The territory adjacent to the Panama Canal which extended 5 miles to each side of the canal was leased by the United States from the Republic of Panama from 1903 until 1979 and was known as the Canal Zone. The reason for this was because the United States had purchased the land on which the canal was built from private and public owners and had also financed and built the Panama Canal. From 1979 to 1999 the canal was under the joint control of Panama and the United States. It was handed over to Panama at the end of 1999.

The Canal Zone Post Office began operating and issued its first postage stamps in June 1904. The first stamps were stamps of Panama overprinted “CANAL ZONE”. The last stamp was issued on 25 October 1978 and showed one of the towing locomotives and a ship in a lock. Panama then took over the administration of the postal service and soon the Canal Zone stamps became invalid.