Doing business in U.S.? Beware 183-day rule

Employers, employees need to be aware of ‘significant’ changes to income tax treaty
By Jennifer Horner and Kerry Gray
|Canadian HR Reporter|Last Updated: 01/20/2009

Anyone who travels internationally for business has heard something about the 183-day test. But recent changes to the Canada-United States income tax treaty mean it’s now crucial for employers and frequent travellers to understand what the rule means.

These changes will come into effect in less than one year — on Jan. 1, 2010. When they do, corporations and employees will feel the squeeze of some significant and unexpected tax issues. Documenting the number of days people spend working outside of Canada is about to become much more important, both to employees and the businesses they represent.

It all comes down to the way “permanent establishment” is defined — a new test is about to change how this works. When a Canadian company carries on business in the U.S., those activities will only be taxable in the U.S. if they are “sufficiently substantial.” Once business activities cross that threshold, they’ve created a permanent establishment (PE) in the U.S. And that means the Canadian business is subject to U.S. tax, or vice versa.