LLC tax treatment in Canada
Moderator: Mark T Serbinski CA CPA
LLC tax treatment in Canada
<font face="Arial">I am a US citizen with a consulting business that I have been operating as a single member LLC (neither a corporation nor a partnership in the US). I want to form a mulitmember LLC in the US (Virginia) with a Canadian citizen (Ontario). In the US, my net income from the LLC flows<font face="Arial"></font id="Arial"> directly through the LLC into my own personal tax liability (as if it were a sole proprietorship), and this will not change if I switch to a multimember LLC. We are getting conflicting advice about what happens to my associate in Canada. What tax treatment does he receive? We have been told that his income will be treated just like mine (as if it were a sole proprietorship), that the LLC will be treated as partership, and that it will be treated as a corporation. We are baffled, and don't know who to believe. And if the multimember LLC is not the right structure, is there one that lets us both have the preferred tax treatment of having our share of the net income flow directly through to our personal tax liability?</font id="Arial">
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Mark T Serbinski CA CPA
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LLC investments are problematic for Canadian residents, and especially for Canadian corporate members.
In Canada, and LLC is treated as a foreign corporation, and the income will either be considered active, or could be foreign accrual property income (FAPI) under Canadian rules. (According to CRA Interpretation Bulletin IT 343R, paragraph 3)
Distributions paid to the Canadian member are considered dividends.
Problems arise since the LLC is not a taxable entity in the U.S., since it flows income through to its members. Accordingly, there is no foreign tax credit available to the Canadian member.
Unless the U.S. LLC elects to be treated as a corporation, complications and potential double taxation issues exist for Canadian members. Possible solutions include the interposition of a U.S. C corporation between the Canadian investor and the LLC, among others.
Your choice of structure to involve the Canadian member should be based on the type of income generated by the LLC, and the nature of the investment by the Canadian member.
Regards,
Mark T. Serbinski, CA, CPA
In Canada, and LLC is treated as a foreign corporation, and the income will either be considered active, or could be foreign accrual property income (FAPI) under Canadian rules. (According to CRA Interpretation Bulletin IT 343R, paragraph 3)
Distributions paid to the Canadian member are considered dividends.
Problems arise since the LLC is not a taxable entity in the U.S., since it flows income through to its members. Accordingly, there is no foreign tax credit available to the Canadian member.
Unless the U.S. LLC elects to be treated as a corporation, complications and potential double taxation issues exist for Canadian members. Possible solutions include the interposition of a U.S. C corporation between the Canadian investor and the LLC, among others.
Your choice of structure to involve the Canadian member should be based on the type of income generated by the LLC, and the nature of the investment by the Canadian member.
Regards,
Mark T. Serbinski, CA, CPA