Owning LLC's in Canada
Moderator: Mark T Serbinski CA CPA
Owning LLC's in Canada
I am a U.S. citizen and my wife is Canadian living in the states since we were married nearly ten years ago. We are moving to her home town in B.C. I own several member interests in LLCs. As I understand it, LLCs are not covered in the US/Can tax treaty so are subject to double tax with no FTC offset along with other negative issues. I have heard there is a new Protocol being negotiated with LLCs being one of the issues addressed. Has anyone heard when this might be ratified. Any other suggestions on owning LLCs in Canada. I have been told to either sell the things are form an S-corp to own them.
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Mark T Serbinski CA CPA
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The basic problem with owning an LLC while a Canadian resident is that there is no tax paid by the LLC since it is a "flow through" entity. As such only the owner of the interest in the LLC is taxable.
If there is no tax paid, there is not foreign tax credit.
A subchapter S corporation is treated as a corporation for Canadian tax purposes, and distributions and income from it are considered dividends under Canadian law, so that is not the answer.
One possible solution is to incorporate a U.S. corporation (C corp.) which in turn is owned by a Canadian corporation. The U.S. C. corporation then owns the LLC's. The U.S. corporation will pay tax, which, assuming that the income is passive, would qualify for FAPI (foreign accrual property income) tax credit against FAPI income in Canada. The earnings of the LLC must be distributed.
You also need to consider the FIE (Foreign Investment Entity ) rules in any situation like the above.
Regards,
Mark T. Serbinski, CA, CPA
If there is no tax paid, there is not foreign tax credit.
A subchapter S corporation is treated as a corporation for Canadian tax purposes, and distributions and income from it are considered dividends under Canadian law, so that is not the answer.
One possible solution is to incorporate a U.S. corporation (C corp.) which in turn is owned by a Canadian corporation. The U.S. C. corporation then owns the LLC's. The U.S. corporation will pay tax, which, assuming that the income is passive, would qualify for FAPI (foreign accrual property income) tax credit against FAPI income in Canada. The earnings of the LLC must be distributed.
You also need to consider the FIE (Foreign Investment Entity ) rules in any situation like the above.
Regards,
Mark T. Serbinski, CA, CPA
I have a similar problem. I have been operating as a single member LLC in the US (effectively a sole proprietor LLC). A Canadian citizen (Ontario) and I want to work together. In the US we can simply form a multi-member LLC, where the income flows through to each of us without the LLC paying taxes. How will my Canadian associate be taxed? Will he be penalized by having to pay "double" taxes?
I am a US citizen that has a consulting business that I have been operating as a single member LLC (neither a corporation nor a partnership). With a Canadian citizen (Ontario) I want to form a multi-member LLC. In the US, the income from the LLC flows on through to be taxed as personal income, as it would with a sole proprietorship. What tax treatment does my Canadian LLC member receive?