Canadian resident doing US business: which structure fits?

What decides the choice?

Four facts shape it: where the work is done and by whom, where the customers, staff and assets are, who will invest, and how you will take the profits out.

Under the treaty, the US taxes a Canadian resident's business profits only if they come through a permanent establishment (PE) in the US (Canada–US Tax Convention, Article VII). States look at activity, not just formation: New York, for example, taxes a corporation formed elsewhere that does business or derives receipts from activity in New York (New York Tax Department).

This page assumes you live in Canada and are not a US citizen or US resident for tax purposes.

How do the three options compare?

What happens with a Canadian corporation selling to US customers?

Canada taxes it as a resident corporation. US federal tax reaches its business profits only if it has a US PE; states apply their own rules.

A PE includes (Article V):

• a fixed place of business in the US, such as an office, a branch or a place of management;
• a person in the US who habitually concludes contracts in the corporation's name (an independent agent acting in the ordinary course of its business does not count);
• services by an individual present in the US for 183 days or more in any 12-month period, if more than 50% of the corporation's gross active business revenue in that period comes from that individual's US services;
• services provided in the US for 183 days or more in any 12-month period on the same or connected projects for US customers.

A place used only to store, display or deliver the corporation's own goods, such as stock in a US warehouse, is not a PE (Article V, paragraph 6). The corporation may still be engaged in a US trade or business, so the filings below can apply.

US filings. If the corporation is engaged in a US trade or business but has no PE, it files Form 1120-F and attaches Form 8833. The claim that business income is not attributable to a US PE is one the IRS requires to be disclosed; failing to disclose can cost US$10,000 per failure for a corporation, including a foreign one (Form 8833; Treasury Regulations section 301.6712-1). The IRS also tells a foreign corporation to file a protective Form 1120-F when it has limited US activities, or when it decides that a treaty removes its US tax. This keeps its right to deductions if that view turns out wrong; deductions generally require filing within 18 months after the due date, which for a corporation with no US office is generally the 15th day of the 6th month after year end (Instructions for Form 1120-F). If the corporation registers to do business in a US state, it may also have to file a beneficial ownership report with FinCEN within 30 days of registering; US-formed companies no longer file one (FinCEN).

States. The treaty covers US federal income tax (Article II). Its PE rule does not limit state taxes, so a state can tax a Canadian corporation that meets the state's own rules (Treasury Technical Explanation of the Convention).

Customers' paperwork. US customers may ask for Form W-8BEN-E. It documents that the corporation is foreign and goes to the customer, not to the IRS. For work done in the US, the corporation can claim the treaty exemption in Part III of the form (Instructions for Form W-8BEN-E).

Canadian tax. Every resident corporation files a T2 return every year, even with no tax payable (CRA), within six months after its year end (CRA: when to file). It also files Form T1135 if its foreign property, such as a US bank account, costs more than C$100,000 at any time in the year; a US-dollar account at a bank in Canada is not foreign property just because of its currency (CRA: T1135 questions). A Canadian-controlled private corporation (CCPC) pays a federal net rate of 9% on active business income up to the C$500,000 business limit, and 15% on income above it, plus provincial tax (CRA: corporation tax rates). The limit is shared among associated corporations, shrinks for corporations with large taxable capital or passive income, and covers only income from an active business carried on in Canada (T2 guide). If you would be your client's employee but for the corporation, the CRA can treat it as a personal services business, which gets neither the small business deduction nor the general tax reduction and pays an extra tax (CRA: personal services business).

Investors. A corporation controlled by non-residents or public corporations is not a CCPC (CRA: type of corporation), so it loses the small business rate.

Getting money out. Salary, or dividends. Dividends from a taxable Canadian corporation qualify for the dividend tax credit (CRA).

If it does have a US PE, the US taxes the profits attributable to it (Article VII), may add a branch tax (a US tax on PE profits not reinvested in the US) that the treaty limits (Article X), and Canada credits US tax on US profits (Article XXIV).

What happens with a US C corporation?

The corporation pays US federal tax of 21% on its taxable income (Instructions for Form 1120), plus state tax where it applies. You pay Canadian tax on what it pays you. If you do the corporation's work yourself, Canada usually also taxes you each year on its profit as foreign accrual property income (FAPI), even when nothing is paid out, with a deduction based on the US tax the corporation paid (Income Tax Act, section 95(2)(b); section 91(1) and (4)).

US filings. Form 1120, generally by the 15th day of the 4th month after year end (earlier for some June 30 year ends). A corporation at least 25% owned by one foreign person generally files Form 5472 if it had reportable transactions with a related party (Instructions for Form 1120). The penalty for not filing it is US$25,000 (Instructions for Form 5472). The state of formation may charge a yearly tax even if you do no business there: every Delaware corporation files an annual report and pays franchise tax (Delaware Division of Corporations).

Canadian filings. A US corporation you own is your foreign affiliate. You file Form T1134 each year, due 10 months after the end of your tax year (CRA: T1134). See foreign property and affiliate reporting.

Where it is run from. A corporation is resident where its central management and control is exercised (CRA: residency of a corporation). A US corporation run from Canada can be resident in both countries; the treaty then treats it as resident only in the US, where it was created (Article IV). But if the work is done in Canada, the corporation may have a PE in Canada. Canada can then tax the profits from that work (Article VII), and a non-resident corporation that carries on business in Canada files a T2 even if it claims a treaty exemption (CRA).

Getting money out. Dividends paid to a foreign person face US tax of 30% unless a treaty lowers it (IRS: FDAP income). The treaty rate is 15% if you own the shares personally, and 5% if the owner is a Canadian company holding at least 10% of the voting stock (Article X). The corporation withholds the tax and files Forms 1042 and 1042-S (Instructions for Form 1042); give it Form W-8BEN to get the treaty rate (IRS).

In Canada you report the full dividend. Foreign dividends do not get the dividend tax credit; you may claim a foreign tax credit for the US tax withheld (CRA: line 12100). The credit covers only foreign tax you paid, not the corporation's US tax (Folio S5-F2-C1, paragraph 1.37). If Canada already taxed the profit to you as FAPI, you can deduct much of the dividend so it is not taxed twice (section 91(5)). A Canadian holding company that receives the dividend instead deducts some or all of it, depending on how the affiliate's profits were earned and taxed (its surplus accounts) (Income Tax Act, section 113).

Estate tax. Shares of a US corporation that you own personally are US property for US estate tax (26 USC 2104). If your US property is worth more than US$60,000 at death, your estate files Form 706-NA; the treaty allows a prorated credit (IRS: estate tax for nonresidents). Shares of a Canadian corporation are not US property.

What happens with a US LLC?

Each country sees a different taxpayer. The US looks through a single-member LLC to you; Canada treats the LLC as a corporation.

• US. A single-member LLC is disregarded unless it elects on Form 8832 to be taxed as a corporation (IRS); with that election it is taxed like the US corporation above. A disregarded LLC wholly owned by a foreign person still files a pro forma Form 1120 with Form 5472 for any year it has a reportable transaction with you, such as money you put in or take out (Instructions for Form 5472). The state where it is formed may charge a yearly tax: a Delaware LLC pays one for every year it is on the state's records (Delaware Division of Corporations). See foreign-owned single-member LLC filing and when foreign owners owe US tax.
• Canada. The CRA treats a US LLC as a corporation (Information Circular IC71-17R6, paragraph 88). If the LLC is not resident in Canada, you file T1134 for it. Canada then taxes you as a shareholder on what the LLC pays you and, if you do the work yourself, usually also on its profit each year as foreign accrual property income (FAPI), even when nothing is paid out (Income Tax Act, section 95(2)(b)). See Canadian owner of a US LLC.
• Mismatch. The US taxes you on the LLC's US business profits as they are earned; Canada taxes you on distributions and, often, FAPI. These can fall in different years and be different kinds of income, so the US tax may not fully offset the Canadian tax. The result depends on the facts.
• Treaty limits. US-source income of a US entity that Canada treats as a corporation is not considered derived by its Canadian-resident owners for treaty purposes, even though the US treats the entity as transparent (Article IV, paragraph 7(a); Treasury Technical Explanation). Treaty benefits may therefore not apply to income earned through the LLC.
• Residence. A disregarded LLC is not a US resident under the treaty (Treasury Technical Explanation), so the tie-breaker that protects a US corporation does not apply. An LLC managed from Canada may be resident in Canada. If it is, it files a T2 and pays Canadian corporate tax on its own profits, without the small business rate, because it was not incorporated in Canada and so is not a CCPC (CRA: type of corporation). It is then not your foreign affiliate, so there is no T1134 or FAPI (Income Tax Act, section 95(1)), and its dividends get no dividend tax credit (CRA).

Can a Canadian resident own an S corporation?

Not unless you are also a US citizen or US resident. S corporation shareholders may not be nonresident aliens (IRS: S corporations). See should you elect S corporation status.

What if you stay self-employed without a company?

The same treaty test applies: US federal tax reaches your business profits only through a US PE (Article VII); states apply their own rules. If you are engaged in a US trade or business, you must file Form 1040-NR even if the treaty exempts the income (Instructions for Form 1040-NR). Attach Form 8833 for the no-PE position unless the amounts it would report total US$10,000 or less for the year (Form 8833; Treasury Regulations section 301.6114-1(c)(2)). For work done in Canada, US customers may ask for Form W-8BEN, the individual version of the foreign-status form (IRS). For any work you do while in the US, the payer generally must withhold 30% unless you give it Form 8233 claiming the treaty exemption, which needs an SSN or ITIN (Instructions for Form 8233). Incorporating in Canada changes your Canadian tax, not the treaty test.

Do sales taxes depend on the structure?

Mostly not. Sales tax follows where and what you sell. One difference can be registration: a business carrying on business in Canada, including a Canadian corporation, must register for GST/HST once it passes the small supplier threshold, even if its sales are zero-rated exports (CRA: when to register). A US company that does not carry on business in Canada generally does not, but one run by an owner working in Canada may be carrying on business here.

• US. A state can require a seller with no physical presence in it to collect its sales tax (South Dakota v. Wayfair). Each state sets its own thresholds and rules.
• Canada. Most goods and services exported from Canada are zero-rated for GST/HST (CRA). A US company selling to Canadian customers may have to register: see non-resident and digital sellers.

Example

Illustrative only. Maya lives in Ontario and is not a US citizen or resident. She writes software for US clients from her home office and never works in the US. Her business makes $100,000 of profit a year and she pays it all out. Figures are in Canadian dollars, with US amounts treated at par; salary and personal tax brackets are ignored. This shows only where tax lands.

In this example the US corporation costs more tax and more returns: its two US taxes total $32,850, against $11,200 of Canadian corporate tax, and Canada's FAPI deduction and foreign tax credit reduce only Canadian tax, never US tax. The comparison can change if Maya moves work, staff or assets to the US, or takes on investors who require a US company.

Different for you?

• You are a US citizen or green-card holder living in Canada: the rules differ, including S corporation eligibility. See Americans living in Canada.
• You already own a US LLC: see Canadian owner of a US LLC.
• You work in the US, even briefly: check the services PE rule and US withholding above; for long stretches, see snowbirds and US residency.
• You missed US filings such as Form 5472: see catching up on missed US returns.
• You own a foreign company and need to know what to report in Canada: see foreign property and affiliate reporting.
• You have partners, investors or more than one owner: business formation.
• You want the structure reviewed against your facts: cross-border tax.