running USA S corp from Canada?

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bizdriver
Posts: 10
Joined: Thu Nov 22, 2012 6:51 pm
Location: Ontario

running USA S corp from Canada?

Post by bizdriver »

Would love it if someone (esp a crossborder CPA that needs a new client) could comment on the relative tax (in)efficiences of running a US S corporation as a US Citizen that is a permanent resident in Canada. I'm starting publishing firm, and need to decide if I will incorporate as a US S corporation or a Canadian corporation. I've already determined that its perfectly legal to run a US S corporation as a USC living in Canada. Do I create extra tax burdens on myself (either for Cdn or US Taxes) by doing so? Do I heap double taxation upon myself ? Is this remotely adviseable ?

Far as I can tell, this is my pro and con list

INCORPORATING AS S Corp
+ much easier to do publishing, distributing, vendors with US relationships
+ better flexibility / transition if I move back to USA in 1-5 years
+ No need to get US ITINs for a canadian business and deal w 30% withholding
+ could choose a state to incorp with no state income or small biz tax (is this right?)
- can't apply for
- probably makes canadian taxes

INCORP AS CANADIAN COMPANY
+ can apply for publishing grants for small publishers
+ free ISBNs from the Canadian agency
+ can get some tax credits (apparently) for canadian publishers
- have to deal with 30% royalty witholding with authors, as all receipts will be in USD from US companies
- hassles and prohibitions on some publishing vendor relationships. E.g. Can't sell direct through Barnes & Nobles if you're not a US resident
- big hassles to stop/discontinue/transfer contracts/business if I eventually relocate to canada.

Any suggestions ?
JGCA
Posts: 754
Joined: Thu Nov 18, 2010 3:05 pm
Location: Montreal, QC Canada

Post by JGCA »

S Corp

This is probably your best bet since the major income you will generate will be from US clients

1) Yes will be easier to deal with US publishers
2) Yes if move back to US then no consequence under S corp under a CND corp you have deemed disposition of the corp assests once you become non resident
3) As long as you pay US suppliers no with tax
4)Can choose a state to inc in but remember certain states like California will levy a franchise tax on the gross income, som do it on net income so be carefull in the state you select AND ON E MAJOR POINT small biz tax rate does not apply in an S corp the income all of it except for long term cap gains are all allocated to you as an individual the S corp once it elects on form 2553 will be a flow through entity you get taxed personally on the net income. ON the first say $ 75K of profit you pay more tax personally than say you were a C corp in the US but you also avoid double taxation as an S corp vs C corp and the accumulated earning tax of 20% over $ 250,000 of accumulated earnings if you were a reg corp this is owed but not as a S corp.
5) For Canadian taxes you will pick up the income as a partnership income on your T1 right off your 1040 and get credit for tax you paid in the US


Canadian Corp

you will have to incorporate in Canada and get CND BN numbers and possibly GST sales tax numbers for export sales income from US to Canada eventhough it may be sales tax exempt you still have to register for GST HST or TVQ and file sales tax returns, any income from the US will not qualify for samll business tax rate in the corp since it is not CND active business income so tax rate in corp approx say 28% instead of 19%.

The CND corp like a US corp then has to dist income to you as a salary or dividend but in a S corp this is not a factor.


So for me your better off in an S corp but make sure teh election on form 2553 is made on a timely basis and select the claender year end which is the default to be able to match the US pers tax and CND pers tax together for foreign tax credit purposes.
JG
bizdriver
Posts: 10
Joined: Thu Nov 22, 2012 6:51 pm
Location: Ontario

is then an LLP/LLLP better or the same to CRA as an S-corp ?

Post by bizdriver »

JGCA, thanks for the thoughtful reply. Much appreciated. Here's 3 follow up questions and a couple additional points of information.

1- are you taking new clients? And does your firm file both Canadian and US returns?
2- CRA classification of income as foreign?
I've since been told that net income to an USA S-corp would be taxed by CRA as high as 43% because its foreign and doesn't count for reg Canadian biz tax rates, is that right? But you say I can designate this income as partnership income?
2a -- and that if I took all the net profits in salary to me, it would be 36% ???
3- would it be at all prudent for me to make the entity a US LLP or LLLP. I'm told CRA doesn't then view this as foreign corporate income, or does your suggestion that CRA can view this as partnership income apply, make the S corp just as valid as LLP/LLLP ?
4-- CRA this year already assigned me (currently an unincorporated sole proprietorship) an HST account. If I start a US S Corp, can I just keep this CRA sole proprietorship #, fill out the sales tax returns (which will be zero collected, as I have no Canadian clients) and avoid the whole canadian incorporation paperwork path ?

Thanks so much!
JGCA
Posts: 754
Joined: Thu Nov 18, 2010 3:05 pm
Location: Montreal, QC Canada

Post by JGCA »

1) I do both US and CND returns, no I do not solicit clients form this forum out of respect for the hardwork of Mr Serbinski and Nelsona its a learning tool for me as well.
2)CRA will not give you the small business tax rate in Canada if you were to incorporate here because the income is all from the US that is why the corp tax would be 46% vs say 15% in Ontario.
2a)If you took all the net profits to yourself as a salary it depends on you r marginal rate could be as high as 46% but the corp get to deduct it as an expense if you took it as a dividend then you could pay as high as 39% but the corp in Canada get no deduction and still pays tax so this is NOT recommended at all.
3)Keep the S corp since you will be flowing this through to your self as business income on your 1040 then all you do is show it as business income on your t1 also.
4) If you start a US Scorp in the US then that has no implications at all in Canada if the work and clients you service are in the US no HST applies
you may want to service only Canadian clients from your Sole proprietorship business in cANADA IF THEY ARE A SMALL percentage of your revenue this will work and at the end of the year since you are a USC you report everything including Canadian income on your 1040 the report it all again on your T1 and vlaim a credit for US tax paid on your T1 except for teh CND portion so you simply keep a seperate record of that income so you can get the tax credit on the 1040 on that portion of Canadian iself employed income.

This is the simplest way I see it if teh CND income is not so much as the US it is a small percentage the major part will be billed in teh US in the S corp then shown on your 1040 and T1 also with Foreign tax credits claimed.
JG
brandyjiang
Posts: 1
Joined: Wed Sep 24, 2014 3:05 am

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