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).
Hybrid Entities – The Tax Problems in Canada
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.
You can read more about the US LLCs with non-US members carrying on business in Canada.
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.
Read: Exemption from Canadian taxes on U.S. LLC profits for residents of third countries
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.
Visit: Tax Services in Canada, US Tax Services in Canada
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56 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.
Maroof,
I am a US Resident with a US LLC that is interested in doing consulting work for a Canadian company in Canada. Do I need to get the two licenses and also am I subject to Canadian Taxes or dows the “treaty” allow me to only pay taxes in the US
Hello JP,
If your LLC carries out business in Canada it needs to be registered. Now carrying out business in Canada is based on the facts. Be also mindful of “doing business with Canada” vs “doing business in Canada”. Further, depending on the nature of the services, you need to assess the situation from both the Excise tax and Income tax point of view. I do not want to rush to answer this with a yes or no, you’d be better served if you ask for advice specific to your situation.
Hi Maroof, I’m a Canadian citizen with a US LLC. I am currently doing ecommerce through Amazon FBA in the US. I am looking to expand to Canada but Canadian suppliers require a business registered in Canada. Am I able to register the US LLC in Canada?
Hi Akash,
Registering a U.S. LLC in Canada is not a problem. If you are a non-resident Canadian or a U.S. taxpayer, it’s important to know that a U.S. LLC will be a non-resident corporation in Canada, regardless of if it is a flow-through entity. Treaty benefits might be limited depending on your situation. If you are a Canadian tax resident, U.S. LLC is not recommended to do business at all, at least based on my opinion. I suggest writing down all the facts and seek specific advice. There is a CFC regime in the U.S., and FA regime in Canada as well. They increase the reporting burden.
Hello,
Im living in canada and running Amazon business in Canada and US. I would like to know if I have to declare the income coming from an LLC in US to Canada when I leave the money on the LLC? Is that a good idea to create an LLC or go with INC in Canada?
Thanks
I have established my company as a Wyoming LLC few months back. Subsequently I moved to Canada and currently living in Canada (Not a Canadian citizen). What are my Canadian tax obligation If I were to continue my company? Can you explain it in bit of detail?
PS: I have no plans to conduct any sort of business within Canada even though I am living there.
Thank you
CF, for cross border taxes, you must seek advice before deciding on your obligations, these comments are for general discussion purposes and you should not rely on them to apply on your situation. Your question is too broad to list down all the potential requirements. Your LLC is potentially a Corporation resident in Canada, and subject to all the filing and taxes as applicable to any foreign incorporated corporation resident in Canada without the access to benefits of tax treaty. If you are eligible and this is the first year of LLC, checking the box may be a better option, again, that’s something you have to analyze with some accountant to avoid any deemed emigration issues. Look at Articles related to residence, permanent establishment, and business profits; and limitation of benefits of tax treaty for this option.
Hello! Hope you are well. I have currently formed a business entity in Georgia but i reside in Toronto, im in the midst of filing my SS-4 to obtain my EIN number and am unsure how taxes will work in both countries and what would be the best thing to file as for tax purposes,(S corp, C,corp, Partnership, etc). Any help or recommendations on who could help would be appreciated! Thanks so much and have a great day.
Best regards,
The purpose of llc/business is airbnb rentals
hi Lucia, if you have option check the box since the beginning of the LLC to at least reduce adverse impact of double taxation to some extent. Rental activities may trigger FAPI inclusion.
I live in Ontario and was planning to incorporate an LLC in USA whose sole purpose would be to own trademarks. It won’t be operational in anyway so no revenue as such. Do you think this is a good idea or shall I consider a Canadian Corporation instead
Does not look like a great idea. If you have trademarks and other IPs, involve both a lawyer and the cross border accountant, and discuss this in detail.
I am considering buying a small business share in a US LLC in California. I am a Canadian resident. The investment will eventually have cashflow payments and equity which could be liquidated at sometime in the future. Will I have tax implications in both the USA and Canada? Can my initial investment be used as a deduction against my personal income?
Thank you Maroof
Hi Tony, it appears that you do need to speak to your accountant. No, your investment is not a deduction. Using an LLC is going to increase your taxes and tax preparation cost.
Hi, I’m considering forming a US LLC, while I’m based in Toronto. I will be providing online marketing service to a company in the U.S. I’m the single member of the entity and I don’t have any real estate, ecommerce nor employees in the states. I will be performing my work in Toronto.
Would like to understand a bit more on my tax obligation.
– In this situation, do I still need to pay tax in the U.S.?
– What’s the tax rate for LLC in Canada?
If you live in Toronto and are a Canadian Tax resident, you should not use a U.S. LLC to conduct online marketing business. If you’d still like to operate through LLC< you need to seek a formal tax advice on that matter.
I live in Canada and I’m looking at creating a single person LLC registered in Wyoming for a investment in the US. I know I will have annual state fees and will have to declare gains and losses on my personal income tax filings in Canada, would I have any other obligations in the US I.e. IRS annual reporting? The only purpose for the LLC is for the investment no other business.
If you live in Canada, you can explore options other than involving an LLC in your investment decisions.
The company will not allow Canadians with a Canadian address to invest in their company due to Canadian restrictions for crypto investments. Thinking the LLC might be a good option but not sure if I would have IRS obligations??
The company has advised that due to ongoing challenges related to the nature of the regulatory structure in Canada they are no longer wanting to conduct business with Canadians. The work around is to form the US LLC. Hiring a company for that formation seems straight forward but I’m not sure if the LLC that will be just used for the investment will have IRS reporting requirements. If so what would they be?
Hi Jeff, you will be better served if you consult a cross border tax accountant. You need advice specific to your tax situation.
I am a US LLC. I have a customer in Canada. How do I know the tax rate for Canada based on the revenue generated from Canada?
Hi Laurie,
First you need to see if it’s a Canadian sourced income or not! Since its a U.S. LLC, you have to check who are the owners/members of this LLC. The corporate taxes in Canada depend on this key information.
Hi Maroof,
I’m a Canadian citizen with a US LLC. I’m moving back to Canada. Can I keep my US LLC and use it in Canada. If so and I am no longer a US resident do I file my LLC taxes in the US then apply it to my Rev Canada filings or vice versa.
Thank you. Ted
Returning Canadians with U.S. LLC should sort out LLC issues before coming back. If its a fiscally transparent entity, bear in mind corporation may immigrate to Canada as well due to central control and management. If its a C corp, it will be dealt as any other C corp. You should look into assets and operations of LLC.
I owned a Corp c in the US, then I moved to Canada and the Corp didn’t bring anny income anymore and had a dissolution in the end of the year while filing the last return. Do I have to include anything in my Canadian tax return for the same year given than I didn’t get any income from the Corp after I moved to Canada?
For a C Corp, you have to see the nature of income, and also the dividends that come out of it. Not all dividends are taxable. This is such a diverse topic, giving a quick answer might not be responsible of us.
I am a US citizen living in Canada. I plan on opening a small business, providing professional services, with a partner who lives in Minnesota. Company will be registered in Minnesota. All clients will be in the US however I will also work from home in Canada. We considering an LLC set up as a corporation. Is this a good option for tax purposes?