Canadian Corporation Owning a US LLC
Canada treats every US LLC as a corporation, even a single-member one the IRS ignores. Work out the real combined rate, what the surplus records are worth, and whether a C corporation would actually leave you better off. The answer is not the one most people expect.
combined effective rate
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The US Side
| Item | Basis | Amount |
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The Canadian Side
| Item | Basis | Amount |
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LLC Against a US C Corporation
| Item | US LLC | US C Corporation |
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What Actually Changes the Number
| Factor | Your Position | Combined Rate |
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Points That Decide This
What to Do Next
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Disclaimer: The CRA treats a US LLC as a corporation for Canadian tax purposes regardless of its US classification, so a Canadian corporation owning 10% or more holds a foreign affiliate and must file Form T1134. A single-member LLC disregarded for US purposes means the Canadian corporation is treated as carrying on business directly in the United States, filing Form 1120-F and paying federal tax at 21%, state tax, and branch profits tax at the 5% treaty rate on the dividend equivalent amount. Dividends from active business income earned in a treaty country are paid from exempt surplus and are fully deductible under paragraph 113(1)(a), but the deduction depends on surplus accounts being computed and supportable. Canadian rates used are 26.5% general and 50.17% on investment income. This model assumes full annual repatriation and does not address foreign accrual property income, the specific state nexus position, or the very different and considerably worse outcome where an individual rather than a corporation owns the LLC. This page is general information, not tax advice.
The Rate Is the Same. That Is the Surprise.
Almost everything written on this subject says a Canadian corporation owning a US LLC suffers double taxation. Run the numbers for an active business and it is not true at the corporate level.
| On $500,000 of US Income | US LLC | US C Corporation |
|---|---|---|
| US federal at 21% | $105,000 | $105,000 |
| State at 6% | $30,000 | $30,000 |
| Branch profits tax or dividend withholding at 5% | $18,250 | $18,250 |
| Canadian tax on an exempt surplus dividend | Nil | Nil |
| Combined rate | 30.65% | 30.65% |
They are identical, because the treaty sets branch profits tax and the direct dividend rate at the same 5%. The LLC is not the problem people describe. What causes the damage is something else entirely, and it is worth knowing which so you fix the right thing.
The Records Are Worth Eighteen Points
The exempt surplus deduction is what removes the Canadian tax, and it is not automatic. It depends on surplus accounts being computed and supportable when the CRA asks. Where they cannot be produced, the deduction is denied and the whole distribution becomes ordinary foreign income.
| Position | Canadian Tax | Combined Rate |
|---|---|---|
| Active business, surplus accounts maintained | Nil | 30.65% |
| Active business, no surplus records | $91,889 | 49.03% |
| Investment or rental income | $173,964 | 65.44% |
That is the double taxation everyone talks about, and it is caused by bookkeeping rather than by the entity. A Canadian corporation that has never had surplus accounts prepared for its US LLC is sitting on an eighteen point exposure it does not know about.
Three Things That Genuinely Favour a C Corporation
- Deferral. Branch profits tax on an LLC is charged annually on the dividend equivalent amount whether or not cash moves. A C corporation pays withholding only when it actually distributes, so profits reinvested in the US carry no second-layer tax at all.
- Simplicity. A C corporation is a corporation in both countries. There is no classification mismatch to explain, no hybrid entity analysis, and no argument with an auditor about what the entity is.
- Canadian-source income. Article IV(7)(b) denies treaty benefits where an amount is derived through an entity that is transparent in one country and opaque in the other. If your LLC will receive interest, royalties or fees from Canada, the treaty rate is denied and 25% withholding applies.
Where the LLC Wins
- Losses in the early years flow through for US purposes and can offset other US income, which a C corporation cannot do.
- No second US entity level for a US buyer, which matters on an eventual sale of the US business.
- Formation is cheaper and faster in most states.
- State treatment is sometimes more favourable, particularly where franchise taxes are involved.
The Management Trap
Where the LLC is genuinely run from Canada, it may be resident in Canada. A corporation is resident where its central management and control is exercised, which is usually where the board actually decides. A US LLC directed entirely from a kitchen table in Toronto can be a Canadian resident corporation taxed on worldwide income, while also paying US tax, and the relief between the two becomes genuinely difficult. Hold real meetings in the US and document them.
Form T1134 Is Not Optional
Ownership of 10% or more of an LLC makes it a foreign affiliate, and Form T1134 must be filed. It is due fifteen months after the Canadian corporation’s year end, moving to twelve months for later years, and the penalties for not filing are significant and separate from any tax.
Many Canadian corporations with a small US LLC have never filed one, usually because nobody told them the LLC counted as a foreign affiliate. It does, and a dormancy exemption only applies where both cost and receipts are under $100,000.
An Individual Owner Is a Completely Different Story
Everything above assumes a Canadian corporation owns the LLC. A Canadian individual owning one directly is in a far worse position, because the US taxes the income at personal rates while Canada sees only a foreign corporation, so there is no matching income inclusion and no foreign tax credit. Effective rates above 70% are routine.
If that describes your situation, the calculator on this page understates your problem considerably and the fix is urgent rather than optional.
What This Calculator Does Not Cover
- Foreign accrual property income where the LLC is a controlled foreign affiliate earning passive income
- State nexus and whether you have filing obligations in states beyond the one you formed in
- Multi-member LLCs, where the US treats the entity as a partnership and the analysis shifts
- A check-the-box election to treat the LLC as a US corporation, which changes the US side entirely
- Transfer pricing on management fees or intercompany charges between the two entities
- The individual owner case, which is materially worse than anything modelled here
Fix the records before you consider changing the entity. On an active business the LLC and the C corporation cost the same. Missing surplus accounts cost eighteen points. Converting an entity to solve a bookkeeping problem is expensive and does not solve it.
Frequently Asked Questions
Common questions from Canadian companies operating in the United States.
Related Calculators and Guides
More tools for Canadian companies operating cross-border.
Fix the Records Before You Change the Entity
Send us the LLC financials and your last T2. We will compute the surplus accounts properly, confirm the T1134 position, and tell you honestly whether converting to a C corporation is worth doing or whether the structure you have is fine.