running a US LLC from Canada

sdesfric · Post by **sdesfric** » Thu Mar 06, 2014 3:38 am

Hi,

I am a Canadian resident and am building an online store that would be selling to US residents.

I have a partner in this venture who is from South Africa.

We are considering setting up an LLC taxed as a partnership.

My understanding is that we will not have a permanent establishment since we don't have a physical presence in the US.

Is it right to assume that we will have to do a tax return in the US but not have to pay any income tax in the US because we don't have a permanent establishment?

Then I would only owe canadian tax on dividends (since LLC is viewed as a corp in canada)?

Thanks

JGCA · Post by **JGCA** » Thu Mar 06, 2014 8:51 pm

Ok the LLC is a hybrid entity in the US and it will need to check the box to treat the disbursements it makes to the unit holders to be treated as a dividend, then the dividend which will need to be paid out in the same year to the unit holders will be treated by CRA as if it were a dividend paid to the shareholders in Canada so you will be able to claim the FTC in Canada for the tax you paid in the US. This is the way to allow for the matching to occur so you can claim the credit in the same year regarless of the CRA saying it is a dividend not a business income allocation. All unit holders in the LLC have to opt to allow the distribution to come out a a dividend so all unit holders have to elect the same basis.

sdesfric · Post by **sdesfric** » Fri Mar 07, 2014 12:20 am

Thanks for the reply.

Wouldn't it be smarter to not be treated as a partnership for tax purposes, and given that we don't have a permanent establishment in the US, not pay income tax there?

Because if I check the box and get treated as a corp for tax purposes we would have to pay corporate tax...

Am I missing something?

sdesfric · Post by **sdesfric** » Fri Mar 07, 2014 1:27 am

Or... would an LLC with no permanent establishment in the US, and that is taxed as a corp avoid paying corporate tax?

testone · Post by **testone** » Fri Mar 07, 2014 6:59 am

If you are located in Canada, why wouldn't the LLC have a permanent establishment in Canada?

sdesfric · Post by **sdesfric** » Fri Mar 07, 2014 5:36 pm

I guess the permanent establishment would be in Canada, but I guess it matters more to be able to show that you dont have a PE in the US?

In terms of avoiding US taxation for an LLC taxed as a partnership with no permanent establishment in the US, is the fact that a US LLC is a hybrid entity (partnership in US, corp in canada) gonna be a problem? Because the US/CAD tax treaty doesnt work for those entities?

Then it would mean I need to elect to tax my LLC as a corp?

JGCA · Post by **JGCA** » Fri Mar 07, 2014 7:49 pm

iIf you want to get the credit in Canada you have to check the box, this has no bearing at all on the PE its simply to match the income for teh foreign tax credit otherwise there is no relief for FTC.

testone · Post by **testone** » Fri Mar 07, 2014 8:28 pm

JGCA, if you make a check-the-box election to treat the LLC as a corporation, and then the corporation has its activities take place in Canada, why wouldn't the LLC need to file a Canadian corporate tax return?

sdesfric · Post by **sdesfric** » Sat Mar 08, 2014 2:54 am

hmm what about an LLC (partnership) with PE outside of canada? Wouldnt there be no need for tax credit given that the canadian partner would not pay income tax in the US?

Or is there an issue generated by the hybrid status?

JGCA · Post by **JGCA** » Sat Mar 08, 2014 12:16 pm

I never said the LLC would not file a T2, I said if you want to match income you have to check teh box in the US and then its a dividend to the CND unit holder who has to file a T2 with CRA and take the income as a dividend and claim the FTC.