How a US LLC is taxed in Canada?

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).

For the income tax consequences of using U.S. hybrid entities such as the U.S. LLC, on “Canadian tax residents”, please see this post. 

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:

1. Attach Schedule 97 to T2 Corporation Income Tax return. (Schedule 97 of T2 Additional information on non-resident corporations in Canada)
2. 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.
3. 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.

1. It is not considered a US resident.
2. It is not eligible to reduced tax rates on its Canadian-source income
3. It must provide documentation from the Internal Revenue Service in the US.
4. 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

Need help?

How to carry on business in Canada using US LLC? We can help you with all your business and tax inquiries, contact us.

Author

Maroof Hussain Sabri

Maroof H. Sabri is a CPA, CA, and member of CPA Ontario and CPA Alberta in Canada. He is also a CPA licensed by the North Dakota State Board of Accountancy in the United States. He lives in Toronto.