United States LLCs And Canadian Residents – A Bad Combination!

Written by | Posted in Income Tax • International

There is a big problem for Canadian residents who use U.S. LLCs- the Canada Revenue Agency (“CRA”) considers them to be corporations, even if they are considered disregarded entities (if only one shareholder) or partnerships (with two or more shareholders) for US tax purposes.

Furthermore, the CRA does not consider the LLC itself to be a resident of the US for the purposes of the Canada-U.S. Income Tax Convention (“the Treaty), since the LLC is not liable to tax (assuming it has not elected to be treated as a corporation under the US “check the box rules”).

In fact, in many cases, US LLCs that are controlled by Canadians will be considered resident in Canada for tax purposes based on “mind and management”.

In other cases, the use of a US LLC by Canadian can lead to double taxation issues, since the IRS taxes the shareholders, but the CRA views the LLC as a corporation. This can be particularly problematic where the shareholders are individuals, or the income is “foreign accrual property income” (“FAPI”).

The Fifth Protocol to the Treaty that was signed on September 21, 2007 did, in fact, extend treaty benefits to U.S. LLCs. However, the relieving provisions in the treaty will not provide any fix at all for Canadian residents who are shareholders (or “members”) of a U.S. LLC. Rather, the Protocol only provided a fix with respect to the share of the income applicable to U.S. residents.

In the vast majority of cases, the use of U.S. LLCs by Canadians is certainly not a tax-effective strategy, and in certain cases, it can be really disastrous.

In accordance with Circular 230 Disclosure

 

Mr. Atlas is a Toronto-based Chartered Accountant who practices as an independent consultant on a wide-range of international and domestic tax issues. Most of his practice consists of advising accounting and law firms on high-level tax issues. Prior to forming an independent tax practice in 1991, was Partner in charge of tax practice of major independent accounting firm in Toronto. Advises clients worldwide. Author of leading book, Canadian Taxation of Non-Residents, considered one of the few Canadian tax professionals, outside of the big accounting and law firms, who is an expert on high-level international tax matters.

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2 comments on “United States LLCs And Canadian Residents – A Bad Combination!”

  • Terry Fallis, EA

    Hi Michael,

    Informative article. So what would be the most tax beneficial legal structure for a Canadian to own US investment property?

    Terry Fallis, EA
    Branch Manager
    Tax Care, Inc.

  • Michael Atlas

    From a pure income tax perspective, a structure that results in personal taxation on both sides of the border would be best.

    That way, the taxpayer gets foreign tax credit in Canada for US tax, and does not suffer disadvantages of corporate taxation in US.

    In its simplest sense, personal ownership directly would achieve that. However, there is often concern for liability exposure, in which case some sort of LP or LLP might be preferable.

    Unfortunately, there is also often concern about exposure to US estate taxes with personal ownership, and that can add additional complications that are beyond what I can discuss here.

Comments are closed.