Cross-Border Tax · Guide
Why Canadians get double-taxed on US LLCs — and what to use instead
For a Canadian resident, a US LLC is usually a tax trap: the CRA treats an LLC as a foreign corporation, not a flow-through. You pay US tax personally as the LLC earns income, then Canadian tax again when it distributes — and the foreign tax credits rarely line up, pushing the combined rate well past what either country alone would charge. A US limited partnership, a C-corporation, or a branch of your Canadian company usually keeps both systems aligned; which one fits depends on your facts.
By the AnalytIQ Accounting team · Last reviewed: August 12, 2026
Why the LLC works for Americans and breaks for Canadians
In the US, a limited liability company is normally fiscally transparent: the entity pays no tax itself, profits flow straight through to the owner, and the owner pays US tax personally in the year the money is earned. One layer of tax plus liability protection — for a US resident, that is the whole appeal, and it is why every American formation service, lawyer, and YouTube video recommends it by default.
The CRA does not see it that way. Canada classifies foreign entities by their legal characteristics, and the CRA's long-standing position is that a US LLC is a corporation. So on the Canadian side the flow-through disappears: the LLC's profit is not your income when it is earned, and cash coming out of the LLC is a dividend from a foreign corporation — fully taxable at your marginal rate, with no Canadian dividend tax credit (that credit is reserved for taxable Canadian corporations).
Two countries now hold two different pictures of the same dollar. The US taxes you in the year the LLC earns; Canada taxes you in the year the LLC pays. Foreign tax credits are built on matching — same taxpayer, same income, same year — and here almost nothing matches. In CRA's eyes the US tax was paid on a corporation's business income, while the Canadian tax hits a dividend, often in a different year. Much of the US tax you already paid simply strands.
The double tax, in round numbers
An illustration for a Canadian owner at roughly a 45% marginal rate whose single-member LLC earns US$100,000 of business profit. These are round figures for illustration only — actual outcomes depend on your bracket, province, the US state, and the year:
| Step | Amount |
|---|---|
| LLC profit for the year | $100,000 |
| US tax you pay personally as it is earned (illustrative 22%) | $22,000 |
| Cash later distributed to you | $78,000 |
| Canadian tax on that distribution as a foreign dividend (45%, no dividend tax credit) | $35,100 |
| Foreign tax credit for the $22,000 already paid | Often little to none — wrong year, and in CRA's view tax on a different taxpayer's income |
| Combined burden | About $57,000 on $100,000 — versus roughly $45,000 in an aligned structure |
CRA has narrow administrative positions that can allow partial relief when distributions land in the same year the income is earned, but they are limited, timing-sensitive, and no substitute for a structure that works by design. And the gap in the table repeats every year the LLC is profitable.
The paperwork nobody mentions at formation
Because Canada sees a corporation, owning a US LLC drags you into the foreign-affiliate rules. Most Canadian owners must file Form T1134 every year — an information return with a late-filing penalty of $25 per day up to $2,500 per year, per form, even in years the LLC earns nothing. Passive income inside the LLC can be caught by the FAPI rules and taxed in Canada as it accrues. And because a transparent LLC is not itself a US taxpayer, Canada-US treaty benefits apply to it awkwardly at best — another layer of friction an aligned structure never creates.
Structures that keep both countries aligned
- US limited partnership. A properly structured LP is a flow-through in both countries, so you pay once and the foreign tax credits line up. Entity choice within the partnership family still matters — CRA treats certain state-law variants such as LLPs and LLLPs as corporations too.
- US C-corporation. Both countries agree it is a corporation. The corporation pays US corporate tax, dividends to you face the treaty withholding rate, and Canada credits that withholding cleanly. Two layers, but predictable ones — often the fit when profits will be reinvested in the US.
- A branch of your Canadian company. Operate in the US directly through your existing corporation. If your activity stays short of a permanent establishment under the treaty, US federal income tax may not apply at all — and there is no hybrid entity anywhere in the chain.
Buying US rental property is its own version of this decision — LLCs are pushed hard by US realtors and are usually the wrong answer for Canadians there too. We cover that on our Canadians owning US rental property guide.
Already signed the operating agreement?
You have options, and the earlier we look, the more of them survive. Depending on the facts: electing corporate treatment for the LLC on the US side so both countries finally see the same thing, timing distributions into the year the income is earned to reach CRA's limited relief, or winding the LLC up and re-forming properly before the gains inside it grow. Each path has its own tax cost and each closes off others, so this is a planning conversation, not a checklist — we map the numbers for your situation before you owe two governments. The cheapest version of that conversation happens before formation; the second cheapest is now.
Source: CRA — Form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates.
Rules at a glance · US Real Estate, Investments and Trading
Not sure which applies to you? Get a free proposal or book 15 minutes.
What we take off your plate
Cross-border tax for Canadians with US property or investments, handled.
- FIRPTA withholding, Form 8288-B and the 1040-NR filed as one file
- The 871(d) election made every year so US rental tax lands on net income
- Canadian and US returns prepared by one team
- Treaty positions and foreign tax credits lined up
- FBAR and T1135 foreign reporting
- ITIN applications certified in-house
Mistakes we fix
Three things that go wrong for Canadians with US property or investments.
- Buying US rental property through an LLC and creating a Canada-US tax mismatch
- Missing the 871(d) election and paying 30% tax on gross US rental income instead of net
- Leaving US stocks in a Canadian brokerage off the T1135 because the account itself is Canadian
Recognise one? Book a call and we will tell you what it is costing you.
How we can help · US Real Estate, Investments and Trading
Where we do the work.
Fixed fees, quoted after a short discovery call. Canadian and US filings under one roof.
Free proposal
A fixed fee for your cross-border tax work, in writing.
- Tell us about your business. The form takes about a minute.
- A short discovery call. Fifteen minutes to confirm what you need.
- A fixed fee in writing. We reply within one business day. No hourly surprises.
- Canadian and US filings under one roof
- Cloud-first: QuickBooks Online, Dext, Wagepoint
- Brampton, Ontario, with clients across Canada and the US
Common questions.
I already own a US LLC. Is it too late to fix?
No, but the repair menu shrinks as profits and asset values grow inside it. Options range from electing corporate treatment on the US side to distributing in the year income is earned to winding it up and re-forming — each with its own cost. Get the structure reviewed before the next profitable year, not after.
My LLC made no money this year. Do I still have Canadian filings?
Very likely yes. A US LLC is generally a foreign affiliate, and Form T1134 is an annual information return that is due whether or not the LLC was profitable. The late penalty runs $25 per day to $2,500 per year, per form — for a return with no tax on it.
Can I just claim a foreign tax credit for the US tax I paid on LLC income?
Usually not in full. Canada taxes the distribution as a dividend, often in a different year than the US taxed the profit, and in CRA’s view the US tax related to a different taxpayer’s income. Narrow administrative relief exists when timing aligns, but much of the credit typically strands.
Related reading
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