If you have a U.S. LLC and are a Canadian citizen or resident, contact us immediately.
AG Tax posted an article earlier this year regarding the problems that U.S. LLCs (Limited Liability Company) can have for Canadians. Since that article was posted, there are still many Canadians contacting us who have started a U.S. LLC. Our tax specialists cannot emphasize enough the negative tax implications for Canadians. Typically, these LLC recommendations come from a US-focused lawyer or accountant, who has not considered the Canadian tax implications. The tax professionals from AG Tax would like to go over how the LLC works in the U.S. and highlight the Canadian tax problem.
How does a U.S. LLC work in the U.S.?
U.S. LLCs are useful investment vehicles when used within the United States by U.S. individuals who have no intentions of becoming Canadian residents. They provide limited liability to LLC members, in a similar way that a corporation does for its shareholders. However, an LLC can act as a tax “flow through” entity, meaning that the earnings of the LLC are not taxed at the corporate level. The earnings flow through the LLC and are taxed directly in the hands of the LLC members. This prevents taxation on the earnings at the corporate level, and then again when the dividend is in the hands of the shareholder. In addition, a U.S. LLC can choose how it would like to be treated for U.S. tax purposes – either as a tax sole proprietorship (if only one LLC member), a partnership, or a corporation.
Major Tax Problems for Canadians with an LLC
LLCs only receive the benefits stated above while under the jurisdiction of the U.S. Internal Revenue Service (IRS). Canadians, or anyone who is a resident of Canada, who choose to use a U.S. LLC must be aware that the Canada Revenue Agency (CRA) might treat the LLC inefficiently from a tax perspective. The CRA, as seen in several court cases, views the U.S. LLC as a corporation, regardless of the U.S. tax treatment. This creates a mismatch on how the income is reported, who pays the tax, and ultimately a limitation on the tax credits available on the Canadian tax return.
In simple terms, the U.S. LLC has business income from the U.S., and the U.S. LLC members pay tax in the U.S. on their personal U.S. tax return. All or a portion of the income is reported on the Canadian tax return. However, due to the difference in how the IRS and CRA view the LLC, the Canadian taxpayer does not get a full foreign tax credit on the Canadian tax return. They instead get only a portion of foreign tax paid as a credit, while the calculated remainder is a deduction. Credits are usually close to a dollar-for-dollar reduction in tax. However, deductions are just a reduction of the taxable income and could have additional taxes to be paid in Canada.
While careful planning can reduce some of the issues listed above, any Canadian that is considering using a U.S. LLC, regardless of the nature of the business, should seek out professional and qualified tax advisors immediately. It is important to note that there are far more practical solutions than an LLC, which give flexibility and liability protection, as well as being more tax efficient.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.