CCPC Owner Moving to the US: Keeping the Company, Form 5471

What changes when a CCPC owner moves to the US?

The corporation stays a Canadian corporation and keeps filing a T2 every year. What changes is its owner: once a US resident controls it, it usually stops being a Canadian-controlled private corporation (CCPC) in Canada and becomes a controlled foreign corporation (CFC) in the US. Both changes raise the yearly work and can raise the tax.

What makes a case not simple: retained earnings or investments inside the company, a spouse or partner who still owns shares and lives in Canada, work done for the company from the US, and any missed year of Form 5471. Gather the corporation's T2s and financial statements, the share register, minute book and directors' list, your move date, and every dividend, salary and loan paid to you.

Whether to keep the company at all is covered in moving across the border with a company. Departure tax on the shares when you leave is in departure tax on private company shares.

Does the corporation stay Canadian after I move?

Yes. A corporation incorporated in Canada after April 26, 1965 is deemed resident in Canada, no matter where its owner lives (CRA: residency of a corporation).

For US tax, a corporation is domestic only if it was created in the US (26 U.S.C. 7701(a)(4)), so running the company from your US home does not move its tax residence, as central management and control might with some other countries. If a company were ever resident in both, the Canada–US treaty, Article IV(3), makes it resident only where it was created (treaty). It can still create a US business presence for the company itself; see the salary section below.

Is a Canadian corporation a corporation for US tax?

Generally yes, automatically. US regulations list "Canada, Corporation and Company" as entities always treated as corporations, so the company cannot elect to be treated as a partnership or disregarded entity (26 CFR 301.7701-2(b)(8)).

The exception is a Nova Scotia unlimited liability company, or any other Canadian company all of whose owners have unlimited liability under federal or provincial law. Such a company is not on the automatic list. Unless it elects otherwise, a single-owner unlimited liability company is ignored for US tax, so its income goes on your own return and it is reported on Form 8858 instead of Form 5471; with two or more owners it is a partnership (26 CFR 301.7701-3(b)(2)). Canada still taxes it as a corporation, so it needs its own review before the first US return.

Does the corporation lose CCPC status when I become a non-resident?

Usually yes, if non-residents control it. A CCPC must not be controlled, directly or indirectly, by one or more non-resident persons. Shares held by non-residents are also tested as if one person owned them all; if that person would control the company, it is not a CCPC (CRA: type of corporation).

Losing CCPC status changes the Canadian result:

Sources: CRA: corporation tax rates.

Timing trap: when a corporation stops being a CCPC for a reason other than an acquisition of control, its tax year is deemed to end immediately before that time and a new year begins (Income Tax Act, section 249(3.1)). Your move can create an extra short T2 year. Control includes shares a spouse or relative holds and facts beyond votes, so a co-owner who stays in Canada does not settle the answer by itself. The control mechanics are in non-resident owners of a Canadian corporation.

Which US forms do I file each year: Form 5471, Form 8938, FBAR?

A US-resident owner of a Canadian corporation generally files Form 5471 with Form 1040, by the return's due date including extensions, every year, even when the company pays nothing out (IRS: Form 5471 instructions).

A sole owner living in the US is usually a Category 4 and Category 5 filer on the same Form 5471. A share already reported on Form 5471 still counts toward the Form 8938 threshold; you list it on Form 8938 by naming the form that reports it (IRS: Form 8938 instructions). A Form 5471 not filed on time can bring a penalty of US$10,000 per company per year.

Which categories apply and their schedules are in information forms for a foreign company. Turning the Canadian books into Form 5471 figures is in US information return from Canadian corporation books. For the shares on Form 8938, see foreign asset report after moving from Canada. For a year already missed, see late foreign company information return.

Is the company's profit taxed to me in the US before I take it out?

It can be. A foreign corporation is a CFC when US shareholders own more than 50% of its vote or value, and a US shareholder of a CFC may have to include certain company income on Form 1040 in the year the company earns it, with no cash paid out. Two rules decide this:

The high-tax exception for tested income applies only when an election is in effect and the item's effective Canadian rate, measured under US rules, is greater than 18.9%, which is 90% of the US corporate rate (26 CFR 1.951A-2(c)(7)). Income the company earns from a US business is left out of both rules, unless a treaty exempts it or lowers its US tax, and is taxed on the company's own US return (26 U.S.C. 952(b); 26 CFR 1.951A-2(c)(1)). The controlling US shareholder makes the election for the CFC year by a statement with the original return, or on an amended return within 24 months of the original return's unextended due date.

Here losing CCPC status matters. Active income at the federal general rate plus a provincial general rate, for example Ontario's 11.5%, has a headline rate above 18.9%. Income that still gets the small business rate usually does not. The headline rate is only a starting point; the test uses the item's actual Canadian tax on income figured under US rules, and must be checked every year.

If the profit is included on your return, you pay US tax on it at your own rates with no credit for the Canadian tax the company paid, so the same profit can be taxed twice. That is why the high-tax election matters. A section 962 election lets an individual be taxed on the inclusion like a US corporation for a year, including a credit for part of the Canadian tax, with later effects on dividends.

A spouse who stays in Canada with shares changes the count: shares owned by a spouse who is not a US citizen or resident are not treated as yours for the CFC test (26 U.S.C. 958(b)(1)). At an even split the company may not be a CFC, and a company that mostly holds investments may then fall under the PFIC rules instead. Recheck both countries' tests the year your spouse moves. The detailed rules are in US owners of foreign companies.

How are dividends I take taxed in Canada and the US?

Canada withholds tax from the dividend, and the US taxes it again with a credit for that withholding.

1. Canada: dividends to a non-resident are subject to Part XIII tax at 25%. The corporation withholds it, remits it and issues an NR4 slip (CRA: T4061). For an individual living in the US, treaty Article X(2) caps the rate at 15% (treaty); the corporation applies it when you give it Form NR301 or equivalent proof of US residence. If it fails to withhold, the company owes the tax plus a 10% penalty, and its directors are liable with it (Income Tax Act, section 227.1). The 5% rate is for a company shareholder, not an individual.
2. US: report the dividend on Form 1040. A Canadian corporation is generally a qualified foreign corporation because it is covered by the treaty, so the dividend can get qualified-dividend rates if the holding-period rules are met. It is not qualified if the company was a passive foreign investment company in the year paid or the year before (IRS: Publication 550). Your state may also tax the dividend under its own rules.
3. Credit: the Canadian withholding can be claimed as a foreign tax credit, but only up to the treaty rate. If more was withheld because no NR301 was given, the excess is not creditable in the US; you apply to the CRA to get it back (IRS: Publication 514).
4. No double count: a dividend paid from earnings you already reported as Subpart F or net CFC tested income is generally previously taxed earnings, excluded from US income. Track those amounts year by year on Form 5471.
5. Loans: money you take as a shareholder loan and do not repay by one year after the end of the corporation's tax year in which the loan was made is treated as a dividend to a non-resident, with the same Part XIII withholding (Income Tax Act, sections 15(2) and 214(3)). See shareholder loan when you leave Canada.

When and how to take money out, before or after the move, is in paying yourself from your corporation after moving abroad.

Is salary for work I do from the US taxed in Canada?

Generally not, if the work is done in the US. Under treaty Article XV(1), employment income of a US resident is taxable only in the US unless the work is performed in Canada (treaty). The US taxes it as US-source wages, because pay for services is sourced where the work is done (IRS: source of income).

Because your employer is a Canadian company, pay for days you work in Canada is taxable in Canada once it exceeds $10,000 in Canadian dollars for the year (Article XV(2)), and you may need to file a Canadian return for it.

The company, as your employer, generally owes US payroll withholding and Social Security and Medicare tax on pay for work done in the US, whatever its own residence (26 U.S.C. 3121(b)). Salary also lowers the company's profit, which changes the CFC calculation. Working for the company from a US home can create a US trade or business or permanent establishment for the company itself; see Canadian corporation US tax return.

Why is a corporation that only holds investments the hardest case?

Almost all of its income is passive, so it can be taxed to you each year under Subpart F. Interest may clear the high-tax test once the company pays general rates, but Canada taxes only half of a capital gain (Income Tax Act, section 38) and generally deducts dividends from other Canadian companies (section 112), so those items usually do not. Two more layers sit on top:

• The company itself: a foreign corporation is a passive foreign investment company (PFIC) when at least 75% of its gross income is passive or at least 50% of its assets produce passive income. While you are a US shareholder and it is a CFC, the CFC rules generally apply instead of the PFIC rules for those shares (26 U.S.C. 1297(d)).
• The funds it holds: Canadian mutual funds and ETFs are often PFICs, because their income and assets are mostly passive (26 U.S.C. 1297(a)). If you own 50% or more in value of the company, you are treated as owning your share of the funds it holds (26 U.S.C. 1298(a)(2)), which can bring Form 8621 and PFIC tax on top of Form 5471.

This is why the keep-or-close comparison in moving across the border with a company matters most for a holding company, ideally before the move. The fund rules are in PFIC rules when moving to the US.

What should I set up in the first year?

Set up records that serve both countries from the first year, because Form 5471 is due with your first US return.

• Books: keep the Canadian-dollar books, mapped to the Form 5471 income statement, balance sheet and earnings and profits schedules.
• Move date and ownership: the date you became a US resident, the share register, and any shares held by a spouse or relative.
• Payouts: every dividend with its date, the Part XIII tax withheld, the NR4 slip and the NR301 you gave the company.
• Earnings already taxed in the US: a year-by-year record of Subpart F and tested-income inclusions and dividends paid from them.
• Governance: directors' list, where board decisions are made, minutes, and a log of days you work in each country, which bear on Canadian tax on your salary and on whether the company has a US business presence. A federally incorporated company still needs at least one director who lives in Canada (Canada Business Corporations Act, section 105(3)); provincial rules differ.
• Investments: a list of every fund or ETF the company holds, with purchase dates and cost.

Example

All figures are illustrative and in Canadian dollars. Rates are rounded.

Consulting corporation, owner now in Arizona

An Ontario consulting corporation earns C$200,000 of profit a year. Its sole shareholder moves to Arizona. In Canada, it stops being a CCPC, which can create a short T2 year at the change; afterwards its active income bears the federal general rate plus Ontario's general rate, about 26.5% in total. In the US, the owner files Form 5471 as a Category 3, 4 and 5 filer in the year of the move and as a Category 4 and 5 filer from then on. At about 26.5%, Canadian tax is about C$53,000, leaving C$147,000. Whether that profit is also taxed to him each year depends on how it is classed: fees under contracts that name him or let clients choose him are Subpart F income; other active profit is tested income. Either escapes only through its high-tax election, if the actual Canadian rate measured under US rules clears 18.9%. If not, up to about C$147,000 can be added to his US income with no credit for the C$53,000 unless he makes a section 962 election. Because he works from Arizona, part of the profit may instead be US business income of the company itself, taxed on its own US return.

Taking a C$100,000 dividend

The same owner gives the company Form NR301, and it pays a C$100,000 dividend. Canada withholds 15%, C$15,000; the company remits it and issues an NR4 slip. The owner reports the dividend on Form 1040 and claims a foreign tax credit for the C$15,000. Any part paid from earnings he already reported as CFC income is excluded from US income. Without the NR301 or equivalent proof, Canada would withhold C$25,000, and only C$15,000 could be credited in the US.

Holding corporation with C$800,000 of Canadian ETFs

A holding corporation earns C$30,000 a year of dividends and gains from Canadian ETFs. After the move, that income is Subpart F income the owner may report each year whether or not it is paid out. The owner is also treated as owning the ETFs, which may be PFICs with their own forms. The yearly US filings can be heavy for the income involved, which is why this case is worth reviewing before moving.

Different for you?

• You have retained earnings, investments in the company, or a spouse co-owner in Canada: CCPC status, the CFC test and the high-tax election all turn on facts; get cross-border tax help before the first US return.
• You have not moved yet: compare keeping, paying out and winding up in moving across the border with a company.
• You are a US citizen living in Canada: see American owners of Canadian corporations.
• You missed Form 5471 for a year: see late foreign company information return and get cross-border tax help.
• The company sells into or works in the US: see Canadian corporation US tax return.
• You need the Part XIII, NR4 and NR301 steps: see non-resident owners of a Canadian corporation.