Canadian owner of a US company: how payouts are taxed

How does Canada tax each way of taking money out of my US company?

Canada first asks what the payment is and who receives it. Moving cash from a US company account to a Canadian account does not, by itself, determine its tax treatment. Sections 15 and 90 of the Income Tax Act distinguish shareholder benefits and loans from dividends.

First identify who owns the US company and who has a legal claim to the money. Pay for employment duties is salary; a payout on shares is a distribution; a genuine repayable advance is a loan. A Canadian company needs its own claim, such as shares or a service contract. A company paying personal bills may instead confer a taxable shareholder benefit under section 15(1). The US treatment of each payout is covered in Paying yourself as a foreign owner.

How is a salary from my US company taxed in Canada?

A Canadian resident reports salary for work performed in Canada as employment income, even if a US company pays it in US dollars. Under Article XV of the Canada–US treaty, salary for duties performed entirely in Canada is generally taxable only in Canada. Article XXIX still lets the US tax its citizens; double-tax relief is determined separately.

If Canadian payroll produces a T4, the salary generally goes on T1 line 10100. Employment income not shown on a regular T4 may go on line 10400 (CRA: line 10100; line 10400). A Canadian resident reports salary for both Canadian and US workdays in Canada. Track workdays by country: US days may also be taxed there and affect the Canadian credit for eligible US tax. A US payer alone does not make Canadian work US-source employment income.

A salary should reflect actual work and be recorded as salary, not relabeled after a transfer. For US withholding and filing, see Paying yourself as a foreign owner.

Does my US company have Canadian payroll duties if I work from Canada?

Yes, a US employer paying someone for employment in Canada can have Canadian withholding, remittance and T4 duties even if the employer has no Canadian incorporation. The CRA says a resident or non-resident employer that fails to deduct and remit amounts required by Regulation 102 can owe the missing amount, interest and penalties.

The employer must assess income tax, CPP and EI separately; coverage and province of employment depend on the actual work arrangement (CRA payroll guide). The CRA's certified non-resident employer exception concerns qualifying non-resident employees, so a Canadian-resident owner should not assume it removes payroll withholding. Running Canadian payroll covers registration and remittances.

Working from Canada may also affect whether the US company is resident, carries on business or has a permanent establishment here. See Choosing a US business structure as a Canadian resident.

How are dividends from my US corporation taxed on my Canadian return?

An individual resident in Canada reports the full US dividend in Canadian dollars on T1 line 12100, before US withholding. A foreign dividend does not qualify for Canada's dividend tax credit (CRA: line 12100).

For an individual who qualifies under the treaty, the US dividend withholding ceiling is generally 15%. A qualifying Canadian company owning at least 10% of voting stock may qualify for 5% instead (Article X). These are US withholding ceilings, not Canadian tax rates.

An individual may claim a Canadian foreign tax credit for eligible US tax on the same income, subject to Canadian limits. US tax withheld above the treaty rate is not creditable merely because it was withheld (CRA foreign tax credit folio, paragraph 1.35); see US tax withheld on payments to Canadians for refund routes. For the calculation on Forms T2209 and T2036, see Foreign income on a Canadian return.

What if Canada already taxed the company's profit to me as FAPI?

FAPI is income of a controlled foreign affiliate that Canada may tax to its owner before a payout. It can include investment income and, under specific rules, income from services a Canadian owner performs for the affiliate (section 95). If Canada already included FAPI, a later dividend needs a separate calculation. Section 91(5) may allow a deduction for its prescribed taxable-surplus portion, limited by the unused balance of prior FAPI additions to the share's tax cost after related deductions and earlier FAPI-backed dividends (section 92(1)).

The deduction is not automatic for every distribution or the whole dividend. Keep the affiliate's FAPI calculations, surplus records, prior Canadian returns and dividend dates together; the year Canada taxed the profit may differ from the year cash arrived. Section 91(1) can tax FAPI before any payout. If US tax on a disregarded LLC's profit was paid by you while Canada taxes a different person or amount, the credit can be difficult; see Canadian owner of a US LLC: filing in both countries.

How does Canada treat money I take out of a single-member US LLC?

Canada generally treats a US LLC as a corporation even when the IRS disregards a single-member LLC for US income tax (CRA; IRS). A US tax return showing LLC profit is therefore not enough to identify a Canadian withdrawal as previously taxed personal business income.

For Canada, identify whether the transfer is a pro rata distribution, salary, repayment of capital, loan or shareholder benefit. Section 90(2) can deem a pro rata foreign-affiliate distribution to be a dividend. A qualifying reduction of paid-up capital instead needs a section 90(3) election: the owner, jointly with connected holders where required, must notify CRA in writing by the earliest applicable filing deadline for the owner's tax year containing the end of the LLC's tax year of distribution (Regulation 5911(6)). A personal expense paid by the LLC may be a shareholder benefit. Prior FAPI may affect a later dividend deduction. An LLC managed from Canada may itself be taxable here; the residence and filing analysis belongs in Canadian owner of a US LLC: filing in both countries.

Can I borrow from my US company instead, and when is the loan taxed in Canada?

An individual Canadian resident who borrows from a corporation they own can have the loan included in income for the year borrowed, even when the lender is outside Canada (section 15(2); CRA shareholder-loan folio). A written note alone does not prevent the inclusion.

Section 15(2.6) excludes a loan repaid within one year after the lender's tax year in which it arose, if the repayment is not part of a series of loans and repayments. Section 15(2.4) can also exclude a qualifying employee loan for a home or work vehicle if it was made because of employment, not share ownership, with genuine repayment terms. An interest-free or low-interest loan can still create an interest benefit even when the principal is excluded (CRA shareholder-loan folio). Record the advance date, lender's year-end, repayment date, interest and any replacement advance before treating a balance as a loan.

If a loan was included in your income, a later genuine repayment may give you a deduction in the repayment year under paragraph 20(1)(j). A repayment in a series of loans and repayments does not qualify.

Does paying through my Canadian holding company change the tax?

Yes, if the Canadian holding company owns the US company's shares when the dividend is paid. Redirecting a dividend on your own shares to its bank account does not make it the holding company's foreign-affiliate dividend. Section 113 can allow the holding company a deduction, depending on the affiliate's surplus account and foreign taxes. If it later pays you a dividend, Canadian-dividend rules apply to that separate payment, including possible dividend tax credit eligibility.

The holding company must track the US company's earnings and surplus, not assume every dividend is exempt. Its T2 may need Schedule 25 and Form T1134. A loan from the foreign affiliate to the Canadian company can trigger the upstream-loan rule in section 90(6); one exception requires repayment within two years of the loan date, outside a series of loans and repayments. Section 90(9) may allow a surplus-backed deduction, but section 90(12) adds it back the next year; a genuine later repayment may permit a deduction under section 90(14). The US classification of an LLC can also change treaty treatment. These are reasons to review the full ownership and payment chain before a transfer.

What about my Canadian company charging my US company a management fee?

A Canadian company can bill a related US company for services it actually provides. The fee is business income of the Canadian company. To use that money personally, its owner needs a separate payment, such as salary for work or a dividend on their shares, with its own Canadian tax treatment. Canada's transfer-pricing rules require cross-border related-party terms to reflect what independent parties would agree to.

Keep the service agreement, work records, invoices, pricing method and proof of payment. The Canadian company may need Form T106 if its total reportable transactions with related non-residents exceed C$1,000,000 (CRA T2 guide). That filing threshold does not remove the need for support below it. A fee between the companies may also have US tax consequences; cross-border tax help can review the payment chain.

Which Canadian forms come with each method?

The forms follow the payment's legal character and the recipient. A Canadian resident should reconcile each bank transfer to the company's books and the Canadian return before filing.

The current Form T2036 says Quebec residents do not use it and no provincial credit remains if the federal credit covers all eligible foreign tax; Revenu Québec provides Form TP-772-V for its credit. Quebec residents also file a Quebec income tax return. Becoming a foreign-affiliate owner can trigger T1134 without a payout; it is due within 10 months after the owner's tax year-end (section 233.4). A Canadian company's T106, when required, is due six months after its tax year-end. Non-affiliate foreign shares may also require Form T1135 if the foreign-property test is met. For Form T1134's ownership and filing tests, see Foreign property and affiliate reporting.

Example

Illustrative only; all amounts are US dollars and no final tax is computed.

A Canadian resident owns a US corporation. The corporation has $100,000 of profit before owner pay. The owner works entirely from Canada and takes $40,000 in documented salary, leaving $60,000 before employer payroll costs and corporate tax, then receives a $20,000 dividend. Canada treats the salary as employment income. The US company must assess Canadian payroll duties for that salary. Canada treats the $20,000 gross dividend as foreign investment income, even if the owner receives only $17,000 after $3,000 of US withholding. The owner's Canadian foreign tax credit depends on eligible US tax and Canadian limits; the $3,000 withholding is not automatically the credit.

If the same business were a single-member US LLC disregarded by the IRS, the owner could not assume a $20,000 transfer is tax-free in Canada. The LLC's Canadian residence, legal distribution, FAPI history and any shareholder loan must be checked first.

Different for you?

• You work in the US as well as Canada: workdays can change source, withholding and credits. See Paying yourself as a foreign owner.
• You are also a US citizen or green card holder: your US personal filing position differs from a Canadian resident who is not a US person. See Americans living in Canada.
• The company is a single-member LLC, or earlier years contain FAPI: match US and Canadian income years before withdrawing profit. See Canadian owner of a US LLC: filing in both countries and get cross-border tax help.
• A Canadian holding company receives dividends or has an open loan from the US company: foreign-affiliate surplus and upstream-loan rules need a review. Get cross-border tax help.
• You are choosing a structure or directing the US company from Canada: see Choosing a US business structure as a Canadian resident.
• You need to run Canadian payroll: see Running Canadian payroll.
• You need to claim a foreign tax credit or check foreign-affiliate reporting: see Foreign income on a Canadian return and Foreign property and affiliate reporting.

Before reviewing a payout, gather the US corporation's Form 1120 or the LLC owner's US return, any Form 5472, Forms 1042-S, Canadian and US payroll slips, T1134 filings, prior FAPI and surplus calculations, and a dated ledger of every advance and distribution.