Start a US LLC From Canada: The CRA Double-Tax Risk

Start here, because it changes the decision: Canada is the one major country where forming a US LLC is often the wrong move, and the reason is not a technicality. The CRA treats a US LLC as a corporation for Canadian tax purposes even though the IRS may disregard it entirely. That mismatch can leave you paying US tax personally on income Canada does not consider yours yet, with no matching foreign tax credit — real double taxation, not a rounding error.

Bottom line

• The CRA’s long-standing position is that a US LLC is a corporation for Canadian tax purposes. A US check-the-box election does not change that.
• Because the IRS may look through the LLC to you while Canada looks at a foreign company, the US tax and the Canadian tax can attach to a different person, a different character of income and a different year. Canada’s foreign tax credit rules generally need those to match. When they do not, part of the US tax is simply lost.
• Article IV(6) of the Canada–US treaty helps you claim US treaty relief on US-source income earned through a transparent US entity. It does not make the LLC transparent for Canadian purposes. That distinction is where most bad advice goes wrong.

The mismatch, in plain terms

A single-member US LLC is disregarded by default for US federal income tax. The IRS looks through it and taxes the owner directly, as it arises.

The CRA does not. Its published and repeatedly confirmed position is that an LLC formed under US state law is a corporation for Canadian tax purposes — a separate entity whose profits are its own until it distributes them, at which point the Canadian member has dividend income from a foreign corporation.

Put those side by side and the problem is obvious:

Canada’s foreign tax credit machinery, in section 126 of the Income Tax Act and Article XXIV of the treaty, is built to relieve double tax where the same person is taxed on the same income in the same year. Here, frequently, it is not the same person, not the same character and not the same year. Practitioners have documented the result for years: US tax paid that cannot be fully credited in Canada.

What Article IV(6) does and does not do. Added by the Fifth Protocol, Article IV(6) treats income as derived by a Canadian resident for treaty purposes where it is earned through an entity that is fiscally transparent under US law. That is genuinely useful — it can secure reduced US withholding on US-source income flowing to you through the LLC. It says nothing about how Canada characterises the entity domestically. The LLC remains a corporation to the CRA.

Three more Canadian issues to raise

FAPI and foreign affiliate status. If you and related persons control the LLC, it is a controlled foreign affiliate. Passive income — interest, rents, most investment income — becomes foreign accrual property income taxed to you annually whether or not a dollar is distributed. Active business income generally escapes that accrual treatment, but only where the foreign affiliate and surplus mechanics are properly tracked and reported.

The information returns, and their penalties. Owning at least 10 percent of a foreign affiliate generally brings a Form T1134 obligation, with administrative relief below a cost threshold commonly cited at CAD 100,000. Form T1135 applies where the total cost of specified foreign property exceeds CAD 100,000 at any time in the year. Late-filing penalties on these forms are charged per day and escalate for continued non-compliance. Confirm the current thresholds and penalty schedules against the CRA’s own guides for the years in question.

Canadian corporate residence. A corporation not incorporated in Canada is still a Canadian tax resident if its central management and control is exercised here. Since the CRA already sees your LLC as a corporation, an LLC whose every decision is made from your kitchen table in Toronto raises the question of whether it is a Canadian-resident corporation — full Canadian corporate tax on worldwide income and a T2 return. That is a bigger problem than the credit mismatch, and it is fact-dependent on where decisions are actually made.

Who should not form a US LLC from Canada

Blunt version. If any of these describe you, get advice before you spend a dollar on formation:

• You will hold passive or investment income in it. FAPI accrual with a credit mismatch is the worst-case combination.
• You will manage it entirely from Canada. That is the central-management-and-control exposure, and it collapses the whole point.
• You intend to retain profits in the entity for years. Every year of retention widens the gap between when the US taxes you and when Canada does.
• It will hold US real estate. The characterisation mismatch compounds with US rules specific to real property.
• You are a salaried professional looking for a lower rate on side income. This structure is not that, and the compliance cost alone will exceed the hoped-for saving.

Alternatives that Canadian cross-border practitioners routinely discuss — a Canadian corporation, a US C-corporation, or a US limited partnership — each carry their own consequences. We are not recommending one; we are saying that on Canadian facts the LLC is frequently not the default answer, and the choice belongs with an accountant who works cross-border.

When a Canadian might still proceed

There are narrower cases. You have a genuine US operating business with US staff or premises and management actually exercised in the US. You need a US entity for a platform, processor or contract that will not accept a Canadian company. Your accountant has modelled the credit position on your numbers and is comfortable. Or the LLC has multiple members and the US treats it as a partnership, which changes the US side of the analysis — not the Canadian characterisation, but the interaction.

In every one of those cases the decision was made by a cross-border accountant with your figures, not by an article. The right first purchase here is an hour of professional time, not a formation package.

The formation steps, if you proceed

1. Choose the state. Wyoming and New Mexico are the low-cost, high-privacy picks. Wyoming files for $100 with an annual report license tax carrying a $60 minimum for LLCs holding $300,000 or less in in-state assets, due in your anniversary month. New Mexico files for $50 with no LLC annual report at all. Delaware charges a flat $300 LLC franchise tax due June 1 and earns its premium mainly if US investors are realistically in the plan — see wyoming-vs-delaware-llc and best-state-to-form-llc-for-non-residents.

2. Appoint a registered agent. Required in every state: a physical in-state address that accepts legal service. Northwest Registered Agent is the pick when privacy matters, because it keeps client addresses out of public filings where the state allows it. Background in what-is-a-registered-agent.

3. File the Articles of Organization. Online in most states, usually approved within a few business days. Fees change — check the current schedule.

4. Get the EIN. Canadians without an SSN file Form SS-4 with “Foreign” on line 7b. From outside the US, fax to 304-707-9471; the IRS generally returns an EIN in about four business days by fax, against roughly four weeks by mail. Detail in how-to-get-an-ein-without-ssn.

5. Sign the operating agreement, and keep every US tax election document with it. Your Canadian accountant needs both to file correctly.

6. Open the US business account. Canadian founders fare comparatively well here, but approval is never guaranteed — see us-business-bank-account-for-non-residents.

7. Diarise both sides. US: state annual report or franchise tax, registered agent renewal, and Form 5472 with a pro forma Form 1120 for a foreign-owned single-member LLC, which carries a $25,000 failure-to-file penalty even in a zero-revenue year. Canada: T1134 and T1135 where applicable. Missing the Canadian returns is the cheaper mistake to avoid and the one people forget. Checklist in us-llc-annual-compliance-checklist.

doola handles the US side end to end, including a US address and bookkeeping, and is built for founders outside the US. Firstbase is the leaner entity-plus-EIN option, compared in doola-vs-firstbase. Neither of them, and no formation service, resolves the Canadian tax characterisation — that is not what they sell.

FAQ

Does the CRA really treat a US LLC as a corporation?

Yes. That is its long-standing position, confirmed in published technical interpretations, and a US check-the-box election does not change the Canadian characterisation. Plan around it rather than hoping otherwise.

Doesn’t the tax treaty fix the double taxation?

Only partly. Article IV(6) helps you obtain US treaty relief on US-source income earned through a fiscally transparent US entity. It does not make the LLC transparent for Canadian purposes, so the domestic character and timing mismatch survives.

Is a US LLC ever right for a Canadian resident?

Sometimes — typically where there is a genuine US operating business with management exercised in the US, or where a US entity is a hard requirement of a platform or contract. It should follow a cross-border accountant’s analysis, not precede it.

What if I already formed one?

Do not unwind it in a panic, and do not ignore it either. Get the T1134 and T1135 position assessed for every year of ownership, because the filing penalties accrue independently of whether any tax was owed.

This is general information, not legal or tax advice. Canadian LLC treatment is genuinely difficult — confirm your position with a cross-border CPA or CA in Canada and with a CPA or attorney in the US before you act.

If your accountant clears the structure, doola is the option built for non-US founders and Northwest Registered Agent is the lean choice when you only need the agent and a privacy-conscious filing. If your accountant does not clear it, that hour of advice was the best money in this whole article. Either way, read us-llc-taxes-for-non-residents next.