LLC Pass through Income treatment?

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webcite_99
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Joined: Fri Feb 18, 2005 8:45 pm

LLC Pass through Income treatment?

Post by webcite_99 » Sat Sep 06, 2008 10:16 pm

For a US citizen that is a shareholder of a US LLC (Partnership tax status) who is living and resident in Canada, how does CRA treat K-1 income for tax purposes? Is it simply treated like all other ordinary US source income, or is there any double taxation or tax hit from CRA in the way in which they treat the year in which the income was realized?

If there is some extra tax hit, what is the best way around it?

crossbordertaxguy
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Joined: Tue Sep 09, 2008 11:36 pm
Location: Blaine, WA
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Post by crossbordertaxguy » Wed Sep 10, 2008 11:51 am

CRA disregards flow-thru status of LLC's, and thus does not tax the flow thru income on the K-1. However, they will tax any distributions shown on the K-1 as dividends. As you can see, this will result in "mis-timed" foreign tax credits on the T1 and your 1040. The US return taxes you on the flow through income. Plus US LLC's with Canadian resident members are not offered the benefits of the US-Canada tax treaty.

Bottom line: Generally NOT a good idea to have a Canadian resident invest in a US LLC.

2 ways around the problem include:
1)Interpose a US C-Corporation to hold the LLC interest.
2)Have the US LLC elect corporation tax status in the US (other LLC members must agree to this however)

Cheers,
Crossborder tax guy

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