Canadian Owner of a US C Corporation: What to File

What does the US corporation file each year?

A US C corporation files Form 1120 each year, including an inactive year. Its taxable income is generally subject to 21% federal income tax (IRS: Form 1120 instructions).

Foreign ownership alone does not trigger Form 5472 without a reportable transaction. State filings may also apply; a Delaware corporation files an annual report and pays franchise tax (Delaware). For details, see Foreign-owned US C corporation filing and Delaware franchise tax.

Could Canada treat the corporation as resident because I run it from Canada?

Yes under Canadian domestic law: the CRA looks at where the corporation's central management and control is actually exercised. Canadian board meetings, decisions and direction can matter more than its US incorporation address (CRA: corporate residence).

Keep records of director locations and major decisions; the incorporation address alone does not settle Canadian residence.

How does the treaty decide corporate residence?

If the corporation is resident in both countries under domestic law but was created under only US law, Article IV(3) treats it as resident only in the US for treaty purposes. Section 250(5) then deems it nonresident of Canada for Canadian income tax purposes (treaty, Article IV; Income Tax Act, s. 250(5)).

Check the creation documents. If the company was created under both countries' laws, the tax authorities must seek agreement; without it, treaty benefits may be unavailable. The owner's home is not the corporate tie-breaker (treaty, Article IV(3)).

Can Canada tax the US corporation's Canadian work anyway?

Yes. Treaty residence in the US does not erase a Canadian business or permanent establishment. Canada may tax profits attributable to a Canadian permanent establishment, and a nonresident corporation carrying on business in Canada must file a T2 within six months after year-end even if it claims treaty relief. The US company must qualify under Article XXIX A before relying on the treaty's business-profit protection (treaty, Articles VII and XXIX A; CRA: Canadian business and T2 deadline).

Canadian branch tax may also apply to the establishment's earnings. For a treaty-eligible US company, Article X(6) caps the additional tax at 5% and includes a cumulative C$500,000 allowance shared with certain associated companies (Income Tax Act, s. 219; treaty, Article X(6)).

A Canadian home office used as the company's fixed place of business, or an owner habitually signing contracts for it in Canada, may create a permanent establishment. The treaty also has a separate rule for substantial services performed in Canada. A home address by itself proves none of these conditions (treaty, Article V).

A Quebec establishment can also require a separate provincial CO-17 return (Revenu Québec).

Do I report the shares on Form T1134 or T1135?

For a US corporation that is nonresident in Canada, Form T1134 generally applies when your equity interest is at least 1% and you plus related persons hold at least 10%. A wholly owned corporation is a controlled foreign affiliate (Income Tax Act, s. 95(1)).

The exclusion depends on the company being a foreign affiliate. For T1134 attachments and other foreign property, see Foreign property and affiliate reporting.

Can Canada tax profit before I receive a dividend?

Ordinary active business profit kept in the US corporation generally does not enter your personal income merely because the company earned it (Income Tax Act, s. 90(1)). But your share of foreign accrual property income (FAPI) from a controlled foreign affiliate can enter your Canadian income before a dividend (s. 91(1)).

FAPI can include interest, certain rents and income from a business treated as non-active. Services performed by a related Canadian resident for the affiliate can change the classification; software sales are not automatically passive income (Income Tax Act, s. 95).

What happens when the corporation pays me a dividend?

If you are a Canadian resident, a nonresident alien for US tax and entitled to treaty benefits, US dividend withholding is generally capped at 15%. Give the payer Form W-8BEN. A US citizen or other US person gives Form W-9 instead; see Americans living in Canada for that filing path (treaty, Article X; IRS: W-8BEN).

The US corporation must withhold when it pays the dividend and is liable for tax it fails to withhold. An individual who controls the payment can also be a withholding agent (IRS).

Report the gross foreign dividend in Canadian dollars on your personal return. Foreign dividends do not qualify for Canada's domestic dividend tax credit. You may claim a federal foreign tax credit on Form T2209 and a provincial or territorial credit on Form T2036 outside Quebec; Quebec residents use Form TP-772-V. The federal credit is generally limited to the lesser of eligible US tax paid and Canadian tax on that US income; the corporation's own US income tax is not your personal withholding tax (CRA: foreign dividends; CRA: foreign tax credit; Revenu Québec). For salary, dividends and loans together, see Paying yourself from a US company.

What changes if my Canadian holding company owns the shares?

The US corporation still files Form 1120. The Canadian holding company files its own T2 and generally files T1134 for the US shares; it, rather than you, receives the dividend (CRA: T2 filing). If it beneficially owns at least 10% of the US corporation's voting stock and qualifies for treaty benefits, the US dividend rate is generally 5%. It gives the payer Form W-8BEN-E; the treaty's limitation-on-benefits rules must also be checked (treaty, Articles X and XXIX A; IRS: W-8BEN-E).

Canadian tax on the holding company's dividend turns on the affiliate's surplus category. Qualifying active business income earned in the US can produce exempt surplus; other income can produce a different result. The US withholding is therefore not automatically a simple personal foreign tax credit (Department of Finance Canada). Gather the US corporation's earnings, taxes and dividend history before moving shares or declaring a dividend.

Example

Illustrative figures in US dollars. Assume the corporation was created only under US law; the Canadian-resident owner is neither a US citizen nor a US resident alien, has made no US joint-return election changing foreign-person status, and qualifies for treaty benefits. No other tax adjustments apply.

A Toronto owner runs the company from home

A Toronto resident wholly owns a Delaware C corporation with US$80,000 of taxable software profit and lends it money. It files Form 1120 and reports the loan on Form 5472. At a 21% federal rate, US tax before credits is US$16,800. The treaty makes the corporation US-resident; the owner files T1134. If the profit is active business income rather than FAPI, the owner does not include that retained profit in personal income. The home office, work and contract authority need review to decide whether the corporation also files a Canadian T2 and owes tax on profits attributable to a Canadian permanent establishment.

The company pays its owner a dividend

The corporation pays the individual a US$50,000 dividend. With a valid W-8BEN, US withholding is US$7,500 at 15%. The owner reports the gross dividend in Canadian dollars and may claim a foreign tax credit for eligible US withholding, subject to the Canadian limit.

A Canadian holding company owns it instead

The Canadian holding company owns all voting shares and qualifies for treaty benefits. On the same US$50,000 dividend, US withholding is US$2,500 at 5% with a valid W-8BEN-E. The holding company files T1134; its Canadian tax depends on the affiliate's surplus accounts.

Different for you?

• You own a US LLC: its two-country treatment differs; see Canadian owner of a US LLC.
• The US corporation has Canadian staff, an office or a home-based director: get cross-border tax help to assess Canadian business activity, a permanent establishment and a T2 before filing.
• Your Canadian corporation earns US income directly: see Canadian corporation US tax return.
• You missed a US filing: see Missed foreign-owner filings and penalties.
• You plan to sell the shares: see Selling US startup shares as a Canadian founder.