Quebec Resident + US resident partnership/corporation

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annoyedtaxpayer
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Joined: Wed Nov 17, 2010 2:09 pm

Quebec Resident + US resident partnership/corporation

Post by annoyedtaxpayer »

I am a Quebec resident, and I have a business partner in the U.S.
We are trying to structure a new company together (where we will each own 50%), and minimize double taxation.

Originally we went and setup an L.P. (Limited Partnership), which my Canadian Corporation owned 50% of, and he owned 50% personally. The Canadian Corporation files taxes in the U.S. on 50% of the profits of the company (through the K-1), and credits can be applied against Canada/Quebec to avoid double taxation.

However, at this point we are trying to setup a company that will be able to take investments from venture capitalists as well as sell in the reasonable future.

The best setup for my partner is to have an LLC, but I read in numerous places that Canada does not recognize LLCs under the treaty, and this would cause double taxation (the Canadian corp would pay taxes in the US and in Canada), which brings it up to a 35% (US) + 30% (Canada) = 65% Taxes on the corporate level alone (before Dividends etc).

We have also gone through a scenario for setting up a C-Corporation in the U.S. and my Canadian corporation owning 100% of a U.S. C-Corporation blocker corp, which owns 50% of this main U.S. C-Corporation. However, a lot of questions are arising as to which tax rates apply on sale and during active business:

Assume: Quebec Citizen owns 100% of Canadian Corp (located in Quebec), this Canadian Corp owns 50% of an Operating C-Corp in the U.S.

1a) Canadian Corporation sells all of its interest in a U.S. C-Corp in a stock sale
What would the rate of tax be for the corporation? For the sole owner personally? Apparently there's a way to avoid double tax.

2a) U.S. C-Corp sells 100% of its assets, pays income tax in the U.S. and then dividends out the rest to the Canadian C-Corp
Does this qualify for Capital Gains treatment? (does it make a difference if the final dividend is a "liquidating dividend")
Can the double tax to the Canadian corp owner be avoided (similar to first bullet)

Instead, now assume that a Quebec Citizen owns 100% of a Canadian Corp (located in Quebec), that owns 100% of a U.S. C-Corp (acting as holding or blocking company) that owns 50% of a U.S. Partnership (conducting U.S. Operations) and that the U.S. C-Corp sells U.S. Partnership (either stock or asset sale) and pays U.S. Taxes

1b) What's the tax effect of the U.S. C-Corp dividending out the money from the sale of the U.S. Partnership?

2b) Does it matter if the dividend is a liquidating dividend? Is there a way to make it qualify as a capital gain? Is there a way to avoid the second tax when the Canadian Corp owner takes the money personally (similar to fist bullet)?


All in all, Canada and the U.S. are making it very hard for me to have a proper setup, and I am dumbfounded right now because I have been doing a ton of research and have consulted with many Tax lawyers and Accountants who are unable to solve the problem. Is there an easy solution to this double taxation problem?

Thank you for your time in reading this.
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