What is a US LLC?
A Limited Liability Company (LLC) is a type of business entity that is created by a state statute in the US. This type of structure does not exist in Canada. You cannot create a Limited Liability Company in Canada, however, you can still use a US LLC to conduct business in Canada.
Generally, for tax purposes in the United States, an LLC with one member is considered a disregarded entity. The phrase disregarded entity means that LLC is disregarded as an entity that is separate from its owner. A disregarded entity is considered to be part of its owner’s tax return. If an LLC has two or more members it is considered as a partnership.
An LLC can elect to be taxed as a corporation by filing Form 8832 with IRS. This is also known as “check the box” which refers to checking the box on the form to make this election.
In the US, when an LLC is not treated as a corporation, its income flows through to the personal tax returns of the owners. It might sound confusing! Legally, all the assets are owned by LLC which limits the liability, however, for income tax purposes all the assets belong to the owner(s).
Income Tax Filing requirement of a non-resident US LLC in Canada?
If during any time of the tax year a non-resident corporation has carried out business in Canada or has disposed of taxable Canadian property, it must file T2 Corporation Income Tax return. A non-resident corporation must file schedule 97 with its T2 Tax return. In the case of US limited liability company, tax treatment depends if the entity is fiscally transparent or has checked the box for US Income tax purposes.
a) If a US LLC is a disregarded Entity as per IRS?
If a US LLC is considered as a disregarded entity as per IRS, it may claim the benefits under the Canada-US Tax Convention:
- Attach Schedule 97 to T2 Corporation Income Tax return. (Schedule 97 of T2 Additional information on non-resident corporations in Canada)
- Article 6 of the US-Canada Tax Convention may be applied to claim the benefits. It is applicable only if the amounts are considered to be derived by a US resident person and a qualifying person.
- File form NR 303 (NR 303 – Declaration of Eligibility for Benefits under a tax treaty for a hybrid entity).
US Canada tax treaty has been amended quite a few times. You can find more information on the treatment of fiscally transparent entities between US and Canada in a technical explanation by the department of treasury and a recent tax interpretation by CRA on Application of Articles IV(6) and X(6) of the Canada-US Treaty
b) If an LLC has filed an election to be taxed as a Corporation with IRS?
Limited Liability Companies (LLCs) in the US can check the box to elect to be taxed as a corporation in the United States.
- It is not considered a US resident.
- It is not eligible to reduced tax rates on its Canadian-source income
- It must provide documentation from the Internal Revenue Service in the US.
- Attach Schedule 20 which is Additional Tax on Non-Resident Corporations
Determine Part I and Part XIV taxes on Canadian-source income. Part XIV tax is a branch tax.
Common US LLC questions asked by our clients:
How to register US Limited Liability Company (LLC) to do business in Canada?
It is not very complicated to register a US LLC in Canada!
US Limited liability companies are registered with provinces in Canada. In the province of Ontario, this can be done by sending Form 6 to the Ministry of (You can download here: Form 6 to register US LLC in Ontario). You must attach $80.00 fee with your form and certificate of good standing from the State along with other requirements as mentioned on the form. Your LLC is registered under the Ontario Business Names Act as an Extra-Provincial Limited Liability Company and a Business Identification Number (BIN) will be issued for your LLC.
Registering your LLC with the province is an important legal requirement if you use your LLC to conduct business in the province. Other provinces such as British Columbia and Alberta have their own rules for these registrations. You should always consult a lawyer or a tax accountant specializing in LLC issues in Canada before making a decision.
Note: Maroof HS CPA Professional Corporation is a CPA firm and not a law firm, hence, the above cannot be considered as legal advice at any point in time.
How to register a US Limited Liability Company (LLC) with the Canada Revenue Agency (CRA)?
You can get a business number (BN) from Canada Revenue Agency (CRA) for your LLC. Business Number (BN) is different from Business Identification Number (BIN), the former is issued by CRA and the latter is issued by the province. In order to conduct business, you will be needing both of these.
What is a Hybrid Entity?
A hybrid entity means an entity that is treated differently in two different jurisdictions. A US LLC is taxed as a corporation in one country whereas taxed as a partnership in another one is a hybrid entity.
Can a US non-resident member of a US LLC claim treaty benefits under the US Canada Tax Treaty?
US Canada tax treaty does provide explanations and treatments to counter “treaty shopping”. Only US residents can claim treaty-based positions under the US Canada tax treaty. If you are a resident of a third country and simply own US LLC, it does not mean that you are entitled to draw benefits by using US LLC to conduct business in Canada. Refer to a technical explanation by the department of the treasury department.
Read: Canadian businesses with US reporting, What forms to file?
Read: Key U.S. Tax Concepts of ECI, FDAP, permanent establishment and US Canada tax treaty
Read: How to operate in the US, a guide for Canadian businesses.
Disclaimer: This post is for general information purposes and might not have been updated since it is published. LLCs taxation issues are often complicated and you should seek formal advice from a tax professional specializing in cross-border taxation between the US and Canada. Further, this post involves references to different articles of the treaty and other applicable forms, this cannot be considered as tax advice.
Visit: Tax Services in Canada, US Tax Services in Canada
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28 thoughts on “How a US LLC is taxed in Canada?”
I created an LLC in the states a few years back and was inquiring if I can register it as a business name in Canada. I live in Canada and I will be conducting business in Canada. Is Federal incorporation the best way to go if I move to another province. I would like a business structure that is good across Canada.
Hello Randy, LLCs are not good for Canadians doing business in Canada. If you plan to do so, you must seek proper tax advice to avoid end-of-year surprises. As far a federal corporation is concerned, you will need extra-provincial registrations in other provinces. The only benefit of federal corp is that it’s a Canadian corporation and has stronger name protection. There are no tax benefits of federal over provincial ones.
Hello, Im Canadian and was advised to open an LLC as a holding account to hold and re-allocate property with fewer tax implications. In this case, would it be best to set this up in Canada or in the US? And what ARE the tax rules for that? Thanks!
HI Meghan, LLCs are hybrid entities. Canadians with Hybrid entities must seek formal tax advice before setting them up to avoid higher tax costs and consequences later on.
I have US LLC on details of US residents and now I am willing to have one in Canada for doing business.
Will the same LLC work for Canada? If yes, what documents we need to have to comply with the rules.
Also, will Canadian brands accept US LLC for doing business if we won’t be having physical existence in Canada?
hi Ahmed. Legally, there is no problem with LLC working in Canada as long as they have all the registrations done. From tax point of view, it is not recommended if you are a Canadian owner of a U.S. LLC.
Hello Maroof, If I am a Canadian purchasing US Real Estate for rental, what is the best thing to do? I understand that a lot of Real Estate in the US is purchased under LLCs. Is that a good option? I’ll need to file taxes in the US for the LLC. But, I don’t want to be disadvantaged in Canada. Same for flipping the real estate. Is it better to just purchase the units as individuals?
Hello Chahid
Yes, in U.S. accountants recommend every one LLC! Yeah, they are good too, but only for Americans.
Using an LLC does put a Canadian taxpayer on a tax disadvantageous position. What structure to use depends on multiple factors. Income tax, though important one, is one of the multiple factors, you should also consider liability protection especially in the U.S. as its a very litigation friendly country!
I’d recommend to first get in touch with a lawyer and then a cross border tax accountant. Get your options from a lawyer and then we can run some simulations and help in decision making process.
I am Canadian and operate an LLC in the US.
I withdrew US 15,000 in total from my LLC in 2021.
Do I have to report that US $ 15,000 as ordinary income or dividend income on my Canadian tax return?
U.S. LLCs is always treated as a non-resident corporation. This is investment income.
Hello Maroof,
I have US LLC (US citizen), and I am willing to do business in Canada.
Will the US LLC work for Canada? If yes, what documents do we need to have to comply with the rules?
Also, will Canadian brands accept US LLC for doing business if we won’t be having physical existence in Canada?
Yes, U.S. LLC can do business in Canada. Register with the province and then the Canada revenue agency.
Hi, I own an LLCs in us as a Canadian resident. I do not have any income coming from us or Canada. All my income is from European countries. Apparently, if you set up a Canadian company that owns a foreign company (in my case a LLC in us), the foreign company can pay tax free dividends to the Canadian company and you end up paying less taxes as a Canadian company (due to schedule 113, 38% gross up, etc.). It’s still unclear on my mind, have you ever heard of that kind of thing ? If so how does it work ?
Hassan, you need a little bit of extra research work. For LLC, that has not checked the box, it’s a foreign corporation in Canada and creates a mismatch. In the U.S. it is not liable for taxes. The effective tax rate for you can be really high. You need proper tax advice.
Hello I am a Canadian citizen divorced planning on living in the state of florida because I want to be close to my teenage children and stay away from canadian winter. I am currently self employed and owner of an Ontario Limited. If I buy a house in florida can I rent it and earn lawful rental income in the usa. Also can My Ontario limited operate in the usa. Or it is better I open up an LLC in florida and purchase a business such carwash or existing construction contracting company. I have my brother us citizen and wants to partner with me. Does having a us citizen partner give me any advantages.
Regards.
Hi Egemen
This is something your brother needs to check with his local CPA in the U.S. For rental operations in the U.S. under your ON Corp, you need to be warry of FAPI rules as well. You must seek proper tax advice before undertaking such transactions.
Greg S.
Hi Maroof,
I have set up a USA LLC for online marketing. As an affiliate marketer, I don’t sell directly to customers but receive commissions from the sellers who are USA-based. The ads will show up on Canadian and USA residents’ devices. Does that mean I’m doing business in both countries? I understand it is not ideal for me to have a USA LLC. Should I dissolve the LLC and set up a Canadian corporation instead?
Hi Greg, there will be many others issued attached to LLCs including what kind of income they are earning and how are they taxed in the U.S. You need proper tax advice on this matter. Especially related to dissolving and shifting business to a new corporation.
Hi Maroof,
I recently invested in a US LLC operating in the US. I am a minority member as I only purchased a 1% interest. How much of a tax disadvantage am I at? Will I be double taxed?
Hi Nav, this is very hard to comment on! Someone needs to look into the investment…
Hi
I have formed a LLC in Texas, USA for doing wholesale business on Amazon. I lives in Canada so please guide me either I will have to ay tax in Canada as well.
For Amazon business, you do not necessarily need LLC. You did not provide information on if you are running a business while in Canada or if your LLC has a permanent establishment in U.S. only.
Hi Maroof,
I am a US citizen in talked with a Canadian non-profit to consult with them for a short term (6 months). I will work remotely from the US. Do I need an LLC? Do I have to pay taxes to CRA and the US?
As per the treaty, business profits are only taxable in Canada if you have a permanent establishment in Canada. You can provide your services from the U.S. and then claim a treaty-based exemption. Choice of entity should be discussed with your U.S. accountant as (s)he will be in a better position to understand your tax situation.
Hi Maroof, I have an LLC and as Canadian citizen, initially i have put some investment from my Canadian Inc. I am doing business on Amazon US marketplace only, when i draw income from LLC how i will report that to CRA, is it an investment income?
hi Saqib, I am afarid there is not much information with me to answer you. Your accountant needs to look into the FAPI rules in addition to LLC distributions.
I am a US Citizen and have a US LLC (single member, disregarded) for use to invest into startups. While this is straightforward for US Delware C-Corp startups, I am looking to invest in a Canadian startup. I need the US LLC as it serves as the management company to create an SPV LLC (special purpose vehicle) with pools money from many smaller angel investors.
Would I need to file any Canadian tax returns or are there any additional steps I’d need to take in order to invest in a Canada-incorporated startup using this US LLC mgmt entity?
hi Shawn, this is something for which you should seek formal tax advice. If a U.S. LLC is simple a non-resident corporate shareholder or it’s carrying out business in Canada, both have different tax impacts.