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 nonresident 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 a T2 Corporation Income Tax return. A non-resident corporation must file schedule 97 with its T2 Tax return. In the case of a 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 the 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. This is not the same as a Canadian resident member of an LLC who cannot claim these treaty benefits.
- File form NR 303 (NR 303 – Declaration of Eligibility for Benefits under a tax treaty for a hybrid entity).
The US-Canada tax treaty has been amended quite a few times. You can find more information on the treatment of fiscally transparent entities between the US and Canada in a technical explanation by the department of treasury and a recent tax interpretation by CRA on the 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. An LLC is now treated as a corporation resident in the United States as it is liable for taxes in the United States. However, a permanent establishment under the treaty may cause it to be a corporation resident in Canada as well.
If this LLC, which is now treated as a Corporation for U.S. federal income tax purposes, has Canadian-sourced income, it is still subject to Canadian corporate taxes on that income. Determine Part I and Part XIV taxes on Canadian-source income. Part XIV tax is a branch tax.
Further, the benefits derived under the tax treaty are subject to ‘limitation of benefits’ articles as well.
Warning: ‘Checking the box’ is not always a great option!
In cases where the Single member LLC owner is already a Canadian tax resident and checks the box after, there is another potential issue of deemed emigration i.e. departure tax on the assets of the LLC.
Common US LLC questions asked by our clients:
How to register a 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 it here: Form 6 to register US LLC in Ontario). You must attach an $80.00 fee with your form (refer to Ontario’s website for updated information) 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 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. A 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 benefit 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.
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 tax advice.
How to carry on business in Canada using US LLC? We can help you with all your business and tax inquiries, contact us.