwards a signed copy to the IRS | 5 days | IRS: Instructions for Form 8233, Withholding Agent's Responsibilities Checked |
| Wait after mailing accepted Form 8233 to the IRS Minimum wait after properly mailing Form 8233 before applying the treaty withholding exemption | 10 days | IRS: Instructions for Form 8233 Checked |
| New York nonresident short-visit withholding policy Qualifying employers are not penalized for failing to withhold on nonresident wages when the employee's primary work location is outside New York and the employer reasonably expects, and the employee works, 14 days or fewer in New York in the calendar year; exceptions apply. The wages remain taxable. | 14-day | New York Department of Taxation and Finance: TSB-M-12(5)I Checked |
| Canada–US treaty services PE revenue test Article V(9)(a): services PE if an individual is present 183 days or more in any 12-month period and more than this share of the enterprise's gross active business revenues in that period comes from that individual's services there | 50% | Department of Finance Canada: Canada–United States Tax Convention (consolidated) Checked |
| Form 1120-F filing date without a US office General filing date for a foreign corporation without a US office or place of business | the 15th day of the sixth month after year-end | IRS: Instructions for Form 1120-F Checked |
| Form 1120-F filing date with a US office General filing date; special rule for a June 30 fiscal year-end | the 15th day of the fourth month after year-end | IRS: Instructions for Form 1120-F Checked |
| General trust fund recovery penalty collection period Generally measured from penalty assessment; suspensions and extensions can apply | 10 years | IRS: Trust Fund Recovery Penalty manual Checked |
| Director liability limit after leaving office Income-tax recovery proceeding and, by statutory cross-reference, CPP and EI recovery proceedings; GST/HST director assessment has the same period under Excise Tax Act section 323(5) | 2 years | Income Tax Act: Director liability Checked |
Primary sources
- Canada–US tax convention, consolidated text
- IRS: Persons employed by a foreign person
- IRS: Source of income—personal service income
- IRS: Publication 515
- IRS: Instructions for Form 8233
- IRS: Foreign corporation Form 1120-F filing responsibilities
- CRA: Employment outside Canada
- SSA: US–Canadian Social Security Agreement
- US Treasury: Canada treaty protocol technical explanation
- Revenu Québec: Employment outside Canada
- Retraite Québec: US certificate of coverage
- New York: Nonresident income tax FAQs
- New York: Withholding tax requirements
- New York: Corporate Tax Reform FAQs
About this guide
Edited and reviewed by Di Lu, CPA on . It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.