The Cross-Border Business Traveler: When a Few Days in the Other Country Become a Tax Filing

An employee who lives in one country and works some days in the other is taxable in the other country on the wages for those days, unless the treaty says otherwise. Article XV of the Canada-US treaty says otherwise for most short trips, but only if specific conditions are met, and the employer's withholding obligation does not always follow the employee's exemption. Frequent travelers, project staff, and executives who split time between offices are the files where this goes wrong.

Key takeaways

• Under Article XV, employment income earned in the other country is exempt there if either (a) it does not exceed $10,000 in that country's currency for the year, or (b) the employee is present in the other country for 183 days or fewer in any twelve-month period and the pay is not borne by an employer resident in that country or a permanent establishment there.
• The 183-day test counts days of presence for any reason, not just working days, over any rolling twelve-month window, not a calendar year.
• Employer withholding is a separate obligation. Canada requires non-resident employers to withhold on days worked in Canada unless they obtain a waiver or certify under the non-resident employer program. The US requires withholding on US-source wages unless the employee provides Form 8233 claiming the treaty exemption.
• Travel days count toward the US substantial presence test whether or not the wages are exempt.
• An employee's presence can create a permanent establishment for the employer if it exceeds 183 days on a single project under the treaty's services rule.

Article XV in practice

The $10,000 rule. A Toronto employee who attends conferences and meetings in the US and earns, on a days-worked allocation, $8,000 USD attributable to US workdays is exempt from US tax on that amount. The allocation is wages multiplied by US workdays over total workdays. A $200,000 employee with 12 US workdays out of 240 has about $10,000 of US-source wages, right at the line.

The 183-day rule. Above $10,000, the exemption requires presence of 183 days or fewer in any twelve-month period and pay borne by a non-US employer with no US permanent establishment. A Canadian company's employee on a nine-month project at a US client site fails the day test and is taxable in the US on the US-workday wages from day one, not from day 184. A US subsidiary that reimburses the Canadian parent for the employee's cost bears the pay, and the exemption fails on that ground too.

Employer withholding

Canada. A US employer sending employees to Canada must withhold Canadian tax on Canadian workdays under Regulation 102 and remit it, even if the employee will be exempt under the treaty, unless the employer obtains a Regulation 102 waiver for the employee or is certified under the non-resident employer certification program (which covers employees exempt under the treaty who are in Canada fewer than 45 workdays in a year or 90 days in a twelve-month period). Without the waiver or certification, the employer withholds and the employee files a Canadian return to recover it.

United States. A Canadian employer sending employees to the US must withhold US federal (and state) tax on US-source wages unless the employee files Form 8233 claiming the Article XV exemption, which the employer submits to the IRS. Without it, withholding applies and the employee files a 1040-NR to recover it. State treatment varies: most states follow the federal exemption, but some (New York among them) have their own thresholds.

The substantial presence test

Days in the US for business count in full toward the substantial presence test. An employee who spends 130 days a year in the US on exempt business trips meets the test in the third year and must rely on the closer connection exception (Form 8840) or the treaty tie-breaker to remain a non-resident. The wage exemption and the residency question are independent.

Permanent establishment

Under Article V(9), an enterprise has a permanent establishment in the other country if its employees provide services there for more than 183 days in a twelve-month period on the same or a connected project and more than 50% of the enterprise's gross active business revenue in that period is from those services. A Canadian consultancy whose staff spend most of a year at a US client can create a US PE, making the firm's attributable profits taxable in the US on Form 1120-F.

Worked example

A Montreal engineering firm sends an engineer to a Houston client for 40 days in year one on a $150,000 salary, then extends the assignment to 220 days across the next twelve months.

• Year one. US-source wages: $150,000 × 40/240 = $25,000, above $10,000. Presence 40 days, pay borne by the Canadian employer with no US PE: exempt under the 183-day rule. Employee files Form 8233 with the employer; employer does not withhold. Quebec and federal Canadian tax apply to all wages.
• Extension. Presence exceeds 183 days in a twelve-month period. The exemption fails for the entire period, not just days after 183. US tax applies to all US-workday wages; the employer withholds; the employee files a 1040-NR and claims a Canadian foreign tax credit. The firm's PE exposure under Article V(9) is triggered if the engineer's services exceed 183 days on the project.

Official sources

"Subject to the provisions of Articles XVIII (Pensions and Annuities) and XIX (Government Service), salaries, wages and other remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State." — Canada-United States Tax Convention, Article XV(1), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

"Non-resident employers, who apply for non-resident employer certification, will not have to withhold and remit tax on the payments they make to non-resident employees who are working in Canada for a limited time and are exempt from tax in Canada under a tax treaty." — Canada Revenue Agency, Non-resident employer certification, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rendering-services-canada/non-resident-employer-certification.html

Practitioner note

The 183-day test is a rolling twelve-month window, not a calendar year, and an assignment that crosses it retroactively removes the exemption for the whole window. We track assignment days for every client with staff crossing the border, and we get the Regulation 102 waiver or non-resident employer certification in place before the first trip rather than after the first CRA letter.

See also: Planning a full move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the Article XV analysis, the Form 8233 and Regulation 102 waiver filings, and the employee's non-resident return in the other country. See cross-border pricing or book a call.