Incblog for Entrepreneurs

Covering entrepreneurship and business start up questions for non-residents and US citizens.


Oct 31 2013

US Incorporations for Canadians

by John Gordon | 20:10 GMT

Canada and the US share a long, famously-undefended border, and happen to be each other’s largest trading partners. Not surprisingly, a lot of residents in each side are interested in setting up a business in the other country. This is when the trouble begins.

The key assumption by Canadians is that the US is physically close and very familiar. So familiar, that when thinking to set up a business in the US, Canadians read materials meant for US residents and assume that it applies to them too.

For startups looking for venture capital, where the rule of thumb is typically to set up a Delaware C corporation, this actually works. For other small or medium businesses, it is common to be asked about setting up a Limited Liability Company, or LLC. LLC’s are great for Americans, but disastrous for Canadian taxpayers.


Canadian and American business entities are pretty much the same except for the LLC. Canada does not anything like it. Canada’s tax laws do not recognize hybrid entities like LLCs, which have both corporate and partnership features, and have the ability to change US tax status. A Canadian taxpayer (corporate or natural person) who operates a branch or subsidiary in the US must pay US withholding taxes based on taxable income (whether distributed or not), then claim a foreign tax credit in Canada. When the US business is a single member LLC, Revenue Canada considers the LLC to be a corporation that pays the withholding tax – but since the actual taxpayer is the Canadian member, there is a mismatch and Revenue Canada will not give the foreign tax credit. The taxpayer will end up paying that withholding tax both to the US and again to Canada because there is no credit given.


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