My US accountant recommends an LLC — is that right for me?
It may be right for a US owner and wrong for you. The limited liability company is the entity US advisers reach for by default, and it is the one Canada agrees with least. The difficulty is a classification mismatch: where one country treats the entity as fiscally transparent and looks through it to the owner, while the other treats it as a corporation and looks at the entity, the same profit is taxed in different hands in each. When that happens the credit for tax paid in one country has nothing to attach to in the other. Ask what the entity will be treated as on both sides before you sign the formation papers.
Why is my LLC income taxed differently in each country?
Because each country is applying its own classification rules to the same entity, and they disagree. One treats the company as transparent, so the income is the owner's as it arises. The other treats it as a corporation, so the income belongs to the entity and only reaches the owner when something is distributed. Neither is wrong in its own system. The problem is the join between them: the tax is charged on different people, in different years, on the same profit, and relief for double taxation is built on the assumption that those match. When they do not, the relief has nothing to bite on.
Can an election fix the LLC classification mismatch?
A classification election can change how one system sees the entity, and in some structures that is enough to bring the two treatments back into line. It is not a universal repair. Which elections are open to you depends on the entity, on who owns it and on where they are resident, and each option carries consequences of its own that have to be looked at before choosing. The timing point matters more than any of this: an election made before the structure is used can do work that the same election cannot do once trading has begun. Making one after the entity has been trading is a different, and usually worse, conversation.
I set up an LLC and have been invoicing through it — now what?
Deal with the history and the future separately. First establish how each country has actually treated the entity for each year it has been trading, because that is the position you are correcting from, not the position you would have chosen. Then look at what relief was claimed, whether it survives, and where the same profit has been taxed twice with nothing joining the two charges. Only then look at restructuring, because changing the entity has its own consequences and they can be worse than the problem if they land in the wrong year. Sequence the work; do not start with the fix.
What happens to my US LLC if I move to Canada?
The entity does not change; the number of countries classifying it does. While you and the company sat in one system there was no disagreement to manage, because only one set of rules was being applied to it. Becoming resident in Canada introduces a second classifier, and where one country treats the entity as fiscally transparent while the other treats it as a corporation, the same profit is taxed in different hands and the credit for tax paid has nothing to attach to. The timing problem is that an election made before the structure is used can do work the same election cannot do once trading has begun, and by the time anyone moves the entity has usually been trading for years. Look at this before the move rather than in the first return after it.
What should I settle before forming a US entity?
Four things, in order. What each country will treat the entity as, which is the question that generates every other problem here. Whether any election is available to align those treatments and when it has to be made. Who will hold the interest, because the answer can differ between owners in the same entity. And what it will cost to get profit out and home, including the withholding that applies to the route you expect to use. Settle those before formation. Once the entity exists and has traded, you are choosing between imperfect repairs rather than between structures.
What is double taxation in a corporation?
That is the economic form: the company pays tax on its profit, then the shareholder pays tax again on the dividend distributed out of that same after-tax profit. Domestic systems soften it with dividend credits or reduced rates on distributions; across borders it is compounded by withholding tax in the paying country. Which relief applies turns on the entity type and the treaty article covering dividends. See repatriating profits.
What is OECD Pillar Two?
A global minimum effective tax for large multinational groups, delivered through top-up taxes rather than a single global rate. Where a group's effective rate in a jurisdiction falls below the agreed minimum, the shortfall is collected — by the parent jurisdiction under the income inclusion rule, by the source jurisdiction under a domestic top-up, or as a backstop by other jurisdictions. Canada has enacted implementing legislation. The compliance burden is data, long before it is tax. See BEPS and Pillar Two.
