US LLC Owned by a Canadian: One Set of Books for Two Tax Views

How is a US LLC taxed in Canada and in the US, and what does that mean for its books?

The IRS ignores a one-member US LLC for income tax, so any US tax falls on its owner. The CRA treats the same LLC as a taxable corporation. One set of books has to serve both, so record the LLC as its own company and label every transfer between you and it by type.

Unless it files Form 8832 to be taxed as a corporation, a US LLC with one owner is disregarded as separate from its owner (IRS), and its activities are treated like a sole proprietorship, branch or division of the owner. The CRA's information circular, which is guidance and not law, says an LLC is treated as a taxable corporation for Canadian tax purposes, whatever the US treatment (paragraph 88).

One US rule shapes the books. A US LLC wholly owned by a foreign person is treated as a separate corporation for the Form 5472 rules. When it has a reportable transaction with you, it files Form 5472 with a pro forma Form 1120, a stripped-down corporate return, and contributions to the LLC and distributions from it are reportable. On the Canadian side, Form T1134 is the CRA's yearly report on a foreign company you own or control; it asks for the LLC's financial statements.

Whether any US federal income tax applies depends on what the LLC earns: a nonresident alien is generally taxed in the US on income connected with a US business and on certain US-source income, so a foreign owner may owe none. State taxes and fees follow their own rules. Whether the Canada–US treaty changes the Canadian result is a separate question. See what to file in each country.

What makes my case not simple?

• Your preparer asked for the LLC's financial statements (for the T1134) or an owner ledger (for Form 5472), and all you have is a spreadsheet and bank statements.
• You do the LLC's work yourself, so Canada may tax its profit to you each year and the books need the full-year profit, not just the payout dates.
• The LLC is run from Canada, so the CRA may treat it as resident in Canada (last section).
• Transfers between you and the LLC were never labelled, or personal and business spending share one account.
• Years of Form 5472 or T1134 were never filed, so the books have to be rebuilt first.
• A Canadian corporation, not you, owns the LLC.

What should I gather first?

• Bank and payment-platform statements for the LLC, every month since it opened.
• The state formation papers, the operating agreement and the EIN letter.
• A list of every transfer between you and the LLC: date, amount, currency and what it was.
• Records of US tax paid or withheld on the LLC's income, by year, and the forms its customers and marketplaces hold. The owner, not the LLC, signs Form W-8BEN or Form W-8ECI.
• Any Form 5472 or T1134 already filed, and prior-year financial statements.

Should the LLC have its own bank account and set of books?

Usually yes. Keep the LLC's money and records apart from yours. The rules cited here do not name a bank account requirement, but both countries' rules depend on seeing the line between the LLC and you. A personal cost the LLC pays for you is a benefit conferred on a shareholder, included in your income, so mixed accounts turn every personal payment into a question.

A foreign-owned LLC must keep permanent books sufficient to establish the correctness of its return, including records relevant to transactions with related parties. Where basic accounting records that document the US tax effects of related-party transactions do not exist, they must be created and kept. The US$25,000 penalty for not filing Form 5472 also applies to not keeping these records. The record rules are in records for a foreign-owned LLC.

The minimum set that keeps the line clear:

• A bank account and card in the LLC's name, used only for the LLC.
• Payment-platform and marketplace accounts opened in the LLC's name.
• One chart of accounts, with the bank reconciled every month.
• A separate owner ledger, covered below.

If you cannot open a US account yet, see a US address and bank account for a company run from abroad. For the US side of the same books, see bookkeeping for a foreign-owned US company.

Required records must generally be kept in the United States. Records not ordinarily kept there, such as a spreadsheet kept in Canada, may stay abroad if the LLC delivers requested documents to the IRS within 60 days of the request; the regulation sets further conditions.

How do I record what I take out: a distribution for the IRS, a dividend for the CRA?

Record every transfer to you as an owner distribution in an equity account, unless it is a documented loan or loan repayment. Do not book it as an expense. Whether a payment can instead be salary depends on the facts and on each country's rules (see the end of this section). Keep the date, the US dollar amount and the Canadian dollars that arrived. That one entry is read two ways.

• IRS. The transfer is ignored for income tax because the LLC is treated as part of you. The Form 5472 instructions still list distributions from the entity as reportable transactions, described on an attached statement.
• CRA. Canada generally reads the payout as a dividend from a corporation. Any amount received as a dividend on a share of a non-resident corporation is included in your income, and a pro rata distribution by a foreign affiliate is generally deemed a dividend. Foreign dividends do not qualify for the dividend tax credit.

The payout date is not always the Canadian tax date. If the LLC is not resident in Canada and you perform its services yourself, the Act generally deems the income from those services to be from a business other than an active business, and foreign accrual property income is included in your income each year whether or not you took it out. The books therefore need the full-year profit as well as the payout dates. See owning a company abroad.

Profit already taxed this way can relieve a later payout. Each year's inclusion adds to the adjusted cost base of your interest, and a later dividend paid out of taxable surplus may be deductible, up to the net amount added. Keep a Canadian cost-base schedule apart from the payout ledger. Contributions of capital (s. 53(1)(c)) and each year's inclusion raise it. Section 91 deductions (s. 92(1)(b)) and qualifying returns of capital (s. 53(2)(b)) lower it. An ordinary dividend does not.

A distribution that reduces the LLC's paid-up capital can be a qualifying return of capital under section 90(3) rather than a dividend, but only if the owner elects in writing by the owner's filing due date for the tax year containing the affiliate year-end (Regulations, s. 5911(6)). Keep paid-up-capital records as well as the history of what you put in. For how Canada taxes each way of taking money out, see paying yourself from a US company; for the US side, see paying yourself as a foreign owner.

Label each transfer when it happens, so the books show what each one was.

What belongs in the owner ledger?

The owner ledger is the LLC's record of every dollar that moves between you and it: money in, money out, loans each way, and costs paid on the other's behalf. Keep one running account per type.

Which of these transfers are reportable on Form 5472 is covered in records for a foreign-owned LLC.

Which currency should the LLC's books use?

Keep the LLC's books in US dollars, the currency of its bank account, its customers and the IRS forms. Add Canadian-dollar amounts where Canadian forms need them. For every transfer between you and the LLC, record both the US dollars that left and the Canadian dollars that arrived.

Canada's default is the Bank of Canada rate for the day, not the rate your bank gave on one transfer. The Act has a foreign affiliate work out its income in Canadian currency, but how a profit that builds up through the year is converted is a question for your preparer, so keep each month's profit in both currencies. For gains and losses from holding US dollars, see foreign exchange on a USD account.

What should the LLC's books produce each year?

Each year the books should produce five things, plus the bank statements behind them:

1. Profit and loss. Revenue and costs, with interest, dividends, royalties and rent tagged apart from sales. The T1134 asks for gross revenue by type.
2. Balance sheet. Cash, amounts owed to and by the LLC, owner loans and equity at year-end.
3. Owner ledger. Contributions, loans and distributions, with dates and both currencies.
4. Exchange-rate schedule. The rate used for each conversion.
5. US tax paid. Who paid, for which year, the amount and the proof.

For a controlled foreign affiliate, the T1134 filing must include the affiliate's financial statements and the notes. The instructions say the unconsolidated statements must be included at the time of filing, subject to a due diligence exception, and the onus is on you to show the exception applies. Statements left out under that exception must be filed within 90 days after they become available. The T1134 is due 10 months after your tax year ends, so build the statements from each year's books rather than reconstructing them later. The CRA does not accept consolidated statements and names no accounting framework for them, so ask your preparer which basis they need before the first set is built.

A dormant or inactive LLC may need no T1134 supplement. The CRA says not to file one when your cost in the affiliate stayed under C$100,000 all year and the affiliate had gross receipts under C$100,000, loans included, and assets never above C$1,000,000; you then give only base-level information on the summary. Whether an operating LLC qualifies depends on its facts, so keep the books either way.

For Form 5472, the LLC's tax year is the one its owner uses for US filings or, if none, the calendar year. Choose cash or accrual and keep to it: Form 5472 counts accrued payments and receipts when the LLC keeps accrual books, so the basis decides which year a transfer lands in.

Which records feed the IRS filing, and which feed the T1134?

The pro forma Form 1120 needs only the LLC's name, address and two items on its first page. The books matter because Form 5472 and the record rules draw on them. The T1134 draws on them more heavily.

For the Form 5472 filing itself, see foreign-owned single-member LLC filing. For T1134 rules and foreign affiliate tax, see owning a company abroad and foreign property and affiliate reporting.

How do I track US tax paid so a Canadian foreign tax credit can be supported?

A foreign owner may owe no US income tax on the LLC's income, and then there is nothing to claim. A customer or marketplace that asks for the owner's Form W-8BEN and does not get it may withhold at 30%, so keep the forms you gave and each year's statement of tax withheld. Where US tax was paid, keep a schedule by year: who owed it and who paid, what it was for, when, the US dollars, the Canadian dollars and the proof. Canada's credit is generally the lesser of the foreign tax paid and the Canadian tax on that income, claimed on Form T2209 and, outside Quebec, Form T2036. The support has to come from your records.

For each payment, record:

• Who owed it, and who paid. Tax you owe personally, paid by you, by the LLC for you or withheld from you. A tax is not treated as paid by you if the actual liability lies with another person, so note any tax the LLC owed on its own account separately.
• Which tax and which year. Foreign tax is matched to the year it relates to, whether paid before, during or after that year.
• The amounts. US dollars, and Canadian dollars at the rate used for the related income: foreign tax is converted at the same rate as the income itself.
• The proof. The CRA asks paper filers for official receipts and, for US tax, the US return and the US tax account transcript. E-filers keep them in case the CRA asks.
• The income it relates to. Tag the payment to the LLC profit or payout it was levied on.

When US income tax is charged to you on the LLC's income, it is your tax, not an LLC cost, and federal income tax is not deductible. If the LLC's account pays it, record an owner distribution tagged as US tax and keep the notice. If no US tax was paid or withheld for a year, the schedule says so.

Recording the tax does not mean Canada will credit it. Whether the credit covers a payment depends on who owed the tax, the type of income and timing, so ask your preparer before relying on it. See the double-tax section of what to file in each country.

When could a Canadian-managed LLC be a Canadian-resident company, and what would that do to the books?

A company formed abroad can still be resident in Canada. The CRA says a corporation is resident where its central management and control is exercised, a question of fact. An LLC whose only owner lives in Canada and makes its decisions here may be treated as resident in Canada. The CRA's residency page does not address one-owner LLCs specifically, so the general corporate test is the source of the uncertainty.

The CRA's page speaks of a board: central management and control usually abides where the board of directors meets. An LLC run by its one owner has no board, so the question is likely where you actually make its decisions. The same page calls where the principal business is done and where the books are kept useful but not conclusive. How the Canada–US treaty applies to a company in this position is a separate question; see what to file in each country.

If the LLC is resident in Canada, the books would generally change in these ways:

• It would file a T2 return every year, even if no tax is payable, due six months after the end of its tax year (CRA).
• Its Canadian tax results would be in Canadian dollars, each amount converted at the spot rate for the day it arose, unless it qualifies for and elects a functional currency.
• Its payouts to you would no longer be dividends from a non-resident corporation, so section 90 would stop applying to them. Which dividend rules apply instead needs professional review.
• It would no longer be a foreign affiliate, because a foreign affiliate is a non-resident corporation, so the T1134 rules above would stop applying to it.
• Its US filing duties come from its status as a foreign-owned US LLC. Ask your preparer how a Canadian residence finding interacts with them.

Residence decides whether the LLC is a foreign affiliate and so whether the T1134 applies. It does not alone decide the T2: a non-resident corporation must file one for any year it carried on business in Canada, even if it claims a treaty exemption. Whether work you do from home in Canada means the LLC carries on business here depends on the facts.

Example

Illustrative only; no tax is computed. Amounts are in US dollars unless marked C$, and the exchange rates are made up. The first two scenarios assume the LLC is not resident in Canada and its receipts are over the dormant-affiliate limit. If central management and control is in Canada, the resident-company rules above apply instead.

A consultant takes US$70,000 out

A Vancouver consultant's Delaware LLC earns US$120,000 in the year. She does the work herself from Vancouver. In March and September she moves US$35,000 each time to her Canadian account.

• Books. Two owner distributions of US$35,000, each with the Canadian dollars that arrived.
• IRS. Ignored for income tax; listed on the Form 5472 statement as distributions.
• CRA. Read as dividends from a corporation. At Bank of Canada rates of 1.36 and 1.38 they are C$47,600 and C$48,300, C$95,900 in total. Her bank credited a little less on each transfer; she keeps both figures, but Canada's default is the Bank of Canada rate.
• Why the full-year profit matters. Because she performs the services herself, Canada may tax the LLC's profit in the year it is earned, not only when she takes it out. Her books also keep a running cost base, since a later payout may be partly deductible.

A seller sets up the books in the first year

An Ontario seller forms a Wyoming LLC to sell on an online marketplace. She opens an LLC bank account, registers the marketplace account in the LLC's name and books monthly in US dollars. She puts in US$5,000 to start, recorded as an owner contribution with her cost that day at a rate of 1.36, C$6,800. At year-end she has a profit and loss, a balance sheet and an owner ledger. Her preparer attaches the first two to the T1134 and uses the ledger for the Form 5472 statement.

A family trip on the LLC card

A Calgary owner pays a C$2,000 family trip with the LLC's card. The LLC's statement shows US$1,450. The books record US$1,450 as an owner distribution, not travel. The IRS allows no deduction for personal or family expenses, and Canada may read the benefit as income to her, about C$2,000 at that day's rate.

Different for you?

• Your books are one bank account and a spreadsheet, or your preparer asked for the LLC's financial statements and an owner ledger: later filings build on the opening balances and transfer labels. Set the books up once, with the payout labels and the residence question, through bookkeeping help and cross-border tax help.
• The LLC's books were never kept or are years behind, years of Form 5472 were never filed, or you received a notice: see rebuilding books for missed foreign-owner filings. Catch the records up with bookkeeping help, then get cross-border tax help for the filings.
• Years of T1134 were never filed: see a missed T1134 for a US company and get cross-border tax help.
• You formed the LLC before you moved to Canada, or you are leaving Canada: an individual files no T1134 for the year they first become resident, but the rules apply from the next year, so record the LLC's balances on the day you arrive. Leaving can bring a deemed sale of certain property at fair market value. See moving across the border with a company and get cross-border tax help.
• You manage the LLC from Canada and it could be seen as resident here: the filings and statements change. See what to file in each country and get cross-border tax help.
• A Canadian corporation owns the LLC: the books and filings differ. The same filing guide outlines them; get cross-border tax help.
• The LLC has two or more members (a spouse included): the US side changes. See owning part of a US LLC from Canada and get cross-border tax help.
• The LLC elected, or you plan to elect, corporate tax status on Form 8832: the owner is treated as contributing all the LLC's assets and liabilities to a corporation on the election's effective date, up to 75 days before filing, so the books need an opening balance sheet at that date. See what to file in each country and get cross-border tax help.
• You are a US citizen or green card holder: see Americans living in Canada.
• You have not formed the LLC yet: compare structures in setting up a US business as a Canadian resident.