US LLC vs Canadian Corporation Tax Calculator

Can a Canadian Own a US LLC? The Tax Problems Nobody Mentions

Yes, you can own one. The question is whether you should, and for a Canadian resident the answer is usually no. The reason is a classification mismatch that has nothing to do with how well the business trades and everything to do with how two tax systems describe the same entity.

The CRA treats a US limited liability company as a corporation. It has separate legal personality, so it falls within the Canadian definition of a corporation, and the fact that the Internal Revenue Code ignores it is irrelevant to that conclusion. The United States, by default, treats a single-member LLC as a disregarded entity and a multi-member LLC as a partnership. Neither system is wrong. They simply disagree, and you are the one standing in the gap.

The practical effect runs like this. In the year the LLC earns a profit, the United States taxes you personally on that profit as business income, whether or not a dollar leaves the company. Canada sees nothing, because to Canada the LLC is a separate corporation and a corporation’s income is not your income. Later, when the LLC distributes cash, Canada taxes you on a dividend from a foreign corporation at your full marginal rate, with no dividend tax credit because the underlying company paid no Canadian tax.

LLC Double Taxation, the CRA Foreign Tax Credit and Article IV(6)

A foreign tax credit is not a general promise of relief. It is a mechanism with conditions, and the central condition is correspondence: the foreign tax must have been paid in respect of the income that Canada is now taxing. Where the US tax was levied on business income in year one and Canada is taxing a foreign dividend in year three, that correspondence is broken and the credit can be restricted or refused outright.

There are partial mitigations and they are worth knowing about, but none of them is a fix. The CRA has published administrative positions under which credit may be allowed in defined circumstances, particularly where the distribution can be traced to the income that bore the US tax and where the timing can be reconciled. The deductions in subsections 20(11) and 20(12) of the Income Tax Act can allow foreign non-business income tax to be deducted rather than credited, which converts a full credit into relief at your marginal rate. Careful matching of distributions to the year the US tax was paid can help. All of this requires advice on your actual facts, and none of it should be assumed.

Please treat the foreign tax credit field in the calculator above as a live assumption rather than a known figure. Set it to zero and look at the combined rate. That is the downside case, and for a great many Canadian residents holding a US LLC it is the realistic one.

Article IV(6) of the Canada-United States Tax Convention was added by the Fifth Protocol and is frequently cited on the internet as the answer to the LLC problem. It is not, and the direction of the relief matters.

Article IV(6) applies where a resident of the United States derives income arising in Canada through an entity that is fiscally transparent under United States law. In that situation the income is treated, for treaty purposes, as having been derived by the US resident, so treaty benefits are not lost merely because the entity is transparent in one country and opaque in the other. It solves the problem of a US person using a transparent entity to earn Canadian income.

The situation on this page runs the other way. You are a Canadian resident deriving United States income through a US LLC. Article IV(6) does not speak to that, and the companion provision does not rescue it either. Anyone who tells you the Fifth Protocol fixed the Canadian-resident LLC problem has read the article in the wrong direction.

Should I Incorporate in Canada or Delaware?

For a Canadian resident selling to American customers, the honest default is an Ontario corporation. The advice to “just form a Delaware LLC” circulates because it is cheap, fast and correct for a US founder, and it is repeated by people who have never had to file the Canadian side of it.

Where a Canadian corporation bills US customers and has no US permanent establishment, Articles V and VII of the treaty generally prevent the United States from taxing its business profits. Customers in a country do not by themselves create a permanent establishment. An office does, staff usually do, and a dependent agent concluding contracts on your behalf often does. Our permanent establishment risk checker works through the tests in detail.

State tax is a separate question and the treaty does not answer it. States set their own nexus rules, many of them economic rather than physical, and a Canadian corporation with no federal US liability can still owe state income tax, franchise tax or sales tax in states where it has crossed a threshold. Delaware in particular charges an annual franchise tax whether or not the entity earns anything, which is why a dormant Delaware entity quietly bills you every year for the privilege of existing.

A US Founder Choosing Between Delaware and Ontario

If you are a US person considering an Ontario corporation, the mismatch runs the other way and it is no more comfortable. A Canadian corporation controlled by US shareholders is likely to be a controlled foreign corporation for United States purposes, which brings the Subpart F regime and the global intangible low-taxed income rules into play. Income can be pulled into your US return before any dividend is paid, and the interaction with Canadian corporate tax and the foreign tax credit rules on the US side is genuinely difficult.

The check-the-box regulations offer choices here too, and they cut both ways. Electing to treat a Canadian corporation as transparent for US purposes may simplify one problem and create another, because Canada will continue to treat it as a corporation. That is the same mismatch this page is about, seen from the other side of the border.

The practical point is that neither direction is a cheap decision. Please do not choose a jurisdiction on incorporation fees. The annual cost of getting the cross-border reporting right will dwarf them, and the cost of getting it wrong dwarfs that.

A Canadian Corporation With US Customers

This is the structure most Canadian founders selling into the United States should be looking at, and it is worth being precise about why it works.

The corporation is resident in Canada and pays Canadian corporate tax on its worldwide income. Where it has no permanent establishment in the United States, the treaty generally reserves the taxation of its business profits to Canada. You pay yourself salary or dividends out of a Canadian corporation in the ordinary way, and the salary versus dividend calculator covers that decision properly, including the gross-up and dividend tax credit that this page deliberately simplifies.

What the structure does not do is remove every US obligation. A protective Form 1120-F is often filed to preserve the treaty position and start the limitation period, and state registration and state tax can apply independently. Where the corporation does acquire a US permanent establishment, the branch profits tax becomes relevant and the analysis in our Canadian branch profits tax calculator applies.

The Filings, and the Penalties That Dwarf the Tax

On most cross-border files the tax is the smaller problem. The information returns are where the damage happens, because their penalties are fixed amounts that bear no relation to the income or to the tax at stake.

Form 5472 is the one to be frightened of. It is required of a 25 per cent foreign-owned US corporation and of a foreign-owned US disregarded entity, which means a Canadian-owned single-member Delaware LLC needs one even if the LLC earned nothing at all. The penalty is commonly cited at 25,000 dollars per return per year. A quiet three-year-old LLC with no income and no filings can therefore carry a six-figure penalty exposure, which is a sentence worth reading twice.

On the Canadian side, the T1134 obligation follows directly from the CRA treating the LLC as a corporation. Because it is a foreign affiliate, you have an annual reporting obligation for an entity that the United States does not even regard as existing. Penalties under subsections 162(7), 162(10) and 162(10.1) escalate with knowledge and with time, and our T1134 and T106 penalty calculator works through the bands. Where the LLC interest or other foreign property exceeds the cost threshold, T1135 applies as well.

Unwinding an LLC That Should Not Have Been Formed

If you are reading this because you already have one, the sequence matters more than the speed.

The first step is to establish the facts: which years the LLC has been in existence, what it earned, what was distributed, what has been filed on each side and what has been reported on your Canadian return. Until that is known, no structural decision is safe, because the cost of any route depends on what has to be corrected behind it.

The second step is to decide between three routes. You can leave the LLC in place and elect corporate treatment for US purposes, which aligns the classifications going forward but does not repair the past and has its own consequences. You can wind the LLC up and move the business to an Ontario corporation, which is usually the cleanest outcome and the one this calculator will most often recommend. Or you can restructure the LLC under a corporation, which is occasionally right where American customers, contracts or licences require a US entity.

The third step is the historical clean-up, and it is the one people want to skip. Voluntary correction programmes exist on both sides and they are considerably cheaper than being found. Our US corporation and LLC tax filing service handles both sides of this, and the non-resident corporation compliance cost calculator gives a sense of what the ongoing obligation costs once the structure is settled.

What This Calculator Does Not Cover

• State-by-state nexus and apportionment, including economic nexus thresholds, combined reporting and how income is divided between states
• GILTI and Subpart F computation, including the high-tax exception, section 962 elections and the US foreign tax credit baskets
• Sections 216 and 217 elections, which apply to rental and pension income of non-residents of Canada and are outside this comparison
• Transfer pricing, which governs what a Canadian corporation may charge a related US entity and carries its own penalty regime under section 247
• Sales tax and economic nexus, including US state sales tax registration and GST/HST on cross-border supplies
• Immigration and work authorisation, which decide whether you may lawfully perform the work in either country and are not a tax question
• US estate tax on US situs assets, which can apply to shares of US corporations held by a Canadian resident and is governed by Article XXIX-B
• Provinces other than Ontario, where the corporate and personal rates and the provincial credits differ
• The dividend gross-up and dividend tax credit, which this page deliberately replaces with a single editable rate for comparability
• Payroll, social security and the totalisation agreement, including self-employment tax and Article XXIV of the treaty

This is the page on our site where professional advice matters most. The three structures look similar on a spreadsheet and behave very differently once the CRA and the IRS each apply their own classification to the same entity. Please send us the entity documents, the years involved and what has been filed on each side, and we will tell you what the real position is before anything else is decided. Where a Canadian corporation already holds a foreign affiliate, the FAPI income inclusion calculator covers the accrual side of the Canadian rules.