A Canadian Business Selling Into the US: When American Customers Create American Tax — and the Three Different Nexus Rules That Decide

The Canadian company with growing US revenue is usually asking one question — do we owe US tax? — that has three answers because three regimes apply. Federal income tax: the statute taxes a foreign corporation on income effectively connected with a US trade or business, but the treaty overrides — Article VII reserves business profits to Canada unless the company operates through a permanent establishment in the US: a fixed place of business (office, branch, workshop), a dependent agent habitually concluding contracts, or construction and service-presence patterns the article and its protocols enumerate (including the services-PE rule that can deem an establishment from sustained personnel presence — 183 days of services in a twelve-month period on the same or connected projects). No PE, no US federal income tax on the profits — remote selling, shipping into the US, US customers served from Canada, even US-based independent sales reps and third-party warehouses generally stay on the safe side, with the fact patterns around Amazon-style inventory placement deserving specific analysis. The protective posture matters even at zero: a treaty-based return (Form 1120-F with Form 8833) discloses the position, starts limitation periods, and — decisively — preserves the right to deductions if the IRS later disagrees, since a foreign corporation that never filed can be taxed on gross receipts; the protective filing is cheap insurance every meaningfully-US-selling company should price. State income and franchise taxes: states are not treaty parties — a company with no federal PE can still meet a state's economic nexus standard (factor-presence thresholds, receipts-based tests) and owe state income or franchise tax, with exposure varying wildly by state and the federal public-law protections for tangible-goods solicitation providing a narrow shield the digital economy mostly outgrew. Sales and use tax: the third rulebook, post-Wayfair — economic nexus at thresholds commonly around US$100,000 of sales into a state (transaction-count tests have faded in many states) obliges registration, collection, and remittance of that state's sales tax on taxable sales, treaty irrelevant, physical presence unnecessary, marketplace rules shifting the burden where platforms sell for you. A Canadian SaaS or goods seller can therefore correctly conclude: no federal income tax (no PE), a protective 1120-F filed anyway, state income tax in two aggressive states, and sales tax registrations in eleven — four different answers, all simultaneously right.

Key takeaways

• Federal: Article VII + PE analysis. Fixed place, dependent contract-concluding agent, construction thresholds, and the services-PE (183 days of personnel presence on connected projects in twelve months) are the triggers; remote sales and independent distributors are not.
• The protective 1120-F/8833: filed on the treaty position even with zero tax — discloses, starts the clock, and preserves deductions against a lost PE argument. The deadline discipline matters; late protective filings lose the protection that names them.
• Inventory and people are the federal risk factors to monitor: owned or controlled US warehousing arrangements, employees or dependent agents on the ground, and sustained service delivery in-country are where no-PE conclusions erode — reviewed annually as the business grows.
• States tax on their own nexus: economic-presence standards reach treaty-protected companies; the tangible-goods solicitation shield is narrow and inapplicable to services and SaaS; exposure is state-by-state arithmetic, not a single analysis.
• Sales tax is thresholds and registration: ~US$100,000-into-the-state standards, taxability varying by product type and state (SaaS taxable in some, exempt in others), marketplace-facilitator rules covering platform sales, and non-compliance accruing as uncollected tax the seller eats later.
• The Canadian side is unaffected in principle and active in practice: profits stay taxable in Canada; any US federal or state income taxes interact with Canadian foreign tax credit and deduction rules; and GST/HST zero-rating on exports runs its own track.

The annual nexus review

Growing US revenue makes this a recurring diagnostic, not a one-time memo: a two-page review each year mapping (1) PE risk factors — people, places, inventory, agents, service days; (2) state income-tax footprint against each active state's standard; (3) sales-tax thresholds crossed, registrations current, taxability of the product mix; and (4) the protective filing's continuity. Companies that institutionalize the review make structure decisions — where the new hire sits, how the warehouse contract reads, whether the US subsidiary's time has come — with the tax map open; companies that don't discover their map in a state's questionnaire.

Worked example

A Kitchener industrial-software company sells US$4.2 million into the US: licenses and remote implementation from Ontario, two trade shows, an independent Chicago reseller, and — new this year — a support engineer doing on-site work totalling 121 days across three client projects. Federal: no fixed place, the reseller is independent, and the service days sit under the 183-day services-PE line on connected-project analysis — no PE; a protective 1120-F with Form 8833 files on time, as it has for three years, preserving deductions against any later disagreement about the engineer's calendar. States: the factor-presence review flags two states whose receipts thresholds their sales cross — state income tax registrations and modest filings follow, treaty notwithstanding. Sales tax: the threshold sweep shows nine states over US$100,000; SaaS taxability splits them five taxable, four exempt; five registrations and a tax-engine subscription later, collection runs correctly, and the reseller's marketplace question is papered. Next year's review has one agenda item circled in advance: the engineer's day count, trending toward the line that would change the first answer.

Official sources

"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." — Canada-United States Tax Convention, Article VII, https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

"FDAP income is taxed at a flat 30 percent (or lower treaty rate, if qualify) and no deductions are allowed against such income. ... Effectively Connected Income, after allowable deductions, is taxed at graduated rates." — Internal Revenue Service, Taxation of Nonresident Aliens, https://www.irs.gov/individuals/international-taxpayers/taxation-of-nonresident-aliens

Practitioner note

The selling-into-the-US question deserves its three-part answer every time, because the comfortable federal conclusion — no PE, treaty protection — says nothing about the states and less about sales tax, and the protective 1120-F that guards it is the cheapest insurance in corporate cross-border practice. Our deliverable is the annual nexus map with the trend lines marked: the service-day counts, the inventory arrangements, and the thresholds approaching, so structure decisions get made with the map open instead of by questionnaire.

See also: Browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the US nexus program — the PE analysis and protective 1120-F/8833 filings, the state income-tax footprint review, sales-tax threshold sweeps and registrations, and the annual monitoring of the factors that move each answer. See cross-border pricing or book a call.