A horrendous idea. Here’s why.
If you’re thinking about starting a new business or making a purchase in the U.S. with an E-2 or L-1 visa, your immigration lawyer or local U.S. accountant might suggest forming an LLC. It’s straightforward and provides asset protection. However, they might not realise that, for a Canadian, a U.S. LLC could create a significant tax risk.
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“.
Many U.S. business owners choose to be taxed as an “S-Corp” to save money on self-employment taxes. A standard U.S. accountant will happily file this paperwork for you. But if you are a Canadian tax resident, this standard advice can cause a disaster.
First, U.S. tax law (Section 1361) legally bans non-residents from owning an S-Corp. Even if the E-2 owner meets the Substantial Presence Test to qualify as a US resident, Canada does not recognize the pass-through election. The CRA views the S-Corp as a taxable foreign corporation, taxing the pass-through passive income and creating massive liability.
Solution
Plan the timing of the S-corp election. Do not rush. S-Corp election is an option, not mandatory. Since you are a Canadian tax resident, first plan your departure from Canada for tax purposes.
If an S-Corp election is necessary and legally permissible, utilization of Article XXIX-B of the Canada-United States Tax Treaty to force the CRA to treat the S-Corp as a pass-through entity.
