Canadian Owner of a US LLC: What to File in Each Country

Why do the two countries treat the LLC differently?

By default the US ignores a single-member LLC and taxes its owner directly. Canada treats the same LLC as a corporation. Almost everything below follows from that mismatch.

• US view. Unless it elects otherwise on Form 8832, a US LLC with one owner is disregarded as separate from its owner (Form 8832 instructions). Its income is your income.
• Canada's view. The CRA classifies a foreign entity by comparing it with Canadian entities (Folio S4-F16-C1, ¶1.3). It says a US LLC is a taxable corporation for Canadian tax purposes, whatever its US treatment (IC71-17R6, ¶88). The US Treasury's Technical Explanation of the 2007 treaty protocol, which the Government of Canada says it subscribes to, uses as its standard example a US LLC that the US treats as transparent and Canada treats as a corporation. It names only partnerships and bare trusts as transparent in Canada (Technical Explanation, Article IV).

An LLC with unusual terms could be classified differently; that needs a review.

What gets filed in each country?

For a calendar tax year:

What does the US require?

When does the LLC file Form 5472?

For any year it has a reportable transaction with a related party: you, or a person or company related to you or the LLC, such as a family member or a company you own more than half of. Money you put in or take out counts. It files a separate Form 5472 for each related party it dealt with. For this one reporting rule, the IRS treats a US LLC wholly owned by a foreign person as a corporation. It files a pro forma Form 1120 (name, address and two items on page 1) with Form 5472 attached, by fax or mail; it cannot be e-filed. The penalty for not filing, filing a substantially incomplete form, or not keeping the required records is US$25,000, plus US$25,000 for each related party for each 30 days the failure continues more than 90 days after an IRS notice (Form 5472 instructions). The due date is the 15th day of the fourth month after year-end (Form 1120 instructions). Details: Foreign-owned single-member LLC filing.

Do you owe US income tax?

Only on US-source income and income effectively connected with a US trade or business (Publication 519). Pay for services is sourced where the work is done. If you do all the work while in Canada, the LLC's service income is generally foreign-source for the US, even when the clients are American. Work done while in the US is US-source.

You file Form 1040-NR if you are engaged in a US trade or business, even if you have no taxable or US-source income, or if you have US-source income not fully taxed by withholding (Publication 519). Whether you are engaged in a US trade or business depends on what happens in the US: see When foreign owners owe US tax.

If you conclude you are not engaged in a US trade or business, you can still file a protective Form 1040-NR. An individual generally gets deductions only on a return filed within 16 months of its due date, so if the IRS later finds effectively connected income, a late return can be taxed without them (Publication 519).

Nonresidents generally do not pay US self-employment tax unless a social security agreement puts them in the US system (Publication 519).

Does the tax treaty protect you?

Generally not, for income earned through an LLC that is not resident in Canada. Article IV(7)(a) of the treaty says an amount is not treated as derived by a Canadian resident when the US sees it as earned through an entity not resident in Canada, and Canada, because it does not treat that entity as transparent, taxes it differently than if earned directly (treaty text). The Technical Explanation gives this exact case: US-source income of a US entity that Canada treats as a corporation is not considered derived by its Canadian-resident owners, even if the US treats the entity as transparent.

The practical effect: treaty relief is generally unavailable for that income. That includes Article VII, which normally lets the US tax a Canadian's business profits only through a permanent establishment in the US. If the LLC is resident in Canada (see below), how the treaty applies needs its own review.

What else applies on the US side?

• Form W-8BEN. When a US client asks, you give it in your own name. The single owner of a disregarded entity is treated as the beneficial owner of its income. If the income is effectively connected with a US trade or business, you give Form W-8ECI instead. Form W-8ECI does not cover pay for services you perform in the US yourself: the client generally must withhold 30% of that pay, and the usual exemption is a treaty claim on Form 8233, which the treaty rule above may rule out for pay earned through the LLC (Form W-8ECI instructions; Form 8233 instructions). A corporate owner uses Form W-8BEN-E in place of W-8BEN (Form W-8BEN instructions).
• FBAR. A US LLC is a US person for FBAR purposes even though it is disregarded for tax, so a Canadian bank account in the LLC's name can require one (FBAR instructions). See Foreign account reporting.
• Beneficial ownership report. FinCEN now exempts companies created in the US (FinCEN).

What does Canada require?

Is the LLC resident in Canada?

Check this first. A company is generally resident where its central management and control is actually exercised, a question of fact (CRA: Residency of a corporation). An LLC whose only owner lives in Canada and makes its decisions here is at real risk of being resident in Canada.

The treaty's tie-breaker for companies may not help. It applies to a company resident in both countries (Article IV(3)), and the Technical Explanation says an LLC that is not itself taxable in the US is not a US resident under the treaty. The CRA page above also says a company claiming treaty residence must be taxed comprehensively in the treaty country.

If the LLC is resident in Canada:

• It files a T2 every year, like every resident corporation (CRA: who files a T2), within six months after its year-end (CRA: when to file).
• It is not a Canadian-controlled private corporation, which must be incorporated in Canada or resident here since June 18, 1971 (CRA: Type of corporation). So it cannot claim the small business deduction (T2 guide, chapter 4).
• For the same reason, dividends it pays you are taxed on your T1 without the gross-up and dividend tax credit that offset corporate tax on dividends from Canadian corporations (s. 82(1)(d); s. 89(1)).
• It reports dividends it pays you on a T5 slip and summary by the last day of February after the calendar year (Income Tax Regulations, s. 201; s. 205).
• It is not a foreign affiliate, so the T1134 rules below do not apply.

A non-resident LLC must also file a T2 for any year it carries on business in Canada, even if it claims a treaty exemption (CRA: who files a T2). It is then taxed in Canada on its taxable income earned in Canada (s. 2(3)) and may owe branch tax on top (s. 219). Because neither the LLC nor you is a US resident under the treaty, the Technical Explanation indicates the permanent-establishment protection is not available to it. Whether working from home in Canada means the LLC carries on business here depends on the facts.

When do you file Form T1134?

If the LLC is not resident in Canada, it is your foreign affiliate when you own at least 1% and you and related persons together own at least 10% (Income Tax Act, s. 95(1)). A wholly owned LLC is also a controlled foreign affiliate, so you file the full supplement with the LLC's financial statements (CRA: T1134 questions).

• Due: within 10 months after your tax year ends, which is October 31 for an individual (s. 233.4(4); CRA). It is separate from your T1; individuals can file it electronically.
• First year in Canada: an individual does not file it, or Form T1135, for the year they first become resident in Canada (s. 233.7).
• Dormant LLC: no supplement is needed if your cost of the shares stays under C$100,000 all year, the LLC's gross receipts are under C$100,000, and the fair market value of its assets never exceeds C$1,000,000 during the year. You still list it on the summary.
• Late filing: C$25 a day, at least C$100 and up to C$2,500, and more if the failure is knowing or grossly negligent (CRA: Table of penalties). The CRA also gets three extra years to reassess income connected with a foreign affiliate (CRA).

When does Canada tax a non-resident LLC's income?

It depends on the kind of income:

The last row matters most for freelancers and consultants. When you are the one doing the work, the idea that LLC income is taxed in Canada only when you take it out generally does not hold. A separate deduction is meant to stop FAPI being taxed again when it is later paid out (s. 91(5)). Nothing is included for a year in which the LLC's FAPI is C$5,000 or less (s. 95(1), "participating percentage").

Money you get other than as a distribution can also count, whether or not the LLC is resident in Canada. Personal costs the LLC pays for you are generally a shareholder benefit, and a loan from the LLC is income unless you repay it within one year after the end of the LLC's tax year, and not as part of a series of loans and repayments (s. 15).

Do you file Form T1135 for the LLC?

Not for an LLC that is not resident in Canada: shares and debts of a non-resident corporation that is your foreign affiliate are not specified foreign property (s. 233.3(1); CRA: T1135). If the LLC is resident in Canada, that exclusion does not apply, and whether your interest in it counts toward the threshold needs a review. Your other foreign property still counts, such as a US bank account in your own name. See Foreign property and affiliate reporting.

Can the same income be taxed twice?

Yes. Canada's foreign tax credit is generally the lesser of the foreign tax paid and the Canadian tax on that income, claimed on Forms T2209 and T2036 (CRA: line 40500). It works cleanly when both countries tax the same income, in the same year, to the same person. With a US LLC, all three can differ (Folio S5-F2-C1):

• Timing. The US taxes you in the year the LLC earns the income; Canada may tax a dividend years later, and the earlier US tax may then not reduce it. Foreign tax counts for the year it is owed under foreign law (¶1.32), and unused non-business-income tax cannot be carried to another year; a deduction may be allowed instead, which gives less relief (¶1.24).
• Type. The folio does not address LLCs. Its nearest example is US tax that a US citizen resident in Canada pays, as shareholder, on an S corporation's business income: not business-income tax, because the shareholder did not carry on the business, but possibly non-business-income tax (¶1.27). FAPI may add a limit. The Act counts FAPI as income from your shares (s. 91(1)). If your US tax is treated as tax on your FAPI, it counts for the credit only up to 15% of the income, and the rest can only be deducted (s. 20(11); ¶1.22).
• Taxpayer. Canada's deduction for foreign tax on FAPI counts tax paid by the affiliate (s. 95(1), "foreign accrual tax"; s. 91(4)). With a disregarded LLC, you pay the US tax, not the LLC. If the LLC is resident in Canada, Canada taxes the LLC while the US taxes you.

How these rules meet in your case depends on your facts.

What if a Canadian corporation owns the LLC?

The results differ enough to need their own review:

• US: the LLC still files Form 5472 with a pro forma Form 1120. The corporation files Form 1120-F if it is engaged in a US trade or business, and in some other cases, such as US-source income whose tax was not fully withheld. It may also owe US branch profits tax on US profits it does not reinvest (Form 1120-F instructions). The treaty rule in Article IV(7)(a) applies to income earned through the LLC the same way.
• Canada: if the LLC is not resident in Canada, the corporation files Form T1134 within 10 months after its own year-end (s. 233.4(4)), and Form T106 if, in a business it carries on, its transactions with the LLC and other related non-residents total more than C$1,000,000 in the year (s. 233.1); see Foreign property and affiliate reporting. A corporation cannot claim a foreign tax credit for foreign tax that relates to its income from shares of a foreign affiliate; relief for that tax runs through other rules, such as section 113 (Folio S5-F2-C1, ¶1.28 and ¶1.50).

What do people consider instead?

• Electing corporate tax status on Form 8832. The LLC then pays US corporate tax and files a full Form 1120, and both countries see a corporation. It still files Form 5472 for reportable transactions with you or other related parties. A company taxable in the US can be a US resident under the treaty, so the company tie-breaker in Article IV(3) can then apply (treaty text).
• A Canadian corporation that does business in the US.
• A US C corporation.

Each changes both countries' filings. For a US company that is not resident in Canada, income from services you perform yourself is still FAPI; what can change is that US tax the company pays may reduce it (s. 91(4)). Compare them in Setting up a US business as a Canadian resident.

Example

Illustrative only; no tax is computed.

Maya lives in Ontario and builds websites for US clients through her own single-member US LLC. In one year the LLC bills US$120,000 and spends US$20,000, and Maya takes out US$60,000 as a distribution of profit. She does all the work from home in Ontario and never works in the US. The LLC has only a US bank account.

In the US:

• The LLC files a pro forma Form 1120 with Form 5472 by April 15, reporting the US$60,000 she took out and any money she put in.
• Maya gives Form W-8BEN to clients who ask for it.
• Her work is done in Canada, so the income is generally foreign-source for the US. If nothing else ties her to a US trade or business, she may have no Form 1040-NR to file, though she may choose to file a protective one. A week of work at a client's US office would likely change that, and treaty protection may not be available.
• No FBAR: the LLC has no account outside the US.

In Canada:

• Maya runs the LLC from Ontario, so it may be resident in Canada. If it is, the LLC files a T2 on its US$100,000 profit, converted to Canadian dollars, without the small business deduction. The US$60,000 she took out is then also a dividend on her T1, with no gross-up or dividend tax credit.
• If it is not resident, Maya files Form T1134 by October 31, with the LLC's financial statements. Because she performs the services herself, the US$100,000 profit is likely FAPI on her T1 for that year, including the US$40,000 left in the LLC. A deduction is meant to stop the US$60,000 she took out being taxed again. She files no T1135 for the LLC.
• Even if not resident, the LLC may carry on business in Canada, since Maya does the work here. If so, it also files a T2 and may owe Canadian tax, including branch tax, on that business income. How that tax interacts with her FAPI is technical: relief such as the section 91(4) deduction may apply, so the two may not simply add up.
• If the LLC is resident or carries on business in Canada, it likely has to register for GST/HST: its US$120,000 of sales is over the small supplier limit, even though sales to US clients are likely zero-rated.

In both cases, Canada is likely to tax the profit in the year it is earned, not only when Maya takes it out.

Different for you?

• You are a US citizen or green card holder: the US side changes completely. See Americans living in Canada.
• You have not formed the LLC yet: compare structures first in Setting up a US business as a Canadian resident.
• The LLC has two or more owners: the US default becomes a partnership, which changes the US filings. Get cross-border tax help.
• The LLC owns US real estate: US rent is taxed at 30% of the gross amount unless you choose to be taxed on net rental income, which means filing Form 1040-NR. A sale is taxed as business income, and the buyer may have to withhold tax (Publication 519). Get cross-border tax help.
• You also bill Canadian clients through the LLC: if the LLC is not resident in Canada, those clients must withhold part of each fee for work done in Canada. The LLC files a T2 to get back any excess, or applies in advance for a waiver (IC75-6). Get cross-border tax help.
• You missed Form 5472 or Form 1040-NR: see Catching up on missed US returns.
• You missed Form T1134 or Form T1135: see Foreign property and affiliate reporting.
• You spend long stretches in the US: you could become a US resident for tax. See Snowbirds and US residency.
• You are leaving Canada: Canada generally treats your LLC shares as sold at fair market value when you leave (CRA). If the LLC is resident in Canada and its management leaves too, the LLC may owe its own emigration tax (s. 128.1(4); s. 219.1). Get cross-border tax help.
• You want both countries' returns done together: see cross-border tax.