Question
Hi Selina,
I run a consulting business from Canada and is planning to form a single-member U.S. LLC. All work is performed from Canada and I don’t have a permanent establishment in the U.S.. I’ve read that the IRS ignores the LLC and taxes me directly, but I also keep hearing that the CRA doesn’t recognize pass-through status and will treat the LLC as a corporation.
What I can’t pin down is how Canada will actually tax the earnings. Will CRA just treat everything as my self-employment income on a T1, or will it treat the LLC as a foreign corporation and then tax any payments I take as foreign dividends? If the latter, does leaving money inside the LLC avoid Canadian tax? I’ve asked a few CPAs and received different answers, so I’d really appreciate a clear explanation and some guidance on what structure I should use going forward.
Best regards,
XXXXXX
Answer
Hi XXXXXX,
Thanks for the thoughtful question. This is a common pain point for Canadians who sell services to the U.S. The short answer is that, for a Canadian resident, a single-member U.S. LLC is usually a poor fit. The IRS generally treats the LLC as disregarded entity and looks through to you personally, but the CRA typically treats that same LLC as a corporation. If you manage and control the LLC from Canada, Canada will often consider it a Canadian-resident corporation. That classification mismatch is what drives the trouble: two different taxpayers in two countries can end up being exposed on the same profit stream, and foreign tax credits don’t line up neatly.
From a Canadian perspective, if the LLC is managed in Canada, the profits are taxable at the corporate level in Canada even if there’s no U.S. permanent establishment. Leaving cash in the LLC doesn’t avoid Canadian corporate tax, since the residence analysis turns on mind-and-management, not where the money sits. When you later distribute cash to yourself, Canada generally taxes that at the personal level (like dividends), so you can see how double-tax can arise if the U.S. has already taxed you personally because it treated the LLC as disregarded.
On the U.S. side, no federal tax may be due on business profits if you truly lack a permanent establishment under the treaty, but you can still have U.S. reporting. A foreign-owned single-member LLC with transactions with its owner typically must file Form 5472 with a pro-forma 1120, and state rules may layer on registration fees or minimum taxes even where federal income tax isn’t due.
In practice, the fix is to align the structure so both countries agree on who the taxpayer is. If you’ll remain Canadian-resident, operating through a Canadian corporation tends to be cleanest. If you must keep the U.S. LLC, consider U.S. elections that make it a corporation for U.S. purposes as well so both sides see a corporation. If you're staying in Canada, try to migrate operations to a Canadian corporation; if you're moving to the U.S. coordinate timing and elections. We also handle the compliance clean-up, like T2 and GST/HST in Canada, 5472 and any state items in the U.S.
You’ve got a lot going on here, so we should talk through your facts and lay out a tidy action plan. You can book a call here: Initial cross-border consulting I hope this helps, and I look forward to our chat.
Cheers,
Selina
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