How does the CRA tax income from a US LLC?

Why the CRA and the IRS disagree about what an LLC is

A US LLC can elect, for US purposes, to be disregarded (a single-member LLC) or taxed as a partnership (multi-member), so its income flows straight through to the member's US return with no entity-level tax. The CRA does not recognize that election. Under Canadian tax law an LLC is a body corporate formed under US state law, so the CRA treats it as a corporation no matter what box was checked on the US side. That single difference is the root of nearly every problem a Canadian LLC owner runs into.

This is not a quirk unique to a rarely-used entity. LLCs are the default vehicle American real estate investors, contractors and small business partners reach for, so a Canadian who partners with a US resident on a US deal, or buys into a US business alongside American investors, often finds an LLC has already been chosen by the other side before Canadian tax exposure was considered at all.

How the timing mismatch creates double tax

Because the IRS taxes the member on the LLC's profit as it is earned, the Canadian owner pays US tax every year regardless of whether cash comes out of the company. Because the CRA sees a corporation, it does not tax the Canadian member until the corporation pays a dividend, which might be years later, in a different amount, or never if profit stays in the company. When the dividend is eventually taxed in Canada, the foreign tax credit rules generally look for US tax paid on that same dividend in that same year, not US tax paid years earlier on the underlying profit before it was distributed. The credit and the income arrive in different years, so much of the US tax already paid is effectively stranded with no Canadian tax left to offset it.

A simple example makes this concrete. An LLC earns US$50,000 of profit in year one; the Canadian member pays US tax on that $50,000 that year even though the cash stays in the company. In year three, the LLC finally distributes $50,000 to the member as a dividend; the CRA now taxes that $50,000 as foreign dividend income in year three, but the foreign tax credit rules are built around matching current-year foreign tax against current-year foreign income, and the tax paid back in year one does not fit that pattern. The member has effectively paid full tax twice on the same $50,000.

Why Article IV(6) of the treaty does not fully fix it

The Canada-US tax treaty has a hybrid entity provision, Article IV(6), meant to address exactly this kind of mismatch by letting income be treated consistently between the two countries in some circumstances. In practice its relief is narrow and depends on the specific facts, including how the income flows and whether it meets the treaty's technical tests, so it is not a general fix that rescues every Canadian LLC owner from the double-tax outcome described above. Anyone relying on it should have the specific position reviewed rather than assuming the treaty automatically neutralizes the mismatch.

The reporting obligations that come with owning an LLC

Beyond the tax mismatch, owning a meaningful interest in a US LLC brings its own paperwork. If the LLC qualifies as a foreign affiliate, generally when a Canadian resident and related parties together hold enough of the company, a T1134 information return is required annually, separate from and in addition to the regular T1 filing. The LLC interest itself is also specified foreign property, so it typically needs to be reported on a T1135 once its cost crosses the usual threshold. Missing either form carries its own penalties independent of whatever tax is owing on the underlying income.

What owners typically move toward instead

Because of this mismatch, Canadians who hold US real estate or run a US business with other investors are usually steered toward structures that both countries tax consistently, most often a US limited partnership, a US C-corporation, or straightforward personal ownership for a single property. Each of those has its own trade-offs, covered in how to decide between personal, corporate and LLC ownership, but none of them carries the specific timing mismatch that makes an LLC expensive for a Canadian resident.

What to do if you already own an LLC

Existing ownership is not necessarily a crisis, but it needs a plan. Reviewing several years of the LLC's US filings alongside the Canadian foreign tax credit position often reveals whether tax has actually been stranded, and by how much, before deciding whether to restructure, wind up the LLC, or simply live with the mismatch because the LLC's non-tax purpose still justifies it. Winding up an LLC and moving its assets into a cleaner structure is itself a transaction with US and Canadian tax consequences, so it needs its own review rather than being treated as a simple administrative step. Our full LLC guide walks through the restructuring options in more depth.

How we help Canadian LLC owners

We review the LLC's structure, the T1134 and T1135 filing history, and several years of returns to see whether foreign tax credits have actually been used or stranded, then lay out whether restructuring makes sense given the specific numbers rather than as a blanket recommendation. For new purchases we walk clients through the alternatives before they set up an LLC, since the fix is far cheaper before the entity exists than after. Our cross-border tax services cover both the review and the ongoing filings.