American Buying a Canadian Business: Who Should Buy It?

Can a US citizen buy a business in Canada?

A US citizen, US resident or US company can acquire a Canadian business, but foreign-investment requirements must be checked before closing. Tax structure and legal permission are separate.

The Investment Canada Act generally requires non-Canadians acquiring control of an existing Canadian business to submit a notification or an application for review, unless an exemption applies; national-security review can cover investments of any size (ISED: Investment Canada Act). A notification can be filed before closing or within 30 days after implementation, but a reviewable investment cannot be implemented until it has been reviewed and found likely to be of net benefit to Canada, apart from limited exceptions (sections 12 and 16). An amendment not yet in force (S.C. 2024, c. 4) would require filing before closing for a business with a prescribed activity. Canadian counsel determines which path applies, along with sector restrictions, competition rules, licences and permission to work; this page does not assess approval.

Should I buy personally, through my US company, a Canadian corporation or a US LLC?

The buyer decides who files in the US, what Canada withholds on dividends paid to you, and whether the IRS ignores the entity. Whichever buyer you pick, the Canadian company is not a Canadian-controlled private corporation (CCPC) while non-residents of Canada control it (see below).

An ordinary Canadian corporation is generally a corporation for US purposes, and a US LLC's default depends on its owners (26 CFR 301.7701-2; 26 CFR 301.7701-3). The CRA's archived examples treat a US LLC as a corporation, and the CRA does not recognise a fiscally transparent LLC as a treaty resident, although Article IV(6) can give its US-resident members treaty benefits (CRA: archived technical guidance; CRA: paragraph 89).

Will my Canadian corporation still be a CCPC?

A Canadian corporation controlled directly or indirectly by non-residents cannot be a CCPC, the private-company category that can claim the federal small business deduction.

A new Canadian holding company does not restore CCPC status while non-resident control continues through it. A corporation also fails if all shares held by non-residents and public corporations, counted as one person's, would control it, so unrelated US co-buyers who together hold control also end CCPC status. If you buy a minority and Canadian residents, such as the seller or a partner, keep control, the company may remain a CCPC; share rights, options and agreements can shift control and need review (CRA: corporation types; Income Tax Act, section 125(7)).

The federal small business deduction needs CCPC status throughout the tax year. On up to the first C$500,000 of active business income, the federal rate is 9% with the deduction and 15% without it; provincial treatment needs its own check (section 125(1)). Buying control ends the target's tax year immediately before closing, as does a later change in CCPC status alone, and a target's year-end that would fall within 7 days before closing can be moved to closing by election in that year's return (section 249; section 251.2(2)).

For residence, CCPC status and payments to an owner abroad, see Non-resident owners of a Canadian corporation.

Should I buy shares or assets, and can the US treat shares as assets?

A share purchase makes you the owner of a foreign corporation for US purposes, with its own filings; an asset purchase makes you, or your Canadian company, the owner of the business. Apart from a ULC (below), only a corporate buyer can ask the US to treat a share purchase as an asset purchase, through a section 338(g) election, and for a Canadian target that needs a full review first.

If your Canadian corporation buys the assets, it owns them and you or your US parent still own foreign shares. A section 338(g) election treats the target as selling its assets and a new corporation as buying them.

A section 338 election needs a corporate buyer purchasing at least 80% of both voting power and stock value within 12 months. A personal purchase does not qualify, even if the shares later go into a company (IRS: Form 8023 instructions).

The purchasing corporation files it by the 15th day of the 9th month beginning after the month of the acquisition date, and it cannot be revoked; a qualifying foreign purchasing corporation not subject to US tax can have a longer period (26 CFR 1.338-2(d) and (e)). The deemed-sale income and earnings reach the target's shareholders through rules such as sections 951 and 1248, so the effect depends on who owned the target and whether it was a controlled foreign corporation (26 CFR 1.338-9(b)). A US election does not change Canada's tax basis, and section 901(m) treats a section 338 election as a covered asset acquisition, so part of the Canadian tax on income the US basis increase shelters can be denied as a US foreign tax credit (26 U.S.C. 901(m)).

For Canadian shares-versus-assets consequences, GST/HST elections, provincial clearances (including Quebec) and setup, see Buying an existing business in Canada.

What US forms may be required after closing?

US reporting follows US tax status and the ownership chain, not the business's Canadian label: a green card holder or other US tax resident can need the same forms as a citizen.

These information returns are generally filed with the relevant US return; FBAR is a separate Treasury filing. Form 5471 failures can carry an initial US$10,000 penalty per foreign corporation's annual accounting period under section 6038, even when an income-tax calculation does not produce a balance due (IRS: Form 5471 penalties).

A US tax owner can also owe US tax on a Canadian corporation's earnings before any distribution (IRS: Form 5471 income reporting). For a US citizen living in Canada, see American owners of Canadian corporations; for Form 5471 categories and foreign-company income rules, see US owners of foreign companies.

Is a Nova Scotia, Alberta or British Columbia ULC different?

Yes. A Canadian unlimited liability company, or ULC, is one whose shareholders are liable for its debts without limit: in Alberta jointly and severally, with a former shareholder open to a claim for 2 years after leaving (Business Corporations Act, s. 15.2); in Nova Scotia on a winding up, with a member who left one year or more before it began not liable (Companies Act, s. 135). Check the Act of the target's province. By default the IRS can ignore it or treat it as a partnership while Canada still treats it as a corporation, which can change US filings and treaty relief.

The regulation excludes a Nova Scotia ULC, and any other Canadian company all of whose owners have unlimited liability under federal or provincial law, from the automatic-corporation list, so an Alberta or British Columbia ULC depends on its liability terms; a historical rule or a Form 8832 election can override the defaults. Each owner, or an authorized officer, manager or member, signs the election; it can take effect up to 75 days before filing or 12 months after, and it generally restricts another for 60 months (26 CFR 301.7701-2(b)(8)(ii); 26 CFR 301.7701-3(b)(2) and (c)).

When one US owner buys all the shares of a ULC whose US classification has never mattered, the ULC is generally disregarded, so the US sees an asset purchase while Canada sees a share purchase, a covered asset acquisition under section 901(m), and the annual US form is generally Form 8858 rather than Form 5471 (26 CFR 301.7701-3(d); 26 U.S.C. 901(m)).

Article IV(7)(b) can deny treaty relief on a payment from a ULC when the US treats the payment differently than it would if the ULC were not fiscally transparent. The CRA's archived 2011 examples describe equivalent-treatment cases where it does not apply, so the result turns on the actual payment (CRA: Technical News No. 44; treaty, Article IV). For a Canadian branch versus a subsidiary after closing, and the ULC trap, see US business expanding into Canada.

How should I fund the purchase and take money out?

You can fund the Canadian company with equity or with loans from you or your US company, and they are taxed differently. Loan interest can be deductible in Canada within limits that include thin capitalization, and ordinary interest to a qualifying US resident is generally exempt from Canadian withholding; dividends are not deductible and carry the withholding rates below.

Canada's thin-capitalization rule can deny a proportion of interest on debt to specified non-residents when the statutory debt-to-equity ratio exceeds 1.5:1. A specified shareholder generally owns at least 25% of votes or share value, alone or with persons not dealing at arm's length. Under the statutory averaging and equity definitions, the acquisition price is not automatically the borrower's equity (Income Tax Act, section 18(4)–(5)).

Interest denied under thin capitalization can be deemed a dividend for non-resident withholding (section 214(16)). Meeting the ratio does not establish deductibility under every other rule, including the excessive interest and financing expenses limit in section 18.2. It does not apply to a group whose net interest and financing expenses are C$1,000,000 or less, but a corporation that is not a CCPC cannot use the separate CCPC exclusion.

The ceilings come from Article X and interest treatment from Article XI; neither determines US income tax. The ceilings do not apply to holdings effectively connected with the recipient's Canadian permanent establishment, where Article VII applies. Residency, beneficial ownership and the treaty's rules on who qualifies must also be met (Canada–US treaty; section 212).

The CRA recommends that the payer collect Form NR301, NR302 or NR303 information before applying a reduced treaty rate, and the payer relies on the residence stated on the form, not a mailing address. If too little is withheld, the CRA can assess the payer, the recipient or both (CRA: treaty documentation), and the payer's directors, which can include you, can be jointly liable, subject to conditions and a due-diligence defence, until two years after leaving office (section 215(6); section 227.1). For evidence, NR4 reporting and deadlines, see Non-resident owners of a Canadian corporation.

What if I live in Canada or will move there to run the business?

A move to Canada does not end US worldwide-income reporting for a US citizen or green card holder. Canadian tax residence depends on residential ties, so residence and the expected move date affect the choice of buyer (IRS: citizens abroad; CRA: newcomers). If both countries treat you as resident, treaty Article IV(2) picks your treaty residence in order: a permanent home, closer personal and economic ties, a habitual abode, citizenship, then agreement between the tax authorities. That decides whether the dividend ceilings above can apply to you (treaty, Article IV).

An individually owned Canadian corporation can meet the CCPC conditions while you are Canadian-resident, even if you remain a US citizen. If a US corporation owns the Canadian company, the CCPC test sees a non-resident controller, and moving the individual does not automatically change the parent's residence, so the company is generally not a CCPC (CRA: CCPC conditions).

For the personal filing position, see Americans living in Canada.

What should I ask before signing, and can I change the buyer later?

The buyer, purchase form, funding and election decisions are normally settled before the purchase agreement is signed, because changing the buyer later is a separate transfer with its own tax consequences and reporting.

1. Identify the target. Incorporation documents, share rights, ownership chart and any US classification elections.
2. Identify what is sold. Letter of intent, price allocation, assumed debts and the seller's tax residence.
3. Obtain the records. Financial statements, tax returns, assessments, asset tax bases, shareholder loans and closing-year records for US reporting.
4. Map the funding. Each borrower, lender, equity subscription and payment to the seller, with loan terms and planned distributions.
5. Assign the closing tasks. Who documents the buyer, CCPC consequences, any section 338 decision, treaty eligibility, information-return filers and legal approvals, including Investment Canada.

If the seller is not resident in Canada, the buyer of taxable Canadian property can owe the seller's tax, due 30 days after the end of the acquisition month: 25% of the cost above any certificate limit for shares and other capital property, 50% for depreciable property and non-capital real estate. A CRA certificate, or no reason to believe after reasonable inquiry that the seller is non-resident, avoids it (section 116; see Non-residents selling Canadian property).

A section 85 election, made jointly by the transferor and the corporation by the earliest income tax return filing deadline of either party for the transfer year or late within 3 years with a penalty, can set an agreed transfer amount for property moved to a taxable Canadian corporation but does not settle US transfer rules. If you are not resident in Canada and later sell target shares to a Canadian corporation you control or otherwise do not deal with at arm's length, section 212.1 can treat consideration other than shares above their paid-up capital as a dividend subject to withholding and can reduce the new shares' paid-up capital; a section 85 election does not switch that off. A move into a US company is a separate transfer in each country, and a transfer to a foreign corporation may need Form 926 and section 367 analysis (section 85; section 212.1; IRS: Form 926 instructions).

Example

Assume a US citizen resident in Utah is buying all the shares of an ordinary Canadian operating company for C$1,000,000. All amounts below are illustrative Canadian dollars; no income tax is calculated.

A new Canadian acquisition corporation between the buyer and the target is still controlled by a non-resident, so it is not a CCPC and gets no small business deduction.

Suppose the acquisition corporation has C$400,000 of equity under the thin-capitalization definition and a C$600,000 loan from the buyer. Debt of C$600,000 is exactly 1.5 times equity, so no interest is denied under thin capitalization. If the monthly peak balances of the loan averaged C$800,000 instead (for closing costs and working capital), with equity unchanged, the average would exceed the C$600,000 limit by C$200,000, which is one quarter of the debt. With interest at 6%, or C$48,000 for the year, one quarter (C$12,000) is not deductible and is treated as a dividend for withholding instead of exempt interest. Other interest limitations still need review, including section 18.2.

Different for you?

• You need Canadian acquisition taxes, GST/HST elections or provincial clearances: see Buying an existing business.
• You are a US citizen or green card holder already living in Canada: see American owners of Canadian corporations.
• The seller or a Canadian partner keeps control, or you will own the company while living abroad: CCPC status and payments to you work differently; see Non-resident owners of a Canadian corporation.
• You are Canadian and buying in the US: see Buying a US business as a Canadian.
• The target is a partnership or sole proprietorship, or the agreement involves a ULC, acquisition debt, an election or a later transfer: arrange a cross-border tax review before signing, with the letter of intent, entity documents, ownership chart, price and funding plan.