Hello, I am a new member to this forum. Glad to know there is a medium to ask questions :)
I am a Canadian Citizen who will be forming a LLC in the US with two American Citizens for a e-commerce business that we will be forming.
I will have no active role in the business...but will rather have a passive role since I don't have a employment visa, nor am I a citizen.
My question is, I was told that since I am a "foreign investor" in the llc, that there will be a 35% witholding tax in the US on the profit that I will be obtaining, and then I will be taxed again when I try to bring money back home to Canada. Is this true?
I have very limited knowledge regarding the international tax treaty, let alone taxes themselves......so i was hoping for some input or help.
Thanks.
Buisness in the US
Moderator: Mark T Serbinski CA CPA
The profits from the LLC will be attributed to you as Dividend income under the CRA treatment which has not changed much under the recent amendments tehy still do not see an LLC as a distinct entity for treaty purposes. As such the normal 30% WT is reduced under treaty to 15% you can file from 8233 to claim the treaty benefit of reduced witholdings. Any tax you pay to teh IRS will be eligible in Canada as a foreign tax credit but be carefull to make sure teh alocated income falls in the same year as you report it to Canada to take the credit.
JG
The LLC is treated as a partnership for U.S. tax purposes. Because the partnership will be engaged in business in the U.S., you will be deemed to be engaged in business in the U.S.
The 35% tax withheld is a pre-payment of tax and is not the final tax due. Your share of the LLC income will be taxed at U.S. graduated rates. The final tax due will depend on the amount of income earned through the partnership.
You may also owe state income taxes.
Distributions from the LLC will not be taxable to you in the U.S. They will be treated as partnership distributions and not as dividends. No dividend withholding tax will be imposed. The treaty will not apply to reduce your U.S. tax.
I am not sure how Canada will tax you.
If you are performing activities in Canada on behalf of the LLC, the LLC may have a taxable presence in Canada and it may need to file Canadian income tax returns.
The 35% tax withheld is a pre-payment of tax and is not the final tax due. Your share of the LLC income will be taxed at U.S. graduated rates. The final tax due will depend on the amount of income earned through the partnership.
You may also owe state income taxes.
Distributions from the LLC will not be taxable to you in the U.S. They will be treated as partnership distributions and not as dividends. No dividend withholding tax will be imposed. The treaty will not apply to reduce your U.S. tax.
I am not sure how Canada will tax you.
If you are performing activities in Canada on behalf of the LLC, the LLC may have a taxable presence in Canada and it may need to file Canadian income tax returns.
If the LLC will not be taxed to him in the US then why is he taxed at grduated rates. He is not taxed in the US on this . He will be subject to tax in Canada but Canada will treat this as dividend income and his witholding tax will be eligible for credit in Canada. True for state purposes this does not hold but under the trreaty it applies federally.
JG
He reports this as dividend income in Canada by default. He is subject to witholding tax only in the US since he is a non resident of the US, he can not be subject to witholding and regular tax in the US this is by treaty which will dictate the witholding tax if he pays 35% or 15% he then has to file a 1040NR pay the tax he owes to US and take credit in Canada as if he earned dividend income he will use form 8833 to declare that he is paying this as dividend income to Canada.
JG
My advice has only dealt with U.S. taxation. I have explicitly stated that I am not sure how the Canadian tax will work.
As I stated above (for U.S. tax purposes), "The 35% tax withheld is a pre-payment of tax and is not the final tax due. Your share of the LLC income will be taxed at U.S. graduated rates. The final tax due will depend on the amount of income earned through the partnership. . . . Distributions from the LLC will not be taxable to you in the U.S. They will be treated as partnership distributions and not as dividends. No dividend withholding tax will be imposed. The treaty will not apply to reduce your U.S. tax."
For example, if the LLC pre-tax income allocated to the Canadian owner is 100, the LLC will withhold 35 of U.S. tax. When the partner files 1040NR, he will compute his U.S. federal tax at graduated rates. Let's say this amount is 30. The partner will get a U.S. tax refund of 5.
I will now speculate on how I believe the Canadian taxation may work. If no distributions are made from the LLC in this year, Canada may allow a credit for the U.S. income taxes paid, but there will be no corresponding income, which may limit the use of the credits.
When a distribution is made from the LLC to the Canadian partner no U.S. tax will be imposed. The distribution will be treated as a partnership distribution rather than a dividend distribution for U.S. tax purposes. Canada will treat the distribution as a dividend and may allow the previously paid U.S. income taxes as credits.
There will be no reduction in dividend withholding tax under the Treaty because there was no dividend withholding tax imposed.
As I stated above (for U.S. tax purposes), "The 35% tax withheld is a pre-payment of tax and is not the final tax due. Your share of the LLC income will be taxed at U.S. graduated rates. The final tax due will depend on the amount of income earned through the partnership. . . . Distributions from the LLC will not be taxable to you in the U.S. They will be treated as partnership distributions and not as dividends. No dividend withholding tax will be imposed. The treaty will not apply to reduce your U.S. tax."
For example, if the LLC pre-tax income allocated to the Canadian owner is 100, the LLC will withhold 35 of U.S. tax. When the partner files 1040NR, he will compute his U.S. federal tax at graduated rates. Let's say this amount is 30. The partner will get a U.S. tax refund of 5.
I will now speculate on how I believe the Canadian taxation may work. If no distributions are made from the LLC in this year, Canada may allow a credit for the U.S. income taxes paid, but there will be no corresponding income, which may limit the use of the credits.
When a distribution is made from the LLC to the Canadian partner no U.S. tax will be imposed. The distribution will be treated as a partnership distribution rather than a dividend distribution for U.S. tax purposes. Canada will treat the distribution as a dividend and may allow the previously paid U.S. income taxes as credits.
There will be no reduction in dividend withholding tax under the Treaty because there was no dividend withholding tax imposed.
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lindashoff01
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