Which sales qualify as foreign-derived for this deduction?
Two kinds, broadly: property sold for use outside the United States, and services provided to a person or for property located outside it. The word doing the work in both is use. Where the property ends up being used, and where the service is actually consumed, decide the answer. Not where the invoice is sent, not the customer's billing address, and not the currency. That is why the deduction is a documentation exercise as much as a computation. The qualifying part of the revenue has to be identified customer by customer, and the evidence for each has to exist before the claim is made rather than after it is questioned.
Can I claim it as a sole proprietor or through an LLC?
Not directly. It is a deduction against a corporation's income, so a business carried on personally, or through an entity whose income is reported by its owners, does not reach it in the ordinary way. Where the same activity would qualify if it were carried on in a corporation, that is a question about structure rather than about the deduction, and it carries consequences well beyond this one: on the treatment of the profits, on what happens when the business is sold, and on the Canadian side if the owner is resident here. It is worth taking as a structural question, not as a claim.
What documents prove foreign use to the tax authority?
It depends what is being sold. For goods: shipping and delivery records showing where they went, and contractual terms on where they may be resold or used. For services: the contract, the location of the recipient, and evidence of where the benefit was received, which for a business customer usually means which of its operations the work was done for. For property used in a business: records identifying where it is deployed. The general rule to work to is that a claim should be supportable from documents created for a commercial reason at the time, rather than assembled afterwards to support the claim itself.
Does software sold to Canadian customers qualify?
It turns on who uses it and where, and on how it reaches them. Selling directly to a business in Canada for use in its Canadian operations is straightforward. Selling through a distributor is not, because the test is concerned with where the product ends up being used rather than with where the distributor sits, so a claim on those sales needs something that shows the end user's location. Sales to a multinational customer with operations in several countries, the United States among them, need apportioning rather than a yes or no. The revenue has to be sorted by end use, which is a systems question before it is a tax one.
How does it interact with serving the same market through a subsidiary?
The two regimes pull in opposite directions by design. One favours serving a foreign market from the United States; the other taxes earnings from serving that market through a foreign company. Where a group does both, the classification of each contract decides which set of rules applies to the income under it, and groups that have grown by adding entities often find the same customer served on both bases with no deliberate decision behind it. Mapping which company contracts with which customer, and for what use, is usually the first useful piece of work, and it frequently changes the answer before any computation is done.
Does this affect our Canadian tax if the parent is Canadian?
Not on its face, but it changes the tax the US subsidiary actually pays, and that figure matters twice on the Canadian side: in the relief available when profits move north, and in the composition of the pools that decide how a distribution from the subsidiary is treated here. A deduction claimed in the subsidiary lowers its US tax, and therefore lowers what supports the Canadian position on a distribution. Groups that plan the claim and the repatriation separately can improve one and worsen the other, which is the argument for computing them in the same exercise.
Why should a Canadian rarely own a US LLC?
Because the two systems classify it differently. The United States generally treats a single-member LLC as transparent while Canada treats it as a corporation, so the income is taxed in different hands in each country and the foreign tax credit does not line up. The result is tax paid twice with no relief to claim. Other structures reach the same commercial outcome without the mismatch. See why a Canadian should rarely own an LLC.
Which country do I pay tax to first?
Generally the source country — where the income arises — taxes first, often by withholding before you receive it. Your country of residence then taxes the same income and credits what the source country took. That order is why timing matters: a residence-country return filed before the source-country tax is settled has nothing to credit yet. Getting the sequence right is most of the work. See international tax planning.
