If you’re planning to buy or start a new business in the U.S. on an E-2 or L-1 visa, your immigration lawyer or a local U.S. accountant may advise you to form an LLC. It’s straightforward and helps safeguard your assets. However, what they might not realize is that for a Canadian, a U.S. LLC can become a significant tax trap.
In most cases, U.S. immigration lawyers or local U.S. accountants lack knowledge of Canadian tax laws, and Canadian accountants are unfamiliar with U.S. tax laws. This creates a dangerous Advisor “Blind Spot” that leads to double taxation.
Double Taxation
In the United States, a single-member LLC is treated, by default, as a “disregarded entity” or, in the case of multiple members, as a partnership. This default tax classification means the LLC itself does not pay federal income tax; instead, the LLC’s profits, losses, deductions, and credits are passed immediately or directly, whether distributed or not, to the members and the members pay taxes through individual tax returns.
In comparison, the CRA does not recognize the flow-through nature of a US LLC and treats the US LLC as a corporation for tax purposes. The CRA only taxes the Canadian resident individual when the LLC formally distributes the income as a dividend.
The timing mismatch of income leads to double taxation on the same income.
Example
Let’s assume you are a Canadian resident who owns 100% of a U.S. LLC.
1 USD = 1 CAD
Year 1 LLC Profit: $100,000 USD
Year 1 Distribution: $0 (You leave the money in the LLC bank account)
Year 2 Distribution: $75,000 USD (You pay yourself a dividend)
Assumed U.S. Tax Rate: 30%
Assumed Canadian Tax Rate on Foreign Dividends: 40%
| Year & Event | U.S. Perspective (IRS)(Views LLC as Flow-Through) | Canadian Perspective (CRA)(Views LLC as Corporation) | Foreign Tax Credit (FTC) Status | Out-of-Pocket Tax Paid |
| Year 1 LLC Net Income $100,000 Distribution $0 | Taxable Income: $100,000 (Taxed immediately, regardless of distribution) U.S. Tax Owed: $30,000 | Taxable Income: $0 (No dividend received) Canadian Tax Owed: $0 | None You cannot claim a credit in Canada because you owe $0 in Canadian tax this year | $30,000 (Paid to IRS) |
| Year 2 LLC Net Income $10,000 Distribution $75,000 | Taxable Income: $10,000 (Taxed immediately, regardless of distribution) U.S. Tax Owed: $3,000 | Taxable Income: $75,000 (Taxed as a foreign dividend in the year received) Canadian Tax Owed: $30,000 | You cannot use Year 1 U.S. taxes to offset Year 2 Canadian taxes. There is no U.S. tax paid this year to claim. | $30,000 (Paid to CRA) |
| Total Impact on $100,000 LLC Income | $30,000 Total U.S. Tax | $30,000 Total Canadian Tax | $0 Total FTC Utilized | $60,000 Total Tax (60% Effective Rate) |
The Solution: If you “check the box” (file IRS Form 8832) to have your U.S. LLC taxed as a C-Corporation, you completely solve the timing mismatch.
By making the IRS treat the LLC as a corporation, both the U.S. and Canada now view the entity exactly the same way. The LLC pays its own taxes when it earns the money, and you only pay personal taxes when you receive a dividend. We ensure your foreign tax credits are applied correctly to eliminate double taxation.
Example: once the LLC is taxed as a corporation in the U.S.
Let’s assume you are a Canadian resident who owns 100% of a U.S. LLC.
1 USD = 1 CAD
Year 1 LLC Profit: $100,000 USD
Year 1 Dividends: $0 (You leave the money in the LLC bank account)
Year 2 Dividends: $75,000 USD (You pay yourself a dividend)
Corporate U.S. Tax Rate: 21%
Assumed Canadian Tax Rate on Foreign Dividends: 40%
| Year & Event | U.S. Perspective (IRS)(Views LLC as C-Corp) | Canadian Perspective (CRA)(Views LLC as Corporation) | Foreign Tax Credit (FTC) Status | Out-of-Pocket Tax Paid |
| Year 1 LLC earns $100,000 Dividends $0 | LLC Corporate Income: $100,000 U.S. Corp Tax Owed: $21,000 | Personal Taxable Income: $0 (No dividend received) Canadian Tax Owed: $0 | None Needed. No personal Canadian tax is owed, so no credit is necessary. | $21,000 (Paid by LLC as a corporation) |
| Year 2 LLC earns $0 Dividendss $79,000 | Dividend Distributed: $79,000 (Subject to 15% Treaty Withholding) U.S. Withholding Tax: $11,850 | Personal Taxable Income: $79,000 (Taxed at 40% = $31,600) Gross Canadian Tax: $31,600 | Successful. You claim the $11,850 U.S. withholding tax to reduce your Canadian bill. | $11,850 (Withheld) + $19,750 (Paid to CRA) |
| Total Impact: | $32,850 Total U.S. Tax(Corp + Withholding) | $19,750 Net Canadian Tax | $11,850 FTC Fully Utilized | $52,600 Total Tax (52.6% Effective Rate) |
