Buying a US Business as a Canadian: Assets or Shares, Who Buys

Should I buy assets, shares or an LLC interest?

An asset purchase generally gives the buyer new US tax costs for the assets purchased. A share purchase generally gives the buyer a cost in the shares while the target keeps its existing asset costs; certain elections can change that result (IRS: basis of assets; Form 8023 instructions).

The agreement's label does not settle the tax result. A single-member LLC is disregarded for US income tax, so buying all its interests is generally treated as buying its assets (26 CFR 301.7701-2; IRS: LLC classification). So is one buyer's purchase of all interests in a partnership-classified LLC; buying only a continuing partnership interest differs (IRS: Form 8594 exceptions; Rev. Rul. 99-6). Canada generally sees corporate shares, so one purchase can give a US asset cost and a Canadian share cost.

A joint section 338(h)(10) election is open only where the sellers are S corporation shareholders, a selling consolidated group or a selling affiliate. A C corporation owned by individuals leaves only the buyer's section 338(g) election, and the target recognizes gain on the deemed sale. Either election goes on Form 8023, is irrevocable and is due by the 15th day of the 9th month beginning after the month of the acquisition date (Form 8023 instructions; 26 CFR 1.338-2(d)).

For Form 8594 mechanics, old tax debts, an owner's personal liability for payroll tax after closing and seller-return checks, use Buying a US business.

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

The right buyer depends on whose money funds the purchase, who needs the later cash and whether US partners will invest. Choose the ultimate owner and operating buyer separately: an individual includes dividends from a non-resident corporation in income (Income Tax Act, section 90), while a Canadian corporation may deduct part or all of a dividend from its foreign affiliate, depending on the affiliate's surplus (section 113).

• Your personal money: buying assets directly makes you the operator for tax purposes; holding shares, of the target or of a new US corporation, puts a US company between you and the business. US shares held personally are US-situated assets for estate tax, which this page does not cover (IRS: nonresident estate tax; Settling an estate across the border).
• Your Canadian corporation's money: buying assets directly makes it the US operator; owning a US corporation instead brings the dividend deduction and foreign-affiliate reporting. Taking company money out to buy personally adds a Canadian dividend or shareholder-loan question.
• A new US LLC: decide its US tax status first. A default LLC does not give a Canadian buyer the same tax treatment in both countries.
• A new US C corporation: it buys assets or shares and files its own corporate return. You or your Canadian corporation owns it, creating separate owner reporting and distribution questions.

Model operating tax, payments to the ultimate owner and the eventual sale together; the entity with the fewest opening filings need not have the lowest total tax. For branch-versus-subsidiary operations and bringing profits home, see Canadian business expanding into the US.

What does each buyer choice file in the US and Canada?

Filings follow the taxpayer that owns and operates the business. Buying shares through a Canadian corporation does not, by itself, make that corporation the operator of the target's US business. The table assumes a Canadian-resident buyer who is not a US citizen or US tax resident, a US operating business, and US companies that are non-resident in Canada. Its operating-return rules come from the Form 1040-NR instructions, Form 1120-F instructions and Form 1120 instructions.

US branch profits tax (30% by statute) applies to a dividend-equivalent amount even if nothing is paid home. For an eligible Canadian corporation the treaty caps it at 5% and allows a cumulative C$500,000 earnings allowance (Form 1120-F instructions; treaty, Article X(6)).

A nonresident individual with no US wages subject to withholding generally files Form 1040-NR by June 15 for a calendar year, and a foreign corporation with a US office generally files Form 1120-F by the 15th day of the fourth month after year-end. A late return generally forfeits deductions and credits unless filed within 16 months (individual) or 18 months (corporation) of the due date, subject to exceptions (Form 1040-NR instructions; 26 CFR 1.874-1(b); 26 CFR 1.882-4(a)(3)).

Form 5472 generally applies, when there are reportable related-party transactions, to a US corporation that is at least 25% foreign-owned, a foreign corporation engaged in a US trade or business, or a foreign-owned one-owner LLC that the US ignores. It is filed with the corporation's income tax return by that return's due date, including extensions. A penalty of US$25,000 applies to each failure to file properly or keep records, with more if it continues after IRS notice (IRS: Form 5472 instructions).

A non-resident corporation generally becomes your foreign affiliate when your equity percentage is at least 1% and your percentage plus related persons' totals at least 10% (section 95). Form T1134 is generally due 10 months after the reporting owner's year-end, subject to exemptions (CRA: foreign-affiliate returns).

A US-incorporated company managed from Canada can be resident in Canada under the central management and control test. The treaty tie-breaker generally makes a company created only under US law resident only in the US, and section 250(5) then deems it non-resident in Canada (CRA: corporate residence; Canada–US treaty, Article IV; section 250). For continuing filings, see Canadian owner of a US corporation.

Can a Canadian buy an S corporation's shares?

A Canadian can acquire the shares, but a nonresident alien or a company cannot preserve the target's S status. US tax status decides, not Canadian citizenship: a US citizen, including a dual citizen living in Canada, or a US resident alien can qualify (26 USC 1361(b)(1)(C); IRS: S corporation requirements).

The S election generally terminates when the corporation stops qualifying, including when an ineligible shareholder acquires shares (26 CFR 1.1362-2(b)). The company is then taxed as a C corporation, and the closing year splits into an S period and a C period. Buying the assets, or buying the shares with a joint section 338(h)(10) election, gives the buyer new asset costs when the target is an S corporation; the election treats the target as selling its assets and liquidating for US tax. The election needs a corporate buyer making a qualified stock purchase, and every S shareholder must consent, including those who do not sell. The instructions expressly address foreign purchasing corporations, so a Canadian corporate buyer is not automatically excluded (Form 8023 instructions).

An individual cannot make a qualified stock purchase, but a new US corporation the individual forms can if it is treated as the purchaser; a later merger into the target or liquidation can show it was not (26 CFR 1.338-3(b)(1)). Because the election is irrevocable (26 CFR 1.338(h)(10)-1), agree on seller cooperation and responsibility for the deemed-sale tax before fixing the price. The qualified-stock-purchase test and the section 336(e) alternative for a sale to an individual are in Buying a US business (26 CFR 1.336-1).

Why does Canada treat a US LLC differently?

The US classifies an LLC by its number of members and any election; Canada does not follow the US election (IRS: LLC classification).

The CRA's published position is that a US LLC is generally a corporation for Canadian tax purposes, based on its legal characteristics. That is an administrative position, so confirm it for the specific LLC (CRA: foreign entity classification).

The owner can be taxed on business income in the US while Canada sees corporate shares and later dividends. Article IV(7) can deny treaty benefits where the countries' treatment differs; do not assume ordinary treaty rates apply through a default LLC (Canada–US treaty).

For the complete filing and double-tax analysis, see Canadian owner of a US LLC.

How is the price split, and what cost do I get in each country?

An asset deal requires a supported price allocation; a share deal generally gives the Canadian buyer a cost in shares. Keep the owner's share cost separate from the target's asset costs. Buying all interests in an LLC can need both, because the countries classify it differently.

A US asset allocation follows the residual method, and inventory, equipment and goodwill produce different deductions; the allocation classes and Form 8594 are in Buying a US business. A section 338 election treats the target as selling its assets and a new target as buying them, and the allocation is reported on Form 8883 (Form 8023 instructions; Form 8883 instructions).

Canadian share cost generally includes acquisition costs that belong in the adjusted cost base. Record the US-dollar price and Canadian-dollar equivalent at acquisition, with exchange-rate evidence; do not translate original cost at a later sale-date rate (CRA: capital gains guide). A corporation that has elected to calculate its Canadian tax in another currency follows different rules (section 261).

If a Canadian taxpayer buys assets directly, prepare a separate Canadian tax-cost and deduction schedule. US allocation and election rules do not establish Canadian deductions by themselves.

How should I fund the purchase, and what do later payments trigger?

Money reaches the business as your equity, a loan or seller financing, and each is taxed differently. A loan to you, a loan to your US subsidiary and a capital contribution are different transactions, so name the borrower, lender and equity owner before moving money.

If your Canadian company lends to a non-resident, including your own US company, and the debt stays outstanding for more than a year without enough interest, section 17 can add interest to the Canadian company's income. Its controlled-foreign-affiliate exception depends on conditions including use of funds; common ownership alone is insufficient (section 17). Loans and interest between related companies may have to be reported on Form 5472, and the US can limit the interest deduction (IRS instructions). Seller notes with inadequate interest can trigger rules that treat part of the price as interest (IRS: installment sales).

For an ordinary US corporation paying an eligible Canadian beneficial owner, treaty dividend withholding is capped at 5% where the owner is a company owning at least 10% of voting stock, and 15% otherwise. Interest generally is taxable only in the lender's residence country. Check treaty eligibility, hybrid entities, profit-linked interest and other exceptions (Articles X, XI and XXIX A). These are limits on US tax at the source, not the owner's total tax across both countries. The US company must withhold on the dividend and is itself liable for tax it fails to withhold (26 USC 1461). To claim a treaty rate, the owner gives the US company Form W-8BEN (individual) or W-8BEN-E (entity) (W-8BEN instructions; W-8BEN-E instructions; W-forms for a Canadian corporation).

What if the buyers include Canadians and Americans?

What each owner files depends on that owner's US status, not citizenship alone. A US citizen living in Canada, or a Canadian who becomes a US resident, can hold S shares if the other S conditions are met; a Canadian resident who is not a US person cannot. A US partner does not remove that problem or the LLC classification mismatch.

A partnership-classified US LLC generally files Form 1065. US business income allocated to foreign partners can require Forms 8804 and 8805 and withholding of 37% on a non-corporate partner's share or 21% on a corporate partner's, paid in installments even without distributions, so allow for the cash. A partnership that fails to pay can be liable for the tax, penalties and interest (IRS: partnership withholding; who must withhold).

Collect each owner's tax residence, citizenship and any corporate ownership first. For a US company with a co-owner outside the US, see US company with a foreign co-owner; for a Canadian partner in a US LLC, see Canadian partner in a US LLC.

What should I settle before signing the letter of intent?

Settle the buyer, purchase type and funding route before fixing tax assumptions in the letter of intent, and put classification and election questions ahead of the price calculation.

1. Identify every buyer: entity type, tax residence, US status, ownership and where management decisions will occur.
2. Compare the transactions: assets, shares or LLC interests; seller willingness to make elections; proposed allocation and each country's tax costs.
3. Trace the money: cash source, actual borrower, loan terms, guarantees and seller note. Separate shareholder borrowing from subsidiary funding.
4. Assign closing responsibilities: election signatures and deadlines, foreign-reporting information and opening tax-cost records.

Ask the seller's side for formation documents, the ownership chart, draft agreements, financial statements, asset tax-cost schedules, federal and state returns, and election evidence, including any S election and LLC classification election. Use Buying a US business for detailed seller-tax and successor-liability review. State registrations, sales taxes and local liabilities need checks in the operating states; federal treatment does not settle them.

I already closed in my own name or the wrong entity. What can change?

A completed purchase may still be reorganized, but moving assets or shares is a new transaction requiring tax review. Establish what actually closed and any remaining election window before transferring anything.

A qualifying corporate acquisition may still permit a section 338 election until the 15th day of the 9th month beginning after the month of the acquisition date (Form 8023 instructions). An individual cannot make a qualified stock purchase, and shares later moved into a corporation in a section 351 exchange are not "purchased" (26 CFR 1.338-3(b)(1); 26 USC 338(h)(3)). An eligible LLC can elect corporate classification, effective no more than 75 days before filing, but the election can create deemed contributions or liquidations with tax consequences, and a further change is generally barred for 60 months (26 CFR 301.7701-3(c) and (g)).

A US property-for-stock transfer may qualify for section 351 deferral if its conditions are met (IRS: corporations). Canada needs its own analysis: related-party transfers below fair market value can produce deemed sale proceeds under section 69. A section 85 election defers an eligible transfer only to a taxable Canadian corporation, generally a company incorporated in Canada and resident there, so it is not available for a transfer to a US corporation (section 85; section 89).

Calculate the proposed transfer's tax in both countries before implementing it; relief in one country does not establish relief in the other.

Example

Illustrative only. Purchase amounts are in US dollars; Canadian share cost is in Canadian dollars. No tax or deductions are calculated.

A Canadian-resident individual considers paying US$1,000,000 for a US operating business using personal funds. Assume a C corporation target, no debt and no acquisition expenses.

• Direct share purchase: the buyer pays US$1,000,000 for all shares. At an illustrative exchange rate of C$1.40 per US$1, initial Canadian share cost is C$1,400,000. Assume the target's existing tax cost in all its assets is US$100,000; it does not increase merely because its shares changed hands.
• Assets through a new US C corporation: the individual funds the US buyer, which purchases the assets. Assume a supported allocation of US$200,000 to inventory, US$300,000 to equipment and US$500,000 to goodwill. The company starts with US$1,000,000 of asset costs: inventory is recovered as it is sold, goodwill is amortized, and equipment may qualify for a first-year deduction (IRS: Publication 946). The individual separately records the investment in the new company.

If the seller instead has an S election or wants an LLC-interest sale, redo the classification and election analysis before treating these options as equivalent.

Different for you?

These situations change the buyer, tax treatment or filing obligations:

• S corporation target, mixed owners, Canadian-company debt or a purchase needing restructuring: bring the letter of intent or signed agreement, returns, ownership chart, price split and funding plan to cross-border tax.
• Choosing a structure before finding a target: see US business for a Canadian resident.
• US citizenship or a green card: see Americans living in Canada.
• Ownership outside foreign-affiliate reporting, or other foreign property: check T1135 and related filings in Foreign property and affiliate reporting.
• An American buying a Canadian business: see American buying a Canadian business.
• A Canadian target: see Buying an existing Canadian business.
• The business owns real estate: see How a Canadian should own US property.
• You plan to run it from the US or move there: US tax residency can change your filings and S eligibility; see Moving from Canada to the US. Licences, foreign-investment reviews and immigration advice are outside this page.
• Planning an exit: see Selling a US business from Canada.