I'm currently a physician in the U.S., and U.S. citizen, but will also be working in B.C. coming up.
Most likely however, my tax home will remain the U.S., as I will probably be spending greater than half the year in the U.S., maintaining a U.S. domicile, etc.
I am considering however the benefits/detriments of forming a Canadian corporation for my practice in Canada.
I do realize that under the IRC subpart F rules I will still be paying tax on my Canadian income at the personal tax rates in the U.S.
However, if the small business corporate tax rate in Canada plus the dividend tax rate is less than the Canadian personal tax rate, I will still come out ahead with a corporation, right?
The rationale is that the personal tax rate in Canada is higher than the U.S. personal tax rate, such that only the portion of Canadian personal tax equal to the U.S. personal tax on that same income will be able to be used as credit.
If I lower the amount of my total tax in Canada through use of a corporation, however, my maximum tax credit for my U.S. taxes will stay the same, but I will come out ahead from having paid less tax in Canada (and overall).
Is this correct?
Thanks!
Cross border tax question with Canadian Corporation
Moderator: Mark T Serbinski CA CPA
You are correct to conclude will come out ahead by paying less Cdn tax , regardless of whther it exceeds your US rate or not, because of how foreign tax credits work: foreign income is added on TOP of your US income, but the credit for foreign tax is only given at your marginal rate. So, persons who have significant incomes in both countries, rarely get dollar for dollar credit for their foreign tax.
Where you *might* run afoul in your plan, however, is whether you -- as a non-resident of canada (which I agree you will be) -- are entitled to the SBC rate. Others here may have more knowledge of this....
Where you *might* run afoul in your plan, however, is whether you -- as a non-resident of canada (which I agree you will be) -- are entitled to the SBC rate. Others here may have more knowledge of this....
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Your not eligible for the SBD corp tax rate in Canada of 13.5% BC because you will remain a US resident so by sec 125(7) of the ITA as a non resident controlling shareholder the corp will not qualify for the SBD rate on the first $500K of taxable income. Also note that by claiming a dividend this will mean the corp will get no deduction for this since its a divided and pay tax at the rate of 27% the dividend is ineligible so the tax credit is not going to wipe out any tax. Subpart F IRS will tax you on this income and no credit will be given to personally for corp tax paid in Canada only if you take it out personally . So Dividends will definitly NOT be recommended if anything a salary so no corp tax is owed and all personal tax is crdited to you in the US. Will it work only if your tax paid in Canada is lower than that in the US because you will not get back all the FTC in the US that you paid in Canada.
JG
Since your income for services performed in Canada and sourced to Canada will not be passive investment income, I would have rather see you state "under the IRC I will still be paying tax on my Canadian income at the personal tax rates in the U.S. " instead of "under the IRC subpart F rules I will still be paying tax on my Canadian income at the personal tax rates in the U.S. "
As well, when you get into foreign tax credit claims, often it is important that the taxpayer making the claim is the exact same taxpayer that paid the tax. Since you, the individual paid the tax in the US, you, the individual should be the one claiming the credit in Canada. This can cause two results to look out for: 1) your Cdn corp may not be able to claim FTC for taxes you personally paid in USA & 2) check out Canada's FTC rules since had your situation been reverse (i.e., trying to claim FTC in USA) you'd have general basket FTC but passive income from the dividend income and no offset.
Now, it may well be that you've looked into all this and that you're OK. perhaps you're taking all dividend income from your Cdn corp and CRA perhaps allows full FTC offset. Just saying to consider these thoughts.
As well, when you get into foreign tax credit claims, often it is important that the taxpayer making the claim is the exact same taxpayer that paid the tax. Since you, the individual paid the tax in the US, you, the individual should be the one claiming the credit in Canada. This can cause two results to look out for: 1) your Cdn corp may not be able to claim FTC for taxes you personally paid in USA & 2) check out Canada's FTC rules since had your situation been reverse (i.e., trying to claim FTC in USA) you'd have general basket FTC but passive income from the dividend income and no offset.
Now, it may well be that you've looked into all this and that you're OK. perhaps you're taking all dividend income from your Cdn corp and CRA perhaps allows full FTC offset. Just saying to consider these thoughts.
So, in reality, for income earned in canada, expect to pay: Cdn federal and provincial income tax, some IRS tax, and some state tax (most states do not credit any foreign tax).
So, bill accordingly.
So, bill accordingly.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
ND is missing the point, you do not want to give him dividends that are passive income because he then pays tax at the full 27% rate in the corp and gets no FTC against this 27% in the US. If he chooses to go with a CND corp then all renumeration will be by way of salary so all tax paid personally is credited back to him in the US as far as can be claimed, of course not all tax will be recovered through the FTC in the US federallay or statelevel. By no means should he take dividends or passive income of anytype in this situation.
JG
Thanks to all for sharing your knowledge.
To summarize:
I would not be eligible for the SBD corporate tax rate unless I am a "Canadian-controlled private corporation," with the operative words being "Canadian controlled."
However, even if I were a resident of Canada and established a CCPC, the dividend tax paid by an individual in Canada is ineligible as a foreign tax credit on a tax filing in the U.S.
And any corporate tax paid in Canada is also ineligible as a foreign tax credit, even though you have to pay tax on that same money in the U.S. at personal tax rates under the IRC rules.
If that is the case, then for any "U.S. person," forming a Canadian corporation for tax purposes for work performed in Canada is to no end.
The potential benefit of the lower corporate tax rate plus dividend tax rate versus personal tax rate are completely negated if you can't take a foreign tax credit on either of these!
If you just take all the money out of the corporation as salary, you may as well just operate as an independent contractor.
To summarize:
I would not be eligible for the SBD corporate tax rate unless I am a "Canadian-controlled private corporation," with the operative words being "Canadian controlled."
However, even if I were a resident of Canada and established a CCPC, the dividend tax paid by an individual in Canada is ineligible as a foreign tax credit on a tax filing in the U.S.
And any corporate tax paid in Canada is also ineligible as a foreign tax credit, even though you have to pay tax on that same money in the U.S. at personal tax rates under the IRC rules.
If that is the case, then for any "U.S. person," forming a Canadian corporation for tax purposes for work performed in Canada is to no end.
The potential benefit of the lower corporate tax rate plus dividend tax rate versus personal tax rate are completely negated if you can't take a foreign tax credit on either of these!
If you just take all the money out of the corporation as salary, you may as well just operate as an independent contractor.
JGCA,
For a US citizen resident in canada, Would setting up a ULC be considered a disregarded entity by IRS, allowing dividends to retain their status and be taxed in the hands of the person?
This would allow FTCs to be granted to the US taxpayer for all types of income from the ULC.
Would this still get the SBD rate?
For a US citizen resident in canada, Would setting up a ULC be considered a disregarded entity by IRS, allowing dividends to retain their status and be taxed in the hands of the person?
This would allow FTCs to be granted to the US taxpayer for all types of income from the ULC.
Would this still get the SBD rate?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
YES an ULC is traeted by CRA as a corp and IRS as a see through entity. The ULC can claim the SBD in Canada if the shareholders are CND residents. Note that only Alberta, NS and BC allow for these entities to exits and each has different requirements as to % of non resient shareholders. The IRS will treat automatically the taxable income of the ULC as dividend income to the US citizen shareholder even if it is not distributed so you want to distribute it in the same year to get the FTC in the US too. So all types of NET income that is taxable will retain their identity and flow to the shareholder as a dividend for US tax purposes but not for Canada unless its declared as a dividend . So you want to make sure you distribute all income out as dividends but in Canada the problem remains that the corp tax is borne by the corp and can not be credited any way to the shareholder so in effect you have reduced teh BC tax from 27% to 14% by way od SBD but since you pay a dividend you can not recoup this in the US, so your still best to go salaries all the way.
JG
So with a ULC, a U.S. person would be able to apply the tax paid on dividends from the ULC as a foreign tax credit on their U.S. taxes, but would still be stuck without a tax credit for the corporate tax paid.
And then you also couldn't keep any money in the ULC, because you would be taxed in the U.S. on this as if it were already distributed, and then taxed again when it actually [i]is[/i] distributed!
And then you also couldn't keep any money in the ULC, because you would be taxed in the U.S. on this as if it were already distributed, and then taxed again when it actually [i]is[/i] distributed!
BASICALLY YES, the income is distributed to the USC regarless if he actually took it out or not so top match the FTC you would distribute it but no credit for the corp tax since its borne by the corp not the indivdual, this is why I said all along you should be taking salary so no tax is payable by the corp but you have to take it all out so you can leave no income in the corp. Not a very good plan since no tax savings at the end of it all.
JG