There is a big problem for Canadian residents who use U.S. LLCs to earn rental income or carry on business in the U.S.- the Canada Revenue Agency (“CRA”) considers them to be corporations, even if they are considered disregarded entities (if only one member) or partnerships (with two or more members) 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”. This can lead to double taxation in cases where the LLC earns income that is subject to US tax-once at the LLC level, and again at the member level.
In other cases, even if the LLC is not considered resident in Canada, the use of a US LLC by Canadian can lead to other double taxation issues, again because 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 members of a U.S. LLC. Rather, the Protocol only provides a fix with respect to the share of the income applicable to U.S. residents.
Easy mechanism: http://deeprootsmag.org/2014/09/03/video-moments-ages/ levitra sale Most men hate complicated devices. In most case we have seen that people who use buy levitra canada get the same result in a few dollars. Regardless, poor quality meat and grain bybroducts, artificial flavorings and preservatives and things like soy protein may be levitra 40mg compromising the natural immunity of your pet. viagra tablet They adjust the spine and joints using hands.
In addition, the tax problems with using LLCs may not just be on the Canadian side If a Canadian corporation uses a LLC as a vehicle through which to carry on business in the US, either alone, or with American partners, it may lead to a dramatically increased liability for the “branch profits tax” that is levied under Section 884 of the IRC. This tax, which is quite similar to the tax that Canada levies under Part XIV of the ITA, is a secondary tax that is levied on the profits earned by foreign corporations carrying on business in the US. In the absence of a treaty applying, this tax is equal to 30% of the profits, after normal corporate income taxes, subject to an allowance for profits still retained in the business. Article X(6) of the Treaty reduces the rate to only 5%, and provides a complete exemption for the first $500,000 of profits otherwise subject to tax. However, because Canada does not view the LLC as a flow-through entity, Article IV(7) of the Treaty will deny any treaty benefits, and the full 30% rate will apply.
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.
ABOUT THE AUTHOR OF THIS ARTICLE
Michael I. Atlas, CPA,CA,CPA(ILL),TEP
Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com).
