US Subsidiary of a Canadian Company: Setup and First-Year Filings

What does a Canadian company with a US subsidiary set up and file?

A Canadian corporation sets up a US subsidiary by incorporating it in one state, issuing its shares to the parent for a recorded payment, and getting it an EIN. From the first year, two sets of returns run side by side: the subsidiary files in the US, and the parent reports the subsidiary to the CRA.

To the CRA, a wholly owned US subsidiary is the parent's foreign affiliate, and the two companies are related, so they do not deal at arm's length (Income Tax Act, section 95; section 251).

What makes it more than paperwork: both countries see the same intercompany transactions, so the numbers on Form 5472, T1134 and T106 must agree with both sets of books. A missing or substantially incomplete Form 5472 alone costs US$25,000. A loan from the parent, goods sold between the companies, US bills the parent paid directly without an agreement, US staff and a short first year each add a step.

Gather: the parent's board resolution, the subsidiary's certificate of incorporation, bylaws and share register, proof the parent paid for its shares, the EIN letter, any loan or intercompany agreement, and both companies' bank records.

What must the Canadian parent decide and sign first?

The parent's board should approve the investment in one resolution that settles the state, the share capital, the people in charge and the funding. Each choice flows into the US filings, so settle it before anything is filed.

• State. A subsidiary generally must register in each state where it does business, as that state defines it, wherever it is formed; forming in one state and operating in another means filings in both. See which state to form in.
• Share capital. The number of authorized shares and their par value. In Delaware these drive the yearly franchise tax; see Delaware franchise tax.
• Directors and officers. Delaware requires at least one director, who must be a natural person; directors need not be shareholders, and section 141(b) sets no residence test (Delaware Code, Title 8). Officers carry the tax role: the president, vice president, treasurer or another authorized officer signs Form 1120 (IRS). Name people who know they will sign.
• Funding. How much goes in for shares and how much as a loan (see below). If one non-resident person, or a group of non-residents not dealing at arm's length, controls the Canadian parent, either can be treated as a dividend paid to that foreign owner under the foreign affiliate dumping rules, unless an exception applies (Income Tax Act, section 212.3).
• Tax year. The subsidiary adopts its tax year on its first return; changing it later generally needs IRS consent on Form 1128 (IRS).

Holding the subsidiary's board meetings in Canada does not make it a Canadian resident: if Canada would also treat it as resident, a company created only under US law is resident only in the US under treaty Article IV(3), and the Income Tax Act follows the treaty (section 250(5)). But if its business is run from an office in Canada, that office can be a permanent establishment, and Canada can tax the profits that belong to it under Articles V and VII (treaty). Even without one, a subsidiary that carries on business in Canada, which includes soliciting orders there through the parent's staff, files its own T2 within six months of its year-end, with Schedule 91 claiming the treaty exemption (Income Tax Act, section 150; section 253; CRA: T2 guide). If the parent has not yet chosen between a branch, a subsidiary and an LLC, read Canadian business in the US first.

Setting up a US subsidiary: what are the steps in order?

Form the company, issue its shares, get the EIN, then open the bank account; payroll and sales tax accounts come only when triggered. The steps below use Delaware; other states use similar filings under their own statutes.

1. Appoint a registered agent. Delaware requires every business entity to keep a registered agent with a physical street address in Delaware (Delaware Division of Corporations). See registered agents.
2. File the certificate of incorporation. It states the corporation's name, its registered office and agent, its purpose (any lawful business is enough), its authorized shares, and the incorporator's name and mailing address (Delaware Code, section 102).
3. Adopt bylaws and elect officers. After filing, the incorporator or the named directors hold an organization meeting, or act by written consent, to adopt bylaws and elect directors and officers (section 108).
4. Issue shares to the parent. The board resolves how many shares are issued and for what consideration: cash, property or another benefit (section 152). Record the issue in the share register.
5. Get the EIN on Form SS-4 (next section).
6. Open a bank account in the subsidiary's name, and have the parent pay for its shares from its own account into it, so the payment is traceable. See US business address and bank account.
7. File BEA Form BE-13 within 45 calendar days of formation. A new US company owned by a foreign parent reports to the Bureau of Economic Analysis even if the bureau never asks; when the expected cost to set it up is US$40 million or less, the report is the short BE-13 Claim for Exemption (15 CFR 801.7). See setting up a US subsidiary for a foreign company.
8. Register as a foreign corporation in each other state where it does business. See registering in another state.
9. Open payroll and sales tax accounts only when triggered: when it first pays wages in a state, or reaches sales tax nexus there. See sending employees to work in the US and sales tax thresholds by state.
10. Sign intercompany agreements before the first intercompany invoice or loan (below).

How does the subsidiary get an EIN when no officer has an SSN?

By fax or mail on Form SS-4. The online application is open only to applicants located in the US whose principal officer has a US taxpayer identification number, and the IRS no longer gives domestic taxpayers an EIN by phone (IRS: Form SS-4 instructions). The IRS staff manual keeps the international phone line for companies formed outside the US, so a Delaware subsidiary is sent to fax or mail even when it is run from Canada (IRM 21.7.13).

The responsible party on lines 7a–7b must be an individual, never the Canadian parent: the person who ultimately owns or controls the subsidiary, or exercises ultimate effective control over it and its funds. If that person has no SSN or ITIN and cannot get one, enter "foreign" or N/A on line 7b. Routes, processing times and current numbers: EIN without an SSN.

Should the parent fund the US subsidiary with shares or a loan?

Both are possible; the paperwork differs. A share purchase needs a board resolution, a share register entry and proof of payment. A loan needs a signed agreement with a fixed interest rate and repayment date that both companies follow, or the advance may be treated as shares (26 USC 385); it also adds reporting in both countries.

Reporting every owner contribution on Form 5472 is a rule for a foreign-owned single-member LLC, not a corporation. Line-by-line reporting of a loan is in putting money into your US corporation from abroad; withholding and Forms 1042 and 1042-S are in US subsidiary of a foreign company.

In Canada, a loan to a non-resident that stays outstanding more than a year without reasonable interest can create deemed interest income for the parent under section 17; subsection 17(8) can exempt a loan to a controlled foreign affiliate, to the extent the parent shows the money was used throughout to earn active business income (Income Tax Act, section 17). Set the rate the way unrelated parties would; see pricing between your Canadian and US companies. For telling shares from a loan after money has already moved, see putting money into your US corporation from abroad.

What does the US subsidiary file in its first year?

Form 1120, with the foreign-ownership question answered and a Form 5472 for each related party it dealt with, plus any withholding returns and its state filings (IRS: Form 1120 instructions).

• Form 1120. Every domestic corporation files, with or without taxable income. It is due by the 15th day of the fourth month after year-end; a new corporation's short first year follows the same rule, counted from the end of the short period. A June year-end follows the same rule for tax years beginning after 2025; the third-month June deadline in the Form 1120 instructions covers only earlier years (Public Law 114-41, section 2006(a)(3)). Form 7004, filed by the due date, extends filing by six months but not payment. Check "Initial return". Federal tax is 21% of taxable income; estimated payments apply if the corporation expects US$500 or more of tax.
• Schedule K, questions 4 and 7. Answer 4a Yes, because a corporation owns the shares, and attach Schedule G (Form 1120) naming the parent; 4b is generally also Yes if one individual owns half or more of the parent, and Part II of Schedule G then names that person. Answer 7 Yes when one foreign person owns at least 25% of the vote or value, and enter the percentage, Canada and the number of Forms 5472 attached.
• Form 5472. File a separate form for each related party with which the subsidiary had a reportable transaction: the parent, and any sister company it paid or billed. Attach them to Form 1120 by its due date, including extensions, and check the first-year box (IRS: Form 5472 instructions). After 90 days from an IRS notice, a continuing failure adds US$25,000 per related party for each 30-day period.

A corporation created in the US is a US person for the FBAR, even when its parent is Canadian (FinCEN). From year two on, see US subsidiary of a foreign company.

What does the Canadian parent file in its first year?

Schedule 25 with its T2, Form T1134 for the subsidiary within 10 months after its own tax year ends, and Form T106 if its dealings with related non-residents, such as the subsidiary, pass C$1,000,000 (CRA: T2 guide).

• Form T1134. The parent files a return for each foreign affiliate (Income Tax Act, section 233.4), with a separate supplement per affiliate. If a Canadian holding company owns the parent, only the lowest-tier Canadian corporation reports the affiliate (CRA).
• Dormant first year. Under a CRA administrative policy, no supplement is filed, only base information on the T1134 summary, if the parent's cost of its interest was under C$100,000, and the subsidiary's gross receipts were under C$100,000 and its assets never above C$1,000,000. Gross receipts include non-revenue receipts such as loans, so funding alone can end dormancy (T1134 instructions).
• Form T106. Required when reportable transactions with all non-arm's-length non-residents together exceed C$1,000,000: one summary, a separate slip for each non-resident, filed apart from the T2 within 6 months after year-end (T106 instructions; section 233.1). Sales of goods or services to the subsidiary, loans, interest and the parent's investment in the subsidiary's shares all count toward the total. The T106 and T1134 limits are in Canadian dollars, so convert the subsidiary's US-dollar amounts before comparing.
• Form T1135. Shares of, and debts owed by, a foreign affiliate are not specified foreign property, so the subsidiary itself is not listed (section 233.3). Quebec's own foreign property return, TP-1079.8.BE-V, leaves them out too (Quebec, 2025 c. 35, s. 128).

A late T1134 or T106 costs the greater of C$100 and C$25 a day, for up to 100 days; knowing or grossly negligent failures cost more (section 162). If a year was already missed, see missed foreign affiliate report for a US company.

Which intercompany agreements should exist from day one?

Every recurring flow between the companies needs a signed agreement before the first payment: a services agreement if the parent's staff work for the subsidiary, a licence for software or a brand, a purchase or distribution agreement for goods, a cost-sharing agreement for intangibles developed together, and a loan agreement. Under treaty Article IX, each country can adjust terms between related companies that differ from what unrelated companies would agree (treaty), and the same flows appear on Form 5472, which has its own part for cost-sharing arrangements, and on T106. A common gap: the parent pays the subsidiary's US bills directly with no agreement or recharge, so neither set of books says whether each payment was a loan, a share payment or a fee. See pricing between your Canadian and US companies and books for a Canadian company and its US company.

How does profit come back to Canada later?

Usually as dividends. US withholding on a dividend is capped at 5% when the Canadian parent is a company owning at least 10% of the voting stock and qualifies under the treaty's limitation-on-benefits article, XXIX-A (treaty, Article X). A parent owned mostly by people who live outside Canada and the US may fail that article's ownership test and need another, such as its active-business test. Without a valid treaty claim, the statutory rate is 30% (IRS: Publication 515). The subsidiary owes any tax it fails to withhold (26 USC 1461), and an officer responsible for withholding who willfully fails to withhold or pay it over can be charged the same amount personally (26 USC 6672).

The parent gives the subsidiary a Form W-8BEN-E claiming the treaty rate in Part III, using line 15 for an ownership-based dividend rate (IRS: Form W-8BEN-E instructions); see W-forms for a Canadian corporation. In Canada, profit the subsidiary earns from an active business in the US generally goes into its exempt surplus, and the parent can deduct a dividend paid from exempt surplus, so that profit is generally not taxed again (Income Tax Act, section 113; Income Tax Regulations, section 5907). Those accounts build from year one. Rent, interest and other income from property differ: unless the business has more than five full-time employees, the parent may have to include that income in its own Canadian income each year, paid out or not (Income Tax Act, section 91; section 95). More on surplus in Canadian business in the US; for a later sale, see selling a US business from Canada.

Does the US subsidiary file a BOI report?

No. FinCEN exempts companies created in the US from beneficial ownership reporting; the remaining reporting companies are entities formed under a foreign country's law that register to do business in a US state (FinCEN). So the Canadian parent may have to report only if it registers itself in a state; see registering a Canadian corporation in a US state and who still files a BOI report.

Example

Illustrative amounts. The subsidiaries' figures are in US dollars; Canadian thresholds are in Canadian dollars, converted at an illustrative C$1.40 per US dollar.

Ontario software company hires US sales staff

An Ontario software corporation forms a Delaware subsidiary to employ two US salespeople. It buys shares for US$50,000 and lends US$100,000 under a signed agreement at 5% a year, with interest paid quarterly.

• Subsidiary: its first Form 1120 answers question 7 Yes, 100%, Canada. Form 5472 for the parent shows the loan balances and the interest paid; the share purchase is not a Part IV line. It deducts interest as paid, withholds nothing because the parent qualifies for treaty benefits and gave a W-8BEN-E, and files Forms 1042 and 1042-S by March 15. Payroll registrations start with the first wages.
• Parent: it reports the interest as income. The subsidiary received about C$210,000, over the C$100,000 gross-receipts limit, so the T1134 needs a full supplement. The share purchase, loan and interest total well under C$1,000,000, so no T106.

BC manufacturer stocks a Texas subsidiary

A BC manufacturer forms a Texas subsidiary to hold inventory and sell to US retailers. The subsidiary buys US$2,000,000 of goods from the parent in year one.

• Subsidiary: formed in Texas, it needs no foreign registration there, but registers in any other state where it does business. Form 5472 reports the inventory purchases from the parent. Its first Texas franchise tax report is due May 15 of the following year.
• Parent: US$2,000,000 is about C$2,800,000, over C$1,000,000, so it files T106 within six months after year-end, plus a T1134 supplement. A purchase agreement with pricing support should exist before the first shipment, because both tax authorities can test the price.

Alberta company forms in December, starts in January

An Alberta corporation with a December 31 year-end forms a Delaware subsidiary on December 10 and buys shares for US$10,000. Nothing else happens until January.

• Subsidiary: it adopts a calendar tax year, so its short first year runs December 10 to 31. Form 1120, marked "Initial return", is due April 15. If the share purchase was its only dealing with the parent, no Form 5472 is generally needed; if the parent also paid the incorporation fees and the subsidiary owes them back, that balance is a loan to report. Its BE-13 Claim for Exemption is due within 45 days, by January 24. Its first Delaware annual report and franchise tax are due March 1.
• Parent: its T1134 is due October 31. Its cost (about C$14,000) and the subsidiary's receipts (about C$14,000) are under C$100,000 and assets are far under C$1,000,000, so the summary carries base information and no supplement.

Different for you?

• The first Form 1120, Form 5472, T1134 and T106 fall due together, or money has already moved without papers: the same transactions must agree on all of them; get cross-border tax help.
• People or companies outside Canada own or control the Canadian parent: the investment can become a deemed dividend under the foreign affiliate dumping rules, and the treaty rates may not apply; get cross-border tax help before money moves, and see Canadian company for a China-resident founder.
• The subsidiary will be run from the parent's Canadian office, or the parent's staff will sell for it in Canada: it may owe its own T2 and Canadian tax on part of its profit; get cross-border tax help.
• The subsidiary will hold US rental property or investments rather than run a business: the parent may be taxed in Canada on that income each year; get cross-border tax help. If the Canadian corporation owns US rental property directly, see Canadian corporation owning US real estate.
• A US citizen or green-card holder owns the Canadian parent: the owner has US filings of their own for the Canadian corporation; see American owners of Canadian corporations and get cross-border tax help.
• You are still choosing between a branch, a subsidiary and an LLC: read Canadian business in the US.
• The subsidiary will buy goods, services or software from the parent: see pricing between your Canadian and US companies and get cross-border tax help.
• You or other Canadian employees will work for the subsidiary in the US: see sending employees to work in the US.
• The Canadian corporation will register in a state itself: see registering a Canadian corporation in a US state.
• A person, not a corporation, will own the US company: see forming a US corporation from Canada.
• The parent is not Canadian: see setting up a US subsidiary for a foreign company.
• A T1134 or Form 5472 was already missed: see missed foreign affiliate report for a US company and get cross-border tax help.