Do Canadian Amazon FBA sellers owe US income tax?

Why the treaty shields most FBA sellers from federal income tax

The Canada-US Tax Treaty gives business profits earned in one country to that country's residents to tax, unless the business carries on its activity through a permanent establishment in the other country. A Canadian corporation selling on Amazon.com has US customers and US-stored goods, but neither fact by itself puts the business on US soil in the way the treaty means.

Article V of the treaty defines a permanent establishment as, broadly, a fixed place of business through which the enterprise's activity is carried on. A warehouse the seller does not operate, staff or control does not fit that description in the way a leased US office or a US sales team would.

Why an FBA warehouse generally is not a permanent establishment

The treaty separately excludes facilities used solely to store, display or deliver goods from the permanent establishment definition, and Amazon's fulfillment centres exist to run Amazon's logistics business, not to house yours. On that basis, the common position among cross-border preparers is that a Canadian seller whose only US footprint is FBA inventory does not have a US permanent establishment.

That said, the analysis is fact-specific and worth confirming rather than assuming. A seller who also leases US warehouse space directly, employs US-based staff, or runs significant activity through a dependent agent in the US moves closer to permanent establishment territory, and each of those facts changes the answer.

There is a second route to a permanent establishment worth ruling out: a dependent agent who habitually concludes contracts in the US on the company's behalf. Amazon does not act as your agent in that sense. It sells to its own customers under its own marketplace terms, fulfills the order from its own facility, and charges you a fee for the service, which is why the arrangement is generally treated as a service Amazon sells to you rather than a US operation you run through Amazon.

Why filing a protective 1120-F still makes sense even when no tax is owed

Treaty protection is a position you claim on a return, not a status the IRS assumes on your behalf. We generally recommend a Canadian FBA seller file Form 1120-F with a treaty-based disclosure under Form 8833 every year it sells into the US, reporting the treaty position that shields its profits from US tax. We cover the mechanics on our protective Form 1120-F page.

The value of filing is protective rather than immediate. If the IRS later concludes the business did have effectively connected income, a return filed on time preserves the seller's right to deduct expenses against that income; skipping the filing risks losing that right and facing tax on gross receipts instead of net profit.

State income and franchise tax is a separate question the treaty does not answer

The Canada-US treaty binds the federal government, not individual states, so a state can require a corporate income or franchise tax filing on facts the treaty would otherwise excuse. A handful of states treat inventory sitting in an in-state fulfillment centre, or crossing a sales threshold, as enough to require a return.

• The trigger is usually the same physical presence that creates sales tax nexus, so states where your FBA stock has sat are the ones to check first.
• Exposure for a small or mid-sized FBA seller is often modest, sometimes a minimum tax or a return showing little owed, but the filing obligation itself does not disappear on its own.
• State rules change more often than the federal treaty, so this is worth reviewing annually rather than settling once.
• A state filing obligation and a federal one are decided separately, so a seller can have zero federal exposure under the treaty while still owing a minimum state tax or a state return.

None of this is unique to Amazon. A Canadian business that stores inventory with any US third-party logistics provider, not only Amazon, faces the same state-by-state review, because the trigger is the physical location of the goods rather than the platform selling them.

What this means alongside your sales tax and GST/HST obligations

Income tax, sales tax and GST/HST are three separate questions that happen to share the same Amazon business. Amazon itself collects and remits US sales tax as a marketplace facilitator on the orders it processes, which we cover in does Amazon collect US sales tax for Canadian FBA sellers, and that collection has no bearing on whether you owe US income tax or need a state filing.

On the Canadian side, the profits from your FBA business are fully taxable in Canada regardless of the US treaty analysis, and goods shipped from Canada to the US remain zero-rated exports for GST/HST purposes. Our Amazon seller accountant page covers how the Canadian and US filings fit together across a full year.

How we handle the US income tax question for FBA clients

We start by mapping where the business has any US footprint beyond FBA stock, since that determines both the permanent establishment analysis and which states might expect a corporate filing. For most FBA-only sellers we file a protective 1120-F with the treaty-based disclosure as a standing annual item, and we flag it clearly to the client as a protective filing rather than a sign that tax is due. We keep the state question on the same annual checklist so it is reviewed every year, not assumed away after the first review.

We also coordinate the US side with the Canadian corporate return so the two never contradict each other. The profits reported to the CRA and the treaty position claimed on the 1120-F describe the same business, and keeping one bookkeeping file behind both filings avoids the mismatched numbers that draw questions from either tax authority.