Doing Business in the U.S. for Canadian Companies

Chapter 1: Introduction

The United States is the world’s largest economy and most dynamic consumer market, making it an attractive destination for Canadian companies seeking expansion. With strong bilateral trade, close geography, a shared language, and cultural familiarity, the U.S. is a natural next step for Canadian entrepreneurs. However, entering the U.S. market requires a clear understanding of cross-border tax rules, legal setup, and regulatory compliance.

This guide offers actionable insights for Canadian businesses operating or planning to operate in the U.S., focusing on tax strategy, U.S. entity formation, ownership structure, and regulatory compliance to promote sustainable growth.

Chapter 2: Why Consider Doing Business in the U.S.?

With over 330 million consumers, the U.S. market offers unmatched growth potential for Canadian exporters and service providers. Thanks to the United States–Mexico–Canada Agreement (USMCA), Canadian businesses benefit from reduced tariffs and simplified customs procedures. A favourable USD-CAD exchange rate can improve profit margins, and U.S. customers often prefer dealing with domestic entities—making a U.S. presence a credibility booster.

Although the U.S. federal corporate tax rate is slightly lower than Canada’s, Canadian businesses expand south primarily to access new markets and boost sales.

Example: A Canadian industrial equipment supplier doubles its revenue in the U.S. after forming a local subsidiary. U.S. clients are more receptive to working with an American entity, and payment processing in USD becomes smoother.

Chapter 3: Forms of Business Activity

Canadian businesses entering the U.S. may initially do so through infrequent travel, which generally does not trigger tax obligations under the Canada-U.S. tax treaty. However, when activities escalate—such as maintaining stock, hiring staff, or negotiating contracts—a “nexus” is created, leading to state-level tax responsibilities.

To manage this exposure, many Canadian companies establish a formal U.S. entity, such as a corporation or LLC, to protect liabilities and streamline compliance.

Example: A Canadian SaaS firm sends tech support staff monthly to New York. These recurring visits and revenue generation create “nexus,” requiring New York State tax filings.

Chapter 4: Choosing the Right U.S. Entity

Canadian businesses typically choose between forming a U.S. corporation or limited liability company (LLC). While LLCs offer flow-through taxation in the U.S., Canada treats them as corporations, often resulting in double taxation. LLCs are also ineligible for treaty benefits.  Conversely, a U.S. C-corporation qualifies for Canada-U.S. tax treaty advantages, such as lower withholding tax and dispute resolution rights.

For Canadian tax alignment and long-term planning, U.S. corporations are usually the better fit.

Example: A Canadian investor forms a U.S. LLC for rental income. CRA does not recognize flow-through status and taxes income again in Canada—resulting in double taxation. Converting to a C-corp resolves this.

Chapter 5: U.S. Taxation Overview

A U.S. C-corporation is subject to 21% federal corporate income tax. Most states also impose income taxes, which vary from 0% (e.g., Nevada, Texas) to 13%+ (e.g., California). A branch profits tax of 5% applies when earnings are repatriated from a U.S. branch of a Canadian corporation.

Dividends paid to Canadian shareholders trigger withholding tax: 5% if a corporate shareholder owns ≥10% voting shares, or 15% in other cases. Note that incorporating in a no-tax state does not avoid tax if business is conducted elsewhere.

Example: A Canadian manufacturer incorporates in Delaware but sells in California. Despite no Delaware taxes, it must file and pay over 8% tax in California due to economic nexus.

Chapter 6: Canadian Tax Interaction — Foreign Affiliate and FAPI Rules

If a Canadian resident owns ≥10% of a U.S. entity, it is considered a foreign affiliate (FA). If controlled by five or fewer Canadian residents, it becomes a controlled foreign affiliate (CFA). Passive income earned by a CFA is treated as foreign accrual property income (FAPI) and taxed in Canada even if undistributed.  Avoiding FAPI classification requires employing staff and maintaining active operations in the U.S.

Example: A U.S. subsidiary earns $400,000 in royalties and has three employees. CRA categorizes this as FAPI, leading to Canadian taxation on the full amount.

FAPI Summary Table

Case Study: Tax Efficiency in Repatriating U.S. Profits

Case Study: Personal vs. Corporate Ownership of a U.S. Shoe Company

Let’s consider a Canadian tax resident who owns a U.S. corporation engaged in the retail shoe business. The company generates $100 of net income. This case study compares the overall tax implications of owning the U.S. company personally versus through a Canadian corporation, using simplified assumptions and 2025 tax rates.

In the personal ownership scenario, the U.S. imposes a 21% federal corporate tax on the shoe company’s profits, reducing the income to $79. When the U.S. company pays this as a dividend to the Canadian individual shareholder, a 15% U.S. withholding tax applies ($12), leaving $67. The gross dividend of $79 is reported on the Canadian individual’s T1 return. Assuming a marginal tax rate of 53%, Canadian tax payable is $42, reduced by a foreign tax credit of $12 for the U.S. withholding tax. The total combined tax paid across jurisdictions amounts to $63.

In contrast, under corporate ownership, the structure allows for tax deferral and reduction. The U.S. federal corporate tax is still $21, and the dividend paid to the Canadian corporation is subject to only 5% U.S. withholding tax under the Canada-U.S. Tax Treaty ($4), allowing $75 to be received by the Canadian corporation. As this income qualifies as “exempt surplus,” no Canadian corporate tax is applied. When the Canadian corporation distributes the $75 to the individual shareholder, personal tax of $29 is payable (assuming a 39% effective rate on eligible dividends). The total tax burden is $54—significantly less than in the personal ownership scenario.

This comparison shows that using a Canadian corporation as a holding vehicle for a U.S. active business can provide a material tax advantage. While administrative costs may increase, the tax deferral and lower effective tax rate make corporate ownership an attractive option for high-income earners or long-term investors.

Tax Comparison Table – U.S. Shoe Business ($100 of U.S. Corporate Income)

Chapter 7: U.S. Sales Tax and Nexus

Each U.S. state controls its own sales tax laws, rates, and registration thresholds. Unlike Canada’s GST/HST system, there is no federal standard. Canadian businesses with economic nexus must collect and remit sales tax in those states—even without physical presence.
Common triggers include inventory storage, personnel, and surpassing revenue thresholds (often $100,000).

Example: A Canadian e-commerce seller exceeds $100,000 in California sales. They must register, collect, and remit California sales tax—even without an office or staff there.

Key Steps:

• Identify nexus states
• Register with each state’s tax authority
• Collect and remit destination-based sales tax

Chapter 8: Immigration Considerations

Operating a U.S. business may involve frequent or extended presence in the U.S. for Canadian founders or staff. Common U.S. business visas include:

• TN Visa: For NAFTA professionals
• L-1 Visa: Intra-company transfers
• E-2 Visa: For substantial U.S. investment
• B-1 Visa: For short-term business activities

Example: A Canadian tech entrepreneur forms a Delaware C-Corp and secures an E-2 visa to oversee U.S. operations directly.
Tip: Engage a U.S. immigration attorney before business activities begin.

Chapter 9: Compliance, Banking, and Reporting Requirements

Starting a U.S. company involves administrative obligations, including:

• EIN Registration: Required for taxes and banking
• Registered Agent: Needed for U.S. address and legal service
• State Filings: Annual returns and fees vary
• S. Banking: Requires EIN, incorporation docs, and in-person visit
• Tax Reporting: Form 1120 (C-corp), Form 5471 (Canadian owner), FBAR, Form 8938, and state returns

Example: A Canadian-owned Nevada entity must file Form 1120, issue 1099s, and complete Form 5471 for its Canadian shareholder.

Chapter 10: Exit Strategies and Asset Protection

Canadian entrepreneurs must plan for business succession, sale, or wind-down in the U.S. Key strategies include:

• Sale of Business: May result in capital gains taxes in both countries
• Estate Planning: For intergenerational transfers
• Dissolution: File final returns and cancel registrations
• Asset Protection: Use corporate entities, insurance, or separate LLCs

Example: A Canadian family sells its U.S. company via an asset sale. Proper planning avoids U.S. estate tax exposure and leverages Canadian capital gains exemptions.

Conclusion

Expanding into the United States presents incredible opportunity for Canadian businesses, but also requires strategic planning, robust compliance, and sound tax structure. With proper entity selection, cross-border coordination, and timely reporting, Canadian entrepreneurs can grow profitably while avoiding common pitfalls in the U.S. market.

Contact Madan CPA today for actionable insights for doing business in the U.S. for Canadian companies.