Canadian Business in the US: Branch, Subsidiary or LLC?

Does my Canadian corporation need a US company to sell to US customers?

No. A Canadian corporation can contract with US customers directly. Forming a US company is a separate decision from whether the Canadian corporation has US tax or filing duties. If it qualifies for treaty benefits, Article VII generally limits US federal tax on business profits to those attributable to a US permanent establishment. Without treaty protection, US law can tax income effectively connected with a US trade or business even without a treaty permanent establishment (IRS: Form 1120-F).

The treaty's permanent establishment test is different from the US domestic test for a trade or business. A Canadian corporation engaged in a US trade or business generally files Form 1120-F even if treaty protection removes federal tax on the profits (IRS: Form 1120-F instructions). The treaty covers federal income tax; state income, franchise and sales taxes need their own review. See where a business files state income tax returns.

Form 1120-F is generally due by the 15th day of the fourth month after year end if the corporation has a US office or place of business (the third month for a June 30 year end), or the 15th day of the sixth month if it does not; file Form 7004 by that date for an extension. A treaty exemption may require Form 8833 with the return; a missing required disclosure can cost a corporation US$10,000. A protective Form 1120-F can preserve deductions if the IRS later rejects the treaty position; an unfiled return can lose those deductions, generally after 18 months from the due date (IRS: Form 1120-F; IRS: filing responsibilities).

How do direct sales, a US branch and a US subsidiary compare?

Direct sales and a branch use the same Canadian corporation; a branch describes its US operations, not a new legal company. Its US activity, rather than the label "direct sales," drives Form 1120-F. A US subsidiary is a separate corporation (IRS: Form 1120-F; IRS: Form 1120).

The T2 is due six months after the Canadian corporation's year end. It does not replace Quebec's CO-17 or Alberta's AT1 provincial corporate return when the company has an establishment there (CRA: T2; Revenu Québec: CO-17; Alberta: AT1).

First identify which company signs contracts, owns US inventory, employs US workers and performs the work. If the Canadian company keeps those activities, forming a subsidiary does not move its US tax duties. If the US company takes them on, compare its own return and dividend withholding with the parent's foreign-affiliate reporting and any tax on transferring existing assets. Decide on an LLC's US tax election before it starts billing. Control of a subsidiary alone does not create a permanent establishment for its parent, but the parent's own activities still matter (treaty, Article V). For Form 1120-F and missed years, see Canadian corporation US tax returns.

Check where each corporation is managed: dual residence can change treaty relief and Canadian foreign-affiliate reporting. Treaty Article IV(3) generally assigns a dual-resident company to the country whose laws alone created it; otherwise the authorities must agree before it receives treaty benefits (treaty; CRA: corporate residence).

When does a US office, worker or warehouse change the decision?

A US office is a strong permanent establishment signal; a worker who habitually concludes contracts for the Canadian corporation can create one too. A sustained US services project can also create one without an office or contract-signing authority; check service days, customers and the revenue from one worker's US services. The treaty, Article V, also excepts certain activities limited to storage, display or delivery. A warehouse therefore needs a facts review, not an automatic yes or no.

Record who signs customer contracts, where staff perform the work, whether the company controls US premises, and where stock sits. These facts affect the permanent establishment test and whether the Canadian corporation has a US trade or business. A US hire adds separate payroll duties; see hiring an employee across the border. US inventory raises separate state and sales tax issues; see Canadian sellers with US inventory. A company operating outside its formation state may also need registration in another state.

If the company must withhold US payroll or dividend tax, an officer or other person controlling payment can personally owe the unpaid tax under Internal Revenue Code section 6672 if they willfully fail to collect or remit it. The IRS generally has 3 years from the later of return filing or the following April 15 to assess; an unfiled return has no assessment limit. Collection generally runs 10 years from assessment (IRS: personal liability; IRS: time limits).

What US tax can a Canadian corporation's branch face?

A Canadian corporation's US branch can face federal tax on effectively connected income; treaty-eligible corporations generally limit business-profits tax to profits attributable to a US permanent establishment. An additional branch profits tax can apply to a calculated amount of after-tax earnings, not every transfer of cash to Canada (treaty, Articles VII and X; IRS: Form 1120-F).

The US statutory branch profits rate is 30%. For an eligible Canadian corporation, the treaty caps the additional rate at 5% and allows a one-time earnings allowance of C$500,000, reduced by amounts already used by it or an associated company for the same or similar business. Reinvested US profits also affect the base. An election to reduce US liabilities can reduce the branch profits tax base but also reduces allocated interest deductions. The corporation's officer signs Form 1120-F, and the election statement accompanies a timely filed return, including extensions. Check the applicable Article XXIX A qualification route before using a treaty rate or exemption (IRS: Form 1120-F; treaty, Articles X and XXIX A).

What does a US corporation owned by my Canadian corporation file?

A US corporation files its own annual Form 1120 regardless of taxable income. If it has reportable dealings with its Canadian parent or another related party, it generally attaches Form 5472; merely having a foreign owner does not by itself establish a Form 5472 filing for a year with no reportable transactions (IRS: Form 1120; IRS: Form 5472).

Form 1120 is generally due by the 15th day of the fourth month after year end (the third month for a June 30 year end); Form 5472 is due with it, including extensions. A missed or substantially incomplete Form 5472 can cost the US corporation or disregarded LLC US$25,000. After 90 days from IRS notice, another US$25,000 applies per related party for each 30-day period (or part of one) of continued failure (IRS: Form 1120; IRS: Form 5472).

See foreign-owned US corporation filings for the detailed Form 5472 and owner-payment rules. Price any dealings between the Canadian and US companies on supportable terms; see pricing between related companies.

Why can a US LLC owned by my Canadian corporation cause a mismatch?

A wholly owned US LLC is normally disregarded for US income tax unless it elects corporate status. The US then generally treats its business income as the Canadian parent's; Canada generally treats the LLC as a separate corporation (IRS: LLC classification; CRA: treaty guidance).

That difference can put Form 1120-F and possible branch profits tax at the Canadian parent, while Canada applies foreign affiliate rules to the LLC. The US may tax current LLC business income to the parent while Canada treats the LLC as a separate company. The income and tax can fall in different entities or years, so Canadian foreign tax relief may not line up automatically. Even a formation contribution or distribution can trigger the disregarded LLC's Form 5472 and pro forma Form 1120 (IRS: Form 5472). Treaty Article IV(7) can also deny a treaty benefit for a payment when the countries treat the LLC differently. The LLC can elect US corporate tax status on Form 8832. Its Canadian parent as member, or an authorized LLC officer or manager, signs; generally file within 75 days after the desired effective date or up to 12 months before it. A later election is treated as a contribution of the LLC's assets to a corporation for US tax purposes. See Canadian ownership of a US LLC for the filing detail.

How do US profits reach the Canadian corporation?

Branch profits already belong to the Canadian corporation; moving cash from its US operation is not a dividend from a separate company. The corporation reports the business income on its Canadian T2 and may claim a foreign business income tax credit for eligible US tax, subject to the Canadian limits. US branch profits tax can apply under its own calculation even without a formal distribution (CRA: Schedule 21; IRS: Form 1120-F).

A US subsidiary may instead pay a dividend to its Canadian parent. The US company generally withholds and reports US tax on that dividend. If the Canadian corporate parent is the beneficial owner and qualifies for treaty benefits, the usual US dividend withholding cap is 5% when it owns at least 10% of the US company's voting stock, and 15% otherwise. Without treaty relief, US domestic withholding rules apply. If the shares are effectively connected with the parent's US permanent establishment, Article VII applies instead of these dividend caps (treaty, Article X; IRS: Publication 515). To claim an eligible treaty withholding rate, the Canadian parent generally gives the US withholding agent Form W-8BEN-E before payment; the US payer handles withholding and Forms 1042 and 1042-S (IRS: Publication 515).

Canada's treatment of that dividend depends on the subsidiary's surplus accounts. Active business income earned by an affiliate resident and operating in a treaty country can qualify as exempt surplus, allowing a Canadian deduction when distributed; other income can be treated differently (Department of Finance). A paid-up-capital reduction can instead qualify as a return of capital under Income Tax Act subsection 90(3): the Canadian parent makes a written election by its T2 filing deadline for the year containing the end of the affiliate's year of distribution; connected shareholders may need to elect jointly (Act; Regulation 5911(6)). Do not assume every US payment is a dividend or tax-free in Canada.

What does my Canadian corporation report about a US subsidiary?

A Canadian corporation that holds shares of a foreign affiliate completes Schedule 25 with its T2 and generally files Form T1134 within 10 months after its tax-year end (CRA: Schedule 25; CRA: T1134). A qualifying dormant affiliate appears on the T1134 summary without a supplement. See foreign property and affiliate reporting for other exceptions and contents.

An ordinary late T1134 can draw C$25 per day, from C$100 to C$2,500; knowing or grossly negligent failures can cost more (CRA: foreign reporting penalties).

Keep the ownership chart, the US company's financial statements and records of dividends, loans and other intercompany transactions. A US corporation is a separate taxpayer: its profit is not automatically the parent's current Canadian taxable income, though foreign accrual property income and surplus rules can change the timing (Department of Finance). Reportable dealings with the subsidiary can also require Form T106 (CRA: T2 guide); see related-company pricing.

For a Canadian-controlled private corporation or substantive CCPC with qualifying foreign accrual business income, Income Tax Act section 93.4 offers prescribed elections that can change the foreign-tax deduction and treatment of taxable-surplus dividends. The parent makes them by its filing deadline for the relevant year; the rule applies to years beginning after 2025, with separate elections for earlier years (Act, section 93.4).

Can I move existing contracts, customers or inventory into the US subsidiary tax-free?

Do not assume so. Moving inventory or valuable contract rights from the Canadian corporation to a related US company can be a disposition in Canada. Income Tax Act section 69 can substitute fair market value when property is transferred to a non-arm's-length person for less; the familiar section 85 election requires a taxable Canadian corporation as the transferee, so it does not generally cover a transfer to a US corporation. US Internal Revenue Code section 351 may defer US gain on a property-for-stock transfer to a controlled US corporation; it does not defer Canadian gain, and branch incorporation has separate US branch-tax rules (IRS: Form 1120-F).

If the Canadian company signed an existing contract and a new US corporation or LLC starts invoicing, check whether the contract, inventory or valuable rights were actually assigned, whether customer consent is needed, and what each transferred item is worth. A new invoice alone does not settle the Canadian or US tax result.

Before reissuing contracts or transferring assets, list which legal company owns each contract, stock item, customer relationship and other intangible; identify the fair market value and tax cost, any required customer consent, and which company will perform future work. The US tax result and possible branch profits tax on a branch incorporation also need review (IRS: Form 1120-F instructions).

Example

Illustrative amounts in US dollars. A Canadian corporation has US customer contracts and plans to open a US office. For its first full year there, it expects US$200,000 of sales and US$120,000 of related costs. It is also considering moving its contracts and unsold inventory with a US$40,000 book value to a wholly owned US corporation.

If the Canadian corporation runs the office and keeps the contracts, assume it has a treaty permanent establishment and all US$80,000 of projected profit (US$200,000 sales minus US$120,000 costs) is attributable to it. That profit enters its Form 1120-F analysis and Canadian T2; branch profits tax is a separate calculation. If the US corporation instead runs the office and earns the same future profit after a valid transfer, it reports that profit on Form 1120, while its Canadian parent reports its foreign-affiliate interest and any later dividend under Canadian rules. The inventory's US$40,000 book amount is not proof of its fair market value; the contract rights may also have value. The transfer needs a separate tax calculation before either company changes invoices.

Different for you?

• You already sell in the US or missed US returns: check Canadian corporation US tax returns.
• Your Canadian company already owns a US LLC: review Canadian ownership of a US LLC.
• Your US corporation has owner payments or missed Form 5472: see foreign-owned US corporation filings.
• You have employees, US inventory or operations in multiple states: see cross-border hiring, US inventory, state income tax filings and registration in another state.
• You need T1134 filing details or intercompany prices: see foreign affiliate reporting and related-company pricing.
• You are choosing a structure, moving an existing business or adding a US parent: bring the ownership chart, contracts, asset values, work locations, inventory states and planned distributions to a cross-border tax review.