S corporations in Canada
Allan Madan, CPA, CA
It’s mostly bad news for US Citizens who own S corporations and live in Canada; or Americans with S corporation doing business in Canada.
The Advantages of an S Corporation in Canada:
- It is considered a separate entity for legal purposes in the US and Canada
- It is considered a flow through entity for tax purposes in the US
- Is not subject to double taxation or corporate tax rates in the US
- Reserve all the benefits of an S-Corp on US earned income
- Not treated as a partnership, which results in double tax (see below)
- Tax withholding requirements for revenue earned in Canada
- Stringent tax obligations if you are a US citizen living in Canada and own an S-Corporation
US Citizen living in Canada with an S-Corporation
As a US Citizen living in Canada, holding an S-Corporation is considered a separate entity for tax purposes. As such, although you may be a resident of Canada, your S corporation will be deemed a foreign entity. You will be required to pay taxes on the Dividends distributed from the S corporation to you in Canada. For more information regarding withholding taxes on these dividends, please consult our article on tax implications for US Companies expanding to Canada. You are also subject to double taxation because you will not be able to claim Foreign Tax Credits (FTC) in the US.
Based on the US-CAN Tax Treaty you can apply for relief from this situation through a competent authority and deem your S-Corp as a partnership for tax purposes. By doing so, you would only be taxed on income earned by the S-Corp on the personal level. However, the fees and hassle associated with this request tend to make it an unattractive solution. Contact a cross border specialist to find out what other options are available to you.
S Corporation doing business in Canada
If you are planning to operate your S-Corporation in Canada, you will need to ensure that your revenues and expenses are recorded separately from your income earned in the US. This is because when you file your 1120-S you will be required to disclose all foreign income separately.
In Canada, you will be required to pay taxes at the corporate level on your Canadian earned income only. However, there are exemptions under the CAN-US tax treaty that can provide relief . In order to be eligible for these exemptions you must ensure that you do not have a permanent establishment or your contract does not exceed 1 year. Under these treaty based exemptions you will not be liable for Canadian taxes on income earned If you wish to claim these exemptions your filing requirements in Canada will be as follows:
- Corporate Tax Return with the election of Treaty Based Benefits (T2)
- You must also attach Schedule 91 and 97 with the return.
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
How would I go about reclassifying my S corporation to a C corporation?
Thanks,
Roger
Hi Roger,
Thank you for your interest in our article.
Conversion from a S corporation to a C corporation has a significant impact on taxes. Be advised that a conversion to a C corporation will result in the corporation’s income being taxed in the corporation instead of in the hands of the owners. The conversion process is as follows:
1. Hold a shareholders’ vote. More than 50% of the shareholders must vote to revoke the S corporation election.
2. Write a letter to the IRS explaining that you wish to revoke the election. This letter must be signed by an authorized individual.
3. To be effective on the 1st day of the corporation’s taxable year (i.e.: January 1), the revocation must be made by the 15th day of the 3rd month of that tax year (i.e.: March 15). If not, it is effective in the following tax year.
Regards,
Allan Madan and Team
Hi Madan Team,
Thank you for your article on S-corporations. Please also explain what LLC and C- corporations are and the differences between them.
Thank you.
Aman
Hi Aman,
Thank you for taking your time to read our article and comment. Please see below the answer to your question.
A LLC is a corporation that provides limited liability for its members, also known as shareholders. C-Corporations are similar, to the extent that they provide limited liability for their shareholders.
C-Corporations pay income tax on profits earned. In addition, shareholders of C-corporations are taxed on dividends received, causing double taxation.
LLCs are taxed differently than C-corporations. LLCs do not pay income tax on profits earned. Instead, profits earned by a LLC are passed on to its members, who pay personal income tax on those profits.
Hope you find this information useful.
Best regards,
Allan Madan and Team
If I am filing a Canadian resident tax return and I have a US S Corporation, do I have any additional filing requirements?
Hi Seongjin,
As the Canada Revenue Agency views US S Corporations as a foreign entity, each year, you are required to file form T1134 – Information Return Relating to Controlled and Non-Controlled Foreign Affiliates (http://www.cra-arc.gc.ca/E/pbg/tf/t1134/t1134-12e.pdf). The deadline for filing this form is 15 months after the end of your taxation year (if individual, December 31st)
Regards,
Allan Madan and Team
What happens if I decide to keep my ownership in an S-corp. as a Canadian resident?
Hi Taylor,
The US-Canada tax treaty discusses a special option that a Canadian can take for the taxation of S-corps, since the flow-through status won’t work in Canada.
A shareholder of a S-Corp has the option of applying and requesting the Competent Authority of Canada (CRA, essentially) to have their income taxed similar to the US rules. The following will happen if this is done:
– The S-corp. will be considered a controlled foreign affiliate (which will have its own reporting requirements)
– All income from the S-corp. will be considered foreign accrual property income (FAPI)
– a foreign tax credit for foreign taxes paid will not be permitted (they will calculated under the FAPI rules instead – a method whereby the cost of the investment in the S-corp. is adjusted by the amount of Canadian taxes paid)
Regards,
Allan Madan and Team
Hi, thank you for your article, but please explain briefly what a”S-Corporation “exactly is .
Hi Vladimir,
Thank you for your question. A S-corporation is a company with a special structure of business ownership that allows the corporation to directly pass its profits, losses, deductions, and credits to the shareholders. The shareholders then file a personal tax return reporting the income received from the corporation. As indicated in the article, the benefit for US residents of having this corporation is avoidance of double taxation as the corporation is not taxes on its profits.
Regards,
Allan Madan and Team
I’ve just formed a new corporation myself. How do I make it a S-Corporation?
Hi Stephanie,
You have 75 days after the formation date of your corporation to elect to become a S-Corporation. The IRS requires Form 2553 to be filed.
Regards,
Allan Madan and Team
My S corp has a Canadian operation and we have several business bank accounts in Canada. Am I subject to FBAR filing obligations in the US? Or is that only for individuals?
HI Marley,
Yes, your S Corporation will still be responsible for reporting foreign (ie. Canadian) bank accounts to the IRS through the form FBAR if at any time during the year the aggregate sum exceeded the threshold (ie. $10,000). Your business could also be subject to filing form 8938 if it held substantial amount of money inside Canada.
Regards,
Allan Madan and Team
Hello Team,
I operate my US S-Corp in Canada. Will I be subject to non-resident tax?
Hi Stefan,
If you have a permanent establishment in Canada, you will be subject to Part XIV tax for non-resident corporations. This branch tax is levied at 25% – this rate can be reduced by the Canada-US tax treaty.
Regards,
Allan Madan and Team
It’s interesting that in the US, you can make elections to have your entity be taxed differently (eg. Partnership, corporation, disregarded, etc). Does Canada have anything equivalent?
Hi Ivy,
No, in Canada, there is no option of having entities be taxed differently than what their legal status says they are. For example, if corporation, then it will be taxed as a corporation, etc.
Best Regards,
Allan Madan and Team
Can I pay a large management free from my S corporation to reduce its profits to $0?
Hi Owen,
Unfortunately, you cannot pay management fees for the sole purpose of eliminating taxable income in the US. The management fee paid must be reasonable.
Best Regards,
Allan Madan and Team
How do I set up an S-corporation?
Hi Coco,
To create an S-corporation, you need to do the following:
1. Incorporate your business normally (i.e.: create the articles of incorporation, by-laws, resolutions, etc.)
2. Verify that the corporation is eligible for S-Corporation status
3. File IRS Form 2553 to elect for S-Corporation status – http://www.irs.gov/pub/irs-pdf/f2553.pdf
Best Regards,
Allan Madan and Team
I am a US citizen interested in investing in a Canadian real estate. I heard about an entity structure in Canada called Unlimited Liability Corporations (ULC) which is similar to a S Corp or LLC in the US. Should I invest through the ULC?
HI Trinity,
ULC is an entity that is considered to be corporation for Canadian purpose and as a flow-through for US purpose. In this manner, you are correct in that ULC is very similar to the LLC or the S Corporation in the US. It may be a good strategy to own Canadian property through the ULC if you are expecting to make a loss (as you’ll be able to claim the loss on your personal return). However, on any profit, double taxation will become a major issue.
Best Regards,
Allan Madan and Team
Hi Allan,
What do I do if I, a US citizen, have to file a non-resident tax return in Canada but do not have a Social Insurance Number?
Hi Roxi,
If you do not have a Social Insurance Number, you must request CRA for an Individual Tax Number (ITN). This can be done by filing the T1261 form which is available on the CRA website. The form comes with instructions on how to complete the application and the supporting documentation that is required.
If you are filing a non-resident return, and need an ITN, you can submit the T1261 with the tax return to the International Tax Services Office.
Best Regards,
Allan Madan and Team
Hi Allan,
Very informative question. I just had a question, If my S Corporation operates in Canada, will I have to pay sales taxes in Canada?
Hi Ricardo,
As a non-resident of Canada, the S Corp will be considered to be carrying on business in Canada even though the person may not have a permanent establishment in Canada. If you are considered to be carrying on business in Canada, you will be subject to GST/HST taxes in Canada unless the products or services you provide are exempt from sales taxes.
For more information on whether your products or services are exempt from sales tax, please see – http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/gnrl/txbl/xmptgds-eng.html
Best Regards,
Allan Madan and Team
Hi Ricardo
As a non-resident of Canada, the S Corp will be considered to be carrying on business in Canada even though the person may not have a permanent establishment in Canada. If you are considered to be carrying on business in Canada, you will be subject to GST/HST taxes in Canada unless the products or services you provide are exempt from sales taxes.
For more information on whether your products or services are exempt from sales tax, please see – http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/gnrl/txbl/xmptgds-eng.html
If I have a US S-Corp that is the 100% owner of a ULC, is the UCL disregarded for US tax purposes? How do I record the loss from the ULC on the 1120-S? Am I required to file a 5471 with the 1120S?
I’m a resident of Canada with dual US / Canadian citizenship 5 years ago I inherited some shares in a US company that’s structured as a US ‘S-Corp” and I’m receiving quarterly dividend payments.
I have a US based accountant report my (non-resident) income from the S-corp and I file and pay the required US taxes on this income to a) IRS b) 2 states (Minnesota & Wisconsin)
This year, I’m reviewing in close detail how a Canadian accountant has been preparing my personal Canadian return and reporting this US Income, because I want to file my Canadian return myself this year..
It appears to me that my Canadian accountant has not been properly reporting this US income because I don’t see any indications that I’ve received any Foreign Tax Credit for the taxes I’ve paid to the US.
Based on the basic description I’ve given above, would you think CRA should give me a Foreign Tax Credit on my US “S-Corp” income?
Hi Sandy,
Thanks for your question. In the US, a S-corporation is treated as a flow through entity. As a result, any income that a S-corporation earns (net of expenses) is passed-through to the shareholders, so that the shareholders pay personal tax on their share of the earnings.
In Canada, a S-corporation is not treated as a flow through entity. Cash distributions paid from a S-corporation to its shareholders are classified as a taxable dividend. A foreign tax credit cannot be claimed for the personal taxes paid. This is why S-corporations result in double taxation for Canadians.
Hi there Allan,
Great information here. As for the T2 return needed for the Canadian source income belonging to the S corporation, does that T2 only show the revenue and expenses in relation to the interest/shares held by the shareholder? For example if three S corporation partners become residents of Canada and hold 25% interest each, do all three have to file a T2 showing their 25% of the Canadian sourced income from the S corp? Thanks!
Hi Leif,
So long as the S-corporation does not have a permanent establishment in Canada, it will not be liable for Canadian corporate taxes. Form T1134 must be filed to report the financial information of the S-Corporation to the CRA. In addition, each Canadian shareholder must include in their income distributions (i.e. dividends) they received from the S-corporation.
Hello Allan,
I recently moved to Canada, and am still operating my S Corporation in the US (still all US based income). I have a finance background and thought I would try my hand at Form 1134. My S Corporation is clearly a ‘controlled foreign affiliate’. Everything went well, although I find myself asking one last question: the financial statement that I provided on Form 1134, should I file it as it is (with the regular S Corporation financial statement my New York bookkeeper gave), or do I need to convert the statement as well into what it would look like if it was a Canadian corporation (which seems like an expensive undertaking). Thank you, Jason
Allan,
I’m a US resident that worked in Canada (Calgary) as an actor on a movie for 3 weeks and was paid through my loan-out s corp. A non-resident Canadian tax was withheld from the check paid to my corp and I received an NR4 from the Canada Revenue Agency. Would my s corp be eligible for an exemption from this Canadian tax and could I get a refund for the amount withheld if I filed a Canadian return? If not, what other options would I have to use this amount as a foreign tax credit either individually or for my s corp? Is it more advantageous tax-wise to work as an individual rather than as an s corp in Canada?
Thanks for your help.
Hi Mark, your S-corp can file a treaty-based tax return with the CRA to recover the taxes withheld. This is because your S corp does not have a permanent establishment in Canada and is not liable for Canadian profits tax on business income earned in Canada.
Going forward, it’s easier for you to operate in Canada as a sole proprietor, rather than through a S-corp
Can a Canadian Corporation own an S Corporation?
Thanks.
Hi Jackie,
A Canadian corporation can own a S-corporation, but it’s not recommended as double-tax may arise.
Hello Allan,
this is an awesome service you provide by giving some answers here. I am in need of Canada / US tax advice. I have an offer for over $1 million a year for the next two years from a US entity. I am a dual citizen, US and Canada and I just moved to Canada to reside full time. I have the choice of being paid personally or to my US S-Corp; or to a Canadian Corp (of some sort, not sure what that would be as I am new to Canada). If you could set up this income in the most tax-efficient way, should I: get paid personally in USD, do a loan out through my US S-Corp, or do a loan-out through sort of Canadian entity. Or get paid personally in Canadian. Or some other structure. Looking primarily to avoid double taxation and major complications, also to maximize retirement tax savings, using such things as a Defined Benefit Plan, and or RSSP / or Sep -IRA. As I am able to structure these deals how I like more or less, I’d love to know your thoughts.
Hi Mark,
Don’t use an S-corporation, or US LLC because you will be double taxed. Also, a Canadian corporation could cause double taxation if you are performing professional services through the Canadian corporation. The reason is that US citizens who perform professional services through a Canadian corporation must pay US personal tax on the profit derived by the Canadian corporation as though they operated as a sole proprietor. So my suggestion is that you either operate as a sole proprietor or through a US LP, both of which will not result in double taxation.
Maximizing your RRSP contributions will help you save some tax.
Moved to Canada from the US. I have a S-Corp that owns interests in LLCs which invests in US rental real estate. Given that I am the sole owner of the S-Corp, am I required to file a Canadian corporate tax return? I don’t necessarily have a fixed permanent establishment as the underlying holdings are rental real estate investments. Thank you!
Hi Doug,
An S-corporation is classified as a foreign corporation for Canadian tax purposes, which could cause double taxation. The S-corporation will have to file a Canadian Corporate Tax Return each year and pay corporate income tax on its annual profits. To reduce the incidence of double taxation, consider paying a cash dividend each year from the S-corporation to yourself equal to the taxable profit for the year.