Using EORs in Canada: Income Tax and GST/HST Risks for SaaS Providers

February 10, 2026
10:47 am

As businesses increasingly seek to access talent on a global scale, Canada has emerged as a key market for highly skilled professionals, particularly in the technology sector. In recent years, many non-resident enterprises have expanded their activities into Canada, both in terms of their customer base and workforce, while aiming to maintain a minimal or non-existent physical presence in order to limit regulatory and compliance burdens.

To achieve this, organizations frequently engage Canadian workers through Employer of Record (EOR) arrangements, which allow access to local talent while outsourcing payroll administration, employment compliance, and related human resources functions. Although EOR structures offer a flexible and efficient solution for global expansion, they may also give rise to legal, tax, and regulatory risks that are not always immediately apparent.

This paper focuses specifically on EOR arrangements and examines the potential risks associated with their use in Canada, as well as why these risks are particularly relevant for non-resident businesses.[1]

Employer of record (EOR) arrangement

An EOR is a third-party entity that formally employs workers on behalf of a company and typically assumes responsibility for payroll, statutory remittances, and certain human resources functions. While this model is commonly used by foreign companies to engage workers in jurisdictions such as Canada, the use of an EOR does not, in itself, determine how Canadian tax authorities will characterize the underlying relationship between the workers and the foreign company for tax purposes.

Non-resident businesses should therefore carefully assess whether individuals engaged through an EOR create a level of presence in Canada sufficient to give rise to Canadian corporate income tax and/or Canadian sales tax obligations.

Where a foreign enterprise:

directs and controls the work performed by such workers in Canada,
oversees the workers’ day-to-day activities,
benefits economically from their services, and
integrates them into its core business operations,

The Canada Revenue Agency (CRA) would likely conclude that these individual workers are employees or dependent agents of the foreign company, notwithstanding the existence of an EOR arrangement.

Case study: Non-resident SaaS provider with Canadian-based clients and EOR employees

In this article, we chose to present a typical fact pattern involving a non-resident SaaS provider and outline the key considerations in determining whether the provider would be required or not to:

file a Canadian corporate income tax return;
pay Canadian corporate income tax; and
register for and collect the federal GST/HST[2].

Software as a Service (SaaS) is a software delivery model under which users access software hosted by the provider through the internet, typically on a subscription basis. The provider retains ownership and control of the software and infrastructure, while users are granted a right to access and use the software’s functionality without acquiring ownership or a copy of the software.

For purposes of this case study, the SaaS provider (USCO):

is resident of the US[3];
has significant Canadian sales (exceeding CAD 100,000 per year);
engages one or more individuals in Canada through an EOR, each working from a home office;
occasionally provides on-site services in Canada (e.g., training or implementation) on a non-regular basis; and
has no other physical presence in Canada, including no Canadian bank account, office, servers (the SaaS platform is fully hosted outside Canada).

Corporate income tax considerations

Under the Canadian Income Tax Act (ITA), a non-resident entity is required to file a Canadian corporate income tax return if it is carrying on business in Canada. However, the non-resident will generally be subject to Canadian income tax only to the extent that such business is carried on through a permanent establishment (PE) located in Canada, as determined under the applicable tax treaty.

Carrying on business (COB) in Canada

The term “carrying on business” is not defined in the ITA; its meaning has developed through case law. Whether a person’s business is being carried on in Canada is a question of fact to be resolved based on the totality of the taxpayer’s conduct. Historically, courts have viewed the location where profit-producing contracts are entered into as a key, often decisive, factor in determining where a business is carried on.

However, the place of contract formation is not always determinative, particularly where other factors outweigh its significance, including the degree of organization, continuity, and profit-oriented purpose of the activities carried out in Canada. The threshold to be considered COB in Canada, for income tax purposes, is relatively low.

Section 253 of the ITA further deems a non-resident to be COB in Canada notably if:

they produce, create, or manufacture anything in Canada; or
solicit orders or offer anything for sale in Canada through an agent or servant.

Where a non-resident entity has a significant Canadian clientele and actively solicits the Canadian market, it will generally be considered COB in Canada. As a result, the non-resident will be required to file an annual Canadian corporate income tax return (T2), even if it may ultimately not be liable to Canadian income tax as per the applicable tax treaty.

Permanent establishment (PE) in Canada

Once it has been determined that the US entity is COB in Canada, the profits from such activities would be subject to Canadian taxation only to the extent that they are attributable to a PE situated in Canada, as defined under the Canada–US Tax Treaty. Under Article V of the Treaty, a PE generally exists where there is:

a fixed place of business, and
through which the business is wholly or partly carried on.

Is an employee’s home office a fixed place of business?

The mere fact that an employee performs work from a home office in Canada does not, in itself, result in a fixed place of business of the foreign enterprise. Rather, the key question is whether the home office is at the disposal of the enterprise and whether there is a commercial reason for the business activities to be carried on from Canada.

In the 2000 Dudney case, the Federal Court of Appeal opined that no PE exists where it can be concluded from the facts that the taxpayer does not have sufficient physical control of space to be carrying on his business at a particular place.[4] However, in its Transfer Pricing Memorandum TPM-8 (2005), the CRA states that the determination of whether a PE exists requires consideration of multiple factors, generally drawn from the OECD Commentary and relevant jurisprudence. The relevance and weight of these factors depend on the specific facts and the nature of the taxpayer’s business, and in different circumstances, factors other than those identified by the Federal Court of Appeal in Dudney may be determinative.

2025 Organisation for Economic Co-operation and Development (OECD) guidance^[5] indicates that where an individual works from home for a significant portion of their time (generally 50% or more), the home office may constitute a place of business of the enterprise if the individual’s physical presence in Canada facilitates the enterprise’s business. Indicators of a commercial reason may include, for example:

direct meetings with Canadian customers;
development or cultivation of a Canadian customer base or identification of business opportunities;
real-time or near real-time interaction with customers or suppliers due to time zone considerations; or
the performance of services that require physical presence in Canada (e.g., on-site implementation, training, or support).

Conversely, where an employee works from home in Canada primarily for personal convenience, talent retention, or cost-efficiency reasons, and where the employee’s physical presence does not play a meaningful role in the conduct or expansion of the enterprise’s business in Canada, the home office would generally not constitute a fixed place of business of the enterprise.

In this context, the mere existence of Canadian customers, absent further indicators of a commercial advantage derived from the employee’s presence in Canada, is insufficient to establish a commercial rationale linking the employee’s location in Canada to the enterprise’s business activities and, therefore, would not, on its own, give rise to a PE.

Dependent agent permanent establishment

A PE may also arise under paragraph V(5) of the Canada-US Tax Treaty where a person in Canada acts on behalf of the non-resident and habitually exercises authority to conclude contracts in the name of the enterprise. However, this rule does not apply to agents of an independent status acting in the ordinary course of their business. For paragraph 5 to apply:

A person must act on behalf of the enterprise;
In doing so, that person habitually concludes contracts in the name of the enterprise, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise;
the authority must extend to the key terms of the contract (such as parties, property, and price); and
the authority must be exercised habitually, requiring a degree of recurrence and regularity rather than sporadic or isolated activity. [6]

Exclusion for preparatory or auxiliary activities

Paragraph V(6) of the Canada-US Tax Treaty provides that a PE in Canada does not include a fixed place of business in Canada used solely for, or an agent referred to in paragraph V(5) (discussed above) engaged in Canada solely in, activities that have a preparatory or auxiliary nature, including the collection or supply of information for the US resident, advertising, scientific research, or similar activities.

Service PE

Under subparagraph V(9)(b) of the Canada-U.S. Tax Treaty, a US entity is deemed to have a PE in Canada where services are performed (physically) in Canada by employees or dependent agents for an aggregate of 183 days or more in any 12-month period in respect of the same or a connected project for Canadian customers.

The number of days mentioned in subparagraph V9(b) refers to days during which services are provided by the enterprise in that other country. Non-working days such as weekends or holidays would not count for purposes of subparagraph 9(b), so long as no services are provided while in the other country during those days. In addition, even if the enterprise sends many individuals simultaneously to the other country to provide services, their collective presence during one calendar day will count for only one day of the enterprise’s presence in the other country.[7]

SaaS providers that only occasionally perform services physically in Canada are generally not impacted by this rule, as such activities typically do not meet the applicable time threshold.

Regulation 105 – services performed in Canada

Every person paying a non‑resident person an amount in respect of services (of a non‑employment nature) rendered in Canada is required to deduct or withhold 15% of this payment.^[8]

The amounts withheld are not considered as final income tax payments, such that if the non-resident is not liable for Canadian income tax due to the absence of a PE in Canada, it may obtain, upon the preparation and filing of a Canadian corporate income tax return, a full refund of the withholding taxes applied.

If the non-resident is determined to have a PE in Canada, the amounts withheld would constitute instalments on account of Canadian income tax payable and may be reduced or refunded to the extent that they exceed the final tax liability, as determined upon the filing and assessment of a Canadian corporate income tax return.

Regulation 102 – sending employees in Canada

Note that sending employees to Canada, even on a temporary basis, can trigger Canadian tax filing, withholding, and reporting obligations for both the employee and the foreign employer, although relief may be available through treaty exemptions and payroll waivers; see our article on Regulation 102 for further guidance.

EOR and Canadian corporate income tax: takeaway

Based on the above facts, USCO should focus on the following factors in assessing whether its use of EOR employee(s) in Canada gives rise to a PE:

Nature of the relationship between USCO and the EOR employees:

Whether USCO’s EOR employees are sufficiently integrated into USCO’s business operations and HR structure, and whether the degree of direction and control exercised over their work is such that they would be considered employees or dependent agents of USCO.

Commercial reason for the EOR presence in Canada:

Whether USCO’s EOR employees are located in Canada for a specific business-driven purpose (e.g., servicing Canadian customers, supporting sales or implementation activities), as opposed to general talent access or employee convenience.

Functions performed by EOR employees:

PE risk increases if USCO’s EOR employees perform customer-facing, sales, business development, or revenue-generating activities, as opposed to internal technical, development, or support functions.

Contract authority and influence:

USCO should assess whether EOR employees have authority to conclude contracts or habitually play a principal role in negotiating or securing customer agreements.

Goods and services tax/harmonized sales tax (GST/HST) considerations

The GST/HST is a value-added tax that applies to every taxable supplies made in Canada in the course of a commercial activity, unless a specific exemption or zero-rating provision applies (taxable at 0%).

In general, a supply of SaaS is characterized as a supply of intangible personal property (IPP). Pursuant to subparagraph 142(1)(c) of the Excise Tax Act (ETA), a supply of IPP is deemed to be made in Canada if the property may be used in whole or in part in Canada. In other words, a supply of IPP would be considered to be made in Canada even if it is not actually used in Canada.

Where a non-resident makes taxable supplies in Canada, the GST/HST registration obligations depend on whether the non-resident maintains a PE in Canada though which supplies are made or is carrying on business in Canada.

If the non-resident maintains a PE in Canada, it is deemed to be resident in Canada in respect of the activities carried on through that PE and is required to register for GST/HST and charge tax on taxable supplies made in Canada through the PE.

Where the non-resident supplier does not maintain a PE in Canada, it will generally be required to register for GST/HST only if it is carrying on business in Canada and makes taxable supplies in Canada.[9]

Importantly, the concepts of “permanent establishment” and “carrying on business” for GST/HST purposes differ from those applicable for corporate income tax purposes and must be analyzed separately based on the relevant Excise Tax Act (ETA) rules and CRA administrative guidance.

Permanent establishment (PE) in Canada

Under subsection 123(1) of the ETA, a non-resident has a PE in Canada where there is:

a fixed place of business through which supplies are made, or
a fixed place of business of a dependent agent (e.g. employee) through whom supplies are made.

Although the definition lists examples such as a branch, office, factory, and workshop, these locations constitute a PE only if they satisfy the broader statutory requirements: business activities must be carried on and supplies must be made through that location. Where the facts do not fall neatly within the listed examples, the CRA applies four guiding principles to determine whether a fixed place of business exists.

CRA Four Guiding Principles[10]

Space at the person’s disposal – There must be identifiable space through which the business conducts activities, even without a legal right of occupation (e.g., allocated space at a client site, public warehouse space, or equipment located in Canada). Incidental or casual presence at another’s premises is insufficient.

Continuity and permanency – The place must exhibit stability and duration. This may arise through indefinite use, recurring presence at the same location, or the expected duration of a project-based activity. Temporary interruptions do not undermine permanency.

Control over the location – The business must exercise operational control through personnel with decision-making authority or through automated systems/equipment performing core business functions, even without onsite employees.

Presence of personnel and ordinary routine – A fixed place of business typically supports an established business routine, evidenced by regular activity conducted by personnel or automated systems. Sporadic or isolated activities generally do not qualify.

These factors must be evaluated collectively to determine whether the business is sufficiently “fixed” in Canada to constitute a PE through which supplies are made.

Through which supplies are made

A PE exists only where the non-resident makes supplies through a fixed place of business. CRA interprets this to require that the activities carried on at that location form an essential and significant part of the non-resident’s supply-making process. There must be a large degree of involvement through the fixed place of business in making or facilitating supplies.

Supplies are generally considered to be made through a fixed place of business where substantive activities, such as executing contracts, performing services, manufacturing goods or maintaining supplied equipment, occur at that location. By contrast, activities of a secondary nature (e.g., soliciting orders, administrative support, advertising, or after-sales services) are not sufficient on their own, although a combination of such activities, or their presence alongside a substantive activity, may support a finding that supplies are made through the Canadian establishment.

Fixed place of another person

A PE may also arise where a non-resident makes supplies through the fixed place of business of a dependent agent in Canada. A dependent agent is one who is not legally or economically independent of the non-resident and whose activities are subject to the non-resident’s direction or control.

For this rule to apply, the agent must maintain a fixed place of business in Canada and perform essential or significant activities through which the non-resident makes or facilitates supplies, even if the agent does not have authority to bind the non-resident contractually.

Carrying on business (COB) in Canada

Even where a non-resident is not considered to have a PE in Canada, a non-resident making taxable supplies in Canada may still be required to register for and collect GST/HST if it is considered to be COB in Canada, a threshold that is significantly less strict than the PE test.

A non-resident is considered to be COB in Canada when its presence or activities in Canada are significant.

The term “carrying on business in Canada” is not defined in the ETA and must be subjected to a factual analysis involving all pertinent details. It’s also important to note that no Canadian court has directly interpreted COB in the GST/HST registration context.

The CRA issued the Policy Statement P-051R2 “Carrying on Business in Canada” which outlines factors that may be considered when determining if a non-resident person operates a business in Canada. Those factors include:

Location of agents or employees;
Delivery and payment location;
Location of purchases or asset acquisition;
Location where transactions are solicited;
Location of assets or inventory;
Where business contracts are concluded;
Bank account location;
Listing in directories;
Branch or office location;
Where the service is performed and
Location of manufacture or production.

The significance of each factor varies based on the business activity and specific circumstances. It is not a matter of a numerical test; judgment is needed to assess each factor’s importance in context of the business activities of the non-resident.

The presence of employees in Canada, and the provision of services physically in Canada are strong indicators of COB. As noted above, although Canadian workers are engaged through an EOR, the individual operates under the non-resident management and supervision and would therefore likely be considered a de facto employee.

Simplified regime

In addition, under the expanded registration rules, a non-resident SaaS provider may be required to register under the simplified GST/HST regime when supplying “specified supplies” (which includes IPP, such as SaaS, to be used in Canada) to “specified Canadian recipients” (unregistered Canadian-based customers) even if it has no PE in Canada and is not considered to be carrying on business in Canada.

While this regime is typically associated with non-resident B2C supplies, certain business customers may also be non-registered due to the nature of their activities, such as non-profit organizations and charities, businesses operating in the financial sector (e.g., financial advisors, insurance brokers), residential real estate businesses, and entities in the health or education sectors.

To avoid registration under the simplified regime, the non-resident must obtain and retain valid GST/HST registration numbers, under the normal GST/HST regime, from its Canadian recipients as evidence that the supplies are made to registered persons.

GST/HST: takeaway

In assessing whether USCO is required to register for and collect GST/HST, the following factors are particularly relevant:

Existence of a GST/HST PE:

Whether the home offices of USCO’s EOR employees, or any other Canadian location, constitute a fixed place of business through which USCO makes or facilitates SaaS supplies.

Nature of activities performed in Canada:

GST/HST risk increases where EOR employees perform essential or significant activities in USCO’s supply-making process, such as performing services for customers or directly facilitating the delivery of SaaS.

On-site services performed in Canada:

Even if provided occasionally and on a non-regular basis, on-site training, troubleshooting, or implementation services may support a finding that USCO is COB in Canada for GST/HST purposes when coupled with other elements of presence in Canada. The higher the frequency and duration of on-site services, the greater the risk.

Carrying on business in Canada for GST/HST purposes:

The presence of EOR employees in Canada, combined with Canadian customers and services physically performed in Canada, is a strong indicator that USCO may be COB in Canada for GST/HST purposes.

GST/HST Registration Number Verification:

If the non-resident SaaS provider has no PE in Canada and is not COB in Canada, it must obtain and retain customers’ GST/HST registration numbers, under the normal GST/HST regime, to support non-application of the simplified GST/HST registration regime.

Conclusion

The use of EOR employees allows non-resident SaaS providers to access Canadian talent without establishing a traditional physical presence. However, as illustrated by the case study, the presence of EOR employees in Canada may nonetheless give rise to Canadian corporate income tax filing obligations and GST/HST registration requirements, depending on the nature and extent of the activities performed in Canada.

For income tax purposes, while the threshold for COB in Canada is relatively low, Canadian taxation will generally arise only where the activities are carried on through a PE under the applicable tax treaty.
For GST/HST purposes, the analysis is distinct and may result in registration and collection obligations even in the absence of a PE for income tax purposes.

Ultimately, the tax implications of EOR arrangements depend on the specific facts, including:

the commercial rationale for the Canadian presence,
The functions performed by EOR employees, and
their degree of involvement in customer-facing and supply-making activities.

Regular review of these factors is essential to ensure that tax compliance aligns with operational reality.

[1] While alternative workforce models such as professional employer organizations (PEOs), agents of record, and staffing agencies also exist, they fall outside the scope of this analysis.

[2] The present article will not cover the Québec Sales Tax or the Provincial Sales Taxes in British Columbia, Manitoba and Saskatchewan.

[3] For purposes of this analysis, the entity is assumed to be a resident of the US and entitled to the benefits of the Canada–U.S. tax treaty. Additional considerations may apply where the entity operates through a partnership, limited liability company, or other fiscally transparent or disregarded entity.

[4] Dudney v. Canada, [2000] A.C.F. n°230, 2000 D.T.C. 6169 (C.A.F.): this case emphasizes that a “fixed place of business” exists only where a non-resident enterprise has a location in Canada that is at its disposal and over which it exercises a meaningful degree of control. However, this case, the taxpayer performed services at his client’s premises, and the court concluded that his restricted access to those premises did not amount to having “a fixed base regularly available to him in Canada.”

[5] The 2025 Update to the OECD Model Tax Convention, 44.10-44.17; The primary reference point for US treaty negotiations is the US Model Income Tax Convention, whereas Canada generally relies on the OECD Model Tax Convention. Accordingly, the US Model Treaty Technical Explanation and the OECD Commentary constitute important supplementary sources for interpreting the Canada–US Tax Treaty. However, neither the Explanatory Notes to the Canada–US Tax Treaty nor the US Model Treaty Technical Explanation provide guidance specific to remote work arrangements or the circumstances in which a remote workforce or home office may give rise to a PE.

[6] Commentary on the 2017 OECD Model Convention , Commentary on article 5, par. 82-101.

[7] Department of the treasury technical explanation of the 2007 protocol amending the convention between the U.S. and Canada with respect to taxes on income and on capital.

[8] Paragraph 153(1)(g) of the ITA and Regulation 105. An additional 9% withholding tax applies on this payment if the services are rendered in the province of Quebec.

[9] Excluding non-resident suppliers required to be registered under the e-commerce registration rules applicable to providers of digital products or tangible goods shipped from Canada to unregistered Canadian (generally B2C), and operators of accommodation or distribution platforms, which may be required to register even if they are not carrying on business in Canada.

[10] Policy Statement P-208R: “Permanent Establishment for GST/HST Purposes”.

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