Your LLC is a pass-through. Canada disagrees.
The most common structure in American small business and real estate becomes a tax problem the day you become a Canadian resident. This is why, what it costs, and the four ways to deal with it — all of which work better before the move than after.
General educational information for U.S. persons planning a move to Canada. Entity classification, foreign-affiliate rules and treaty relief are fact-specific and change; this is not tax or legal advice. Confirm your position with a cross-border professional before acting.
The IRS sees a pass-through. The CRA sees a corporation.
A single-member LLC that has never filed an election is, to the IRS, invisible. Its income lands on your Schedule C or Schedule E as if the entity didn’t exist. A multi-member LLC is a partnership: the income flows through, the members pay. Either way, there is one layer of U.S. tax and it is yours. That is why Americans put rental property, consulting income, side businesses and sometimes the family investment account into LLCs without a second thought.
Canada does not classify entities by election. It classifies them by what they are under the law that created them, and a limited liability company — a body with its own legal personality, limited liability for its owners and perpetual existence — is a corporation. The CRA has taken that position consistently, and the courts have upheld it. From the day you become a Canadian tax resident, the LLC you own is a foreign corporation in the CRA’s eyes, and you are its shareholder.
That single difference generates every problem that follows. The U.S. taxes you on the LLC’s income as it’s earned, because it sees through the entity. Canada taxes you when the corporation pays you a dividend, because it doesn’t. The two countries tax the same dollar at different times and characterize it differently, and the foreign tax credit system — which assumes both countries are looking at the same income in the same year — struggles to reconcile them.
Article IV(6) of the Canada–U.S. Treaty, added by the 2007 Protocol, lets treaty benefits flow through a fiscally transparent entity to its U.S.-resident owners. It was written for U.S. residents earning Canadian income through an LLC. It does not help a Canadian resident who owns a U.S. LLC, because the treaty is about who is resident where, and you are now resident in Canada. The U.S. Treasury’s Technical Explanation of the 2007 Protocol sets out how paragraphs 6 and 7 operate, and the case they solve is not yours.
Three ways the same income gets taxed twice.
Timing
Say your LLC earns rental income this year and you leave it in the LLC’s account. The IRS taxes you on it this year. Canada sees no income — a foreign corporation earned money and paid you nothing. You pay U.S. tax and have no Canadian tax to credit it against. Next year you pay yourself the accumulated cash. Canada now taxes a dividend. The U.S. sees nothing — you’re taking your own money out of a disregarded entity. You pay Canadian tax and have no U.S. tax that year to credit. Both countries have taxed the income in full; neither year offered a credit that lined up.
Character
Even when timing cooperates, character often doesn’t. Rental income to the IRS is a dividend from a foreign corporation to the CRA, taxed as ordinary income with none of the dividend tax credit Canada offers on Canadian corporate dividends. Long-term capital gains inside the LLC, taxed at preferential U.S. rates, become dividends when distributed — full-rate ordinary income in Canada. The favorable U.S. treatment you built the structure around is lost the moment the money crosses.
Passive income that Canada attributes to you anyway
If the LLC’s income is passive — rents, interest, portfolio gains — Canada may not wait for a dividend. Its foreign accrual property income rules can attribute the LLC’s passive earnings to you as a Canadian resident in the year they’re earned, whether or not you were paid. That closes the timing gap in one direction, but it also creates a Canadian filing obligation for the foreign corporation you own, with its own penalties for lateness, and it doesn’t remove the character problem.
| Your LLC holds | What the IRS taxes, and when | What the CRA taxes, and when | Where it bites |
|---|---|---|---|
| A U.S. rental property | Net rent each year, on your 1040 | Dividend when you take cash out; possibly attributed sooner under the passive-income rules | Timing gap; rent becomes ordinary dividend income |
| A consulting or service business | Business income each year | Dividend when distributed; possible Canadian corporate filing if you’re doing the work from Canada | Timing gap; the business may now have a Canadian permanent establishment |
| An investment account | Interest, dividends, gains as earned | Attributed annually under the passive-income rules and taxed as ordinary income | Character: preferential U.S. gains become full-rate Canadian income |
| Mineral or royalty interests | Royalty income each year, with depletion | Dividend or attributed income; no depletion equivalent | Both; and the interests are U.S. real property for estate purposes |
Simplified. Treatment depends on the LLC’s activity, whether it has one member or several, and what elections are in place. Educational, not tax advice.
One rental, two very different years.
Illustrative figures only — no tax rates are applied, because the point is the structure, not the arithmetic. Suppose a couple moving from Austin owns a single-member LLC holding one rental duplex. The LLC nets $30,000 a year after expenses, which they leave in the LLC’s account to build a repair reserve. They become Canadian residents on August 1.
Year one. The IRS taxes the full $30,000 on their U.S. return, as it always has. For the five Canadian-resident months, the CRA sees a foreign corporation earning rent and paying its shareholders nothing. Unless the passive-income attribution rules reach the income, there is no Canadian tax this year — and therefore nothing for the U.S. tax to be credited against. The U.S. tax is simply paid.
Year two. The LLC has $60,000 in its account. The couple, now settled, pay themselves $50,000 to fund a down payment. To the IRS this is nothing — an owner moving money from one pocket to another. To the CRA it is a $50,000 dividend from a foreign corporation, ordinary income, taxed at their full Canadian marginal rate with no dividend tax credit. There is no U.S. tax that year on that $50,000 to offset it, because the U.S. taxed it in year one. Two full tax bills on the same $50,000, one in each year.
Had they instead dissolved the LLC before August 1 and held the duplex directly, year one would look the same on the U.S. side, and Canada would have taxed net rent from August 1 with a credit for the U.S. tax on the same income in the same year. One bill, reconciled.
Four things to do with the LLC, and the order to consider them in.
- Dissolve it and hold the assets directlyThe cleanest answer for a single-member LLC holding one or two rentals or an investment account. Because the IRS already disregards the entity, distributing its assets to you is generally not a taxable event federally; you simply own what the LLC owned. Canada then taxes you on the underlying income, in the same year the IRS does, and the credits line up. Do it before your residency date so Canada never sees the corporation. Watch for state transfer taxes and lender consent on mortgaged property.
- Elect to be taxed as a corporation on both sidesFiling Form 8832 makes the LLC a corporation for U.S. purposes too. Both countries now see the same thing: a corporation that pays tax on its own income and dividends to you. The mismatch disappears. The cost is that you have just created a U.S. C-corporation, with entity-level U.S. tax, and Canada’s foreign-affiliate rules and filings now apply for as long as you own it. Right for an operating business with retained earnings; expensive for a passive holding vehicle.
- Move the business into a Canadian corporationIf the LLC is an active business you will run from Canada, the business itself is probably becoming Canadian whether you like it or not — work done from a Canadian desk creates a Canadian permanent establishment. A Canadian corporation gives you small-business rates on active income and a structure Canada understands. The transfer of assets across the border has its own U.S. and Canadian consequences and needs to be modeled, not assumed.
- Keep it and manage the mismatchSometimes unavoidable — a multi-member LLC where the other members are staying in the U.S., an LLC that holds property the lender won’t let you retitle. Then the work is annual: distribute income in the year it’s earned so the two countries tax it in the same year, track the LLC’s earnings and the taxes paid for foreign-affiliate reporting, and accept that the character problem is a permanent cost of the structure.
Value every interest the LLC holds as of your arrival day. Canada treats you as having acquired your shares of the LLC — and, if you dissolve it, the underlying assets — at fair market value on the day you become resident, per the CRA’s guidance on completing a return for newcomers. That valuation is your Canadian cost base forever. Without it, every future sale is taxed by Canada on gains that accrued while you lived in Texas. The CRA’s capital gains guide covers how that base flows into a later disposition.
Five ways this goes wrong.
- Assuming pass-through means pass-through everywhere. It doesn’t. Canada classifies the entity, not your election. The single most common surprise on a first Canadian return.
- Leaving cash in the LLC “for now.” Every dollar retained past your residency date is a dollar the U.S. has already taxed and Canada will tax again when it comes out. Empty the account or dissolve the entity before you cross.
- Dissolving after the move instead of before. Once Canada sees a corporation, dissolving it is a disposition of shares and a distribution from a foreign corporation — both Canadian tax events. The same act a month earlier was invisible to both countries.
- Forgetting the foreign-affiliate filings. A Canadian resident who owns a foreign corporation has annual information reporting to the CRA, separate from the T1135 you may already know about. The penalties are per-form and per-year and do not depend on whether any tax was owed.
- Running the business from Canada under a U.S. entity. If you are doing the work in Canada, the LLC is carrying on business in Canada. That creates Canadian corporate tax exposure for the LLC itself, on top of everything above.
The questions we get on this one.
Does Canada really treat my LLC as a corporation even though the IRS ignores it?
Yes. Canada classifies an entity by its legal characteristics under the law that created it, not by U.S. elections. A limited liability company has separate legal personality and limited liability, so the CRA treats it as a corporation. Your U.S. disregarded-entity or partnership status has no bearing on the Canadian analysis.
What does ‘double taxation’ actually mean here? I thought the treaty prevented that.
The treaty and the foreign tax credit prevent the same income from being taxed twice in the same year by both countries. The LLC problem is that the two countries tax the income in different years and as different kinds of income — U.S. tax when it’s earned, Canadian tax when it’s distributed as a dividend. Credits require both to see the same income at the same time, so they often don’t line up.
I have a single-member LLC holding one rental. What’s the usual answer?
Most often: dissolve it before your Canadian residency date and hold the property directly. The IRS already disregards the entity, so unwinding it is generally not a U.S. taxable event. Canada then taxes the rent in the same year the IRS does, and the credit works. Check state transfer tax and get lender consent first.
What if I file Form 8832 and make it a corporation for the IRS too?
Then both countries see a corporation and the mismatch disappears. You’ve also created a U.S. C-corporation with its own tax return and entity-level tax, and as a Canadian resident who owns a foreign corporation you have annual foreign-affiliate reporting to the CRA. It fits an operating business with retained earnings better than a passive holding vehicle.
My LLC has other members who are staying in the U.S. Can I still dissolve it?
Not unilaterally. A multi-member LLC is a partnership to the IRS and a corporation to the CRA, and the other members have their own interests. Options include buying out or being bought out before you move, converting to an entity both countries see the same way, or keeping it and managing the timing by distributing income each year it’s earned. Each has a cost; none is free.
Do I need to file anything with the CRA just for owning the LLC?
Once you are a Canadian resident and own a foreign corporation, yes — annual information reporting on foreign affiliates, with penalties that apply per form and per year regardless of whether tax is owed. This is separate from the T1135 foreign-property report. Ask specifically about it; it is the filing most often missed.
What’s the deadline for sorting this out?
Your Canadian residency date. Everything that happens before it — dissolution, distribution, election — is a U.S.-only event. Everything after it is a Canadian event too. The day itself is when your cost base is set and when the CRA starts seeing the corporation.
Does this apply to an S-corporation as well?
Similar problems, different mechanics. An S-corporation is a corporation to both countries, so the classification mismatch is smaller, but Canada does not recognize the S election — it sees a regular corporation paying dividends — so the timing and character issues largely return. And an S-corporation cannot have a nonresident alien shareholder, which matters if you ever renounce. Get it reviewed before the move.
The American’s Guide to Moving to CanadaNational hubMoving to Canada from TexasWhere the LLC question comes up mostMoving to Canada from FloridaState guideConcentrated stock when you move to CanadaRelatedHolding U.S. property through a holdcoThe southbound mirror of this problemThe Canada–U.S. Tax Treaty GuideReference
Sort the entity before the border sees it.
Twenty minutes with Lucas to look at what your LLC holds, who else owns it, and which of the four paths fits — while dissolving it is still a non-event.
Introductory meeting
- What the LLC holds and how it’s currently taxed
- Whether to dissolve, elect, convert or keep
- Your arrival-day valuation and what still needs doing
49th Parallel Wealth Management is a registered investment adviser; advisory services are offered only where the firm is registered or exempt.
