Many Canadians view the U.S. as “ripe” with opportunities for investment. With U.S. LLCs offering up many benefits to American-only filers, it’s no wonder that this country is becoming more popular among Canadian investors. But before taking such a plunge head first – especially when there may be tax implications at stake – consult your cross-border legal specialist about which type of business structure is right for what you plan to do next!
US LLCs and US Taxation
A US LLC is a type of business entity that has features in common with both corporations and partnerships. It provides limited liability for its members on the one hand, but also benefits from flow-through taxation within the U.S. – a special kind of legal status that may be suited to some entrepreneurs who are looking either to grow their company.
In the U.S., it is possible to have an LLC taxed. The most common of these options include taxation as a disregarded entity – with income taxed solely for members’ benefits; partnership tax where each member is allocated their share accordingly upon creation and subsequent distribution of profits from that particular period onward; or even separate corporation status.
The benefits of limiting the liability of its members, with flexible taxation options, make LLCs an appealing choice for U.S. residents.
US LLCs and Canadian Taxation
North of the border, however in Canada both single-member and multi-member LLCs are considered corporations for tax purposes. A Canadian member of a US LLC can generally expect to be taxed on the LLC’s earnings in the US, even if those earnings are not distributed. On the contrary, those earnings are taxed in Canada when distributed to the Canadian member from the LLC.
What’s the potential result of this discrepancy in treatment between the countries? There is the potential for taxation in the U.S. in one year and in Canada in another. While it may be possible to align the amounts taxable in both countries in the same year, there may be limited ability for the Canadian member to claim Canadian foreign tax credits on the U.S. taxes paid. Further, treaty benefits are not available to the LLCs, as this is applied at the level of the LLC member. This increases the potential for double taxation.
Need Help from a Cross-Border Tax Accountant in Toronto or Oakville, Ontario?
Contact Cross-Border Financial Professional Corporation – When Perspectives Matter!
Follow us on Linkedin and Twitter, or hang out on Facebook.
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.