Canadian Permanent Resident with US LLC

[bcbounders]

I have been scouring all over the place trying to find answers to some tax questions involving being a Canadian Permanent Resident (US Citizen) who owns a US LLC and have been unsuccessful so far. I'm hoping that someone on this forum can help!

Here's my (potential) situation:

My husband and I are in the process of applying for our Canadian Permanent Residency and expect to have everything completed and in place in the next few months. We will be settling in British Columbia (we just LOVE it there... that's where we got married!). The problem is that we are full-time RV'ers, so our situation tends to fall through most tax "cracks". We will not be purchasing a home in BC (nor do we own one in the US), but will be living in our motorhome in RV parks throughout BC (primarily in the lower mainland).

We have a US LLC for our website design business, with an existing customer base in the US. We plan on living in BC for 6 months of the year (summer) and heading south to the US southwest for the winter months (if only Canada had a province that had winter weather like Arizona's, LOL!), working the whole time we are in the US.

My questions are:

(1) How will we treat the income we earn through our LLC? I know that the tax treaties are setup to help prevent double taxation, etc., but I also know that Canada does not really recognize LLCs. So does that mean the income we earn will be considered "Self Employment" income? Will there be additional taxes as a result?

(2) Does it matter that we will not pursue customers in Canada? We plan on only doing work for US customers WHILE we are in the US. The six months in BC will be like a work "holiday".

(3) What if we DO end up having to do work (remotely) for our US customers while we are physically in BC? (they may not be able to wait for us to head south again) Does that technically count as income EARNED in Canada? Will it change the way we claim the income, etc.?

(4) Would we be better off forming a company in BC? And, if so, how hard is that? Are there a lot of paperwork/filing/tax issues to deal with (LLCs in the US are great since they are east to establish and can be setup as pass-through entities so that all income/deductions are handled on our personal income tax returns)?

Sorry to blather on with all these questions (and if this is the wrong place to be posting this). I'm just getting frustrated that I can't seem to find any (easy) answers and would prefer to avoid having to pay a lot for a cross-border accountant's advice (but, obviously, will if that's what it comes to).

Thanks for any thoughts!

- John

[Steven]

1) Depends what you mean by an "LLC", if it's an S-corp then you're going to have problems because your tax home must be in the US and that's going to be hard to pull off as a Canadian LPR living in Canada.

2) Well this makes things simpler because you could effectively only pay yourself in the US while you are there, so you don't need a Canadian payroll and a business number for your US company.

3) Yep, it counts as Canadian source, so you'd have to get a BN and all the rest of it. If it's a trivial amount of work the better idea is probably to register as self-employed and invoice your US corporation for a small amount. But you still get a BN and you need GST/PST accounts as well, even though it would be zero-rated.

4) As above, if it's a trivial amount of work you're doing in Canada, better to be self-employed.

You haven't really asked the most important question, which is what your residency status would be.

This is very finely balanced in your situation. A claim of permanent residence is exactly that, and you claim to reside permanently in Canada. Moreover you reside in Canada six months out of the year.

However you're also a US citizen and have a US business and reside there six months out of the year.

I think it would basically boil down to where you have your driver's licence, where your RV is registered and whether you register for provincial health care.

If your tax home becomes Canada then you have to pay Canadian income taxes on your worldwide income wherever it was earned, although you can claim a foreign tax credit. If your LLC is an S-corp though that would be a major problem. You'd have to convert it to a C-corp and file a 1040 as a non-resident, using Form 2555. Also the corp would have to file an 1120.

Really your best bet here is to keep your tax home in the US. Unlike the US, Canada isn't quite as tough on LPRs as the US is (if you were a US LPR and file as a non-resident, you lose LPR status), however it's still considered a heavy-duty residential tie.

You'd have to file for a ruling from the CRA on form NR-73 and you may want to seek some decent legal advice as well, filing as a non-resident self-employed person in Canada when you're an LPR of Canada is a fairly obscure area of law.

I'm not entirely clear on why you want to become Canadian LPRs if you only plan on spending six months a year here and not work, you can do that as a visitor anyway.

[bcbounders]

Steve,

Thanks for the detailed response. I'll answer your last question (why even become PRs) first: for personal/social/political reasons. As a gay couple, we prefer to call Canada our home, since we are legally married there and find the culture to be much more accepting. And the "6 months" of staying here isn't a literal time... we want to be able to spend more AND to have the option of getting jobs in BC should our Web Design company fail to keep food on the table!

We plan on importing our car & RV and registering them in BC. We will be opening new bank accounts and applying for credit cards to establish a new financial history. And we are also planning on applying for Provincial healthcare after the 3 month waiting period. We will consider BC to be our home... tax, or otherwise... as it is the place that we intend to return to (and the place we would "settle" much more permanently if we are unable to continue our web design work while staying mobile).

As far as our LLC... it is a "true" LLC, in that we file as a partnership, not an S-Corp. So that sounds like we'll escape that bullet. And if we can manage to only do work while we are physically present in the US and "pay ourselves" while we're there, we should be good, too.

I'm a bit concerned about the potential that we will have to do some work for US clients remotely while we are in BC... so I suppose we should look into the issues of establishing a BC business to ensure that everything is "above board." Also, I am concerned that working as a "self-employed" contractor who invoices our US LLC could undo the legal/financial protections the LLC is intended to provide (shielding our personal assets from any legal action initiated against the LLC).

Again, I REALLY appreciate your help/thoughts! The move to BC, itself, is daunting enough as it is. Adding in all of the legal/tax/business issues just makes it worse!

- John

[Steven]

As far as our LLC... it is a "true" LLC, in that we file as a partnership, not an S-Corp. So that sounds like we'll escape that bullet. And if we can manage to only do work while we are physically present in the US and "pay ourselves" while we're there, we should be good, too.

Your tax home will be Canada as LPRs with DLs and claiming healthcare here. You will be taxed on your worldwide income, you can't get the healthcare without paying for it!

So basically you will have to file T1s and claim a foreign tax credit for the US income/FICA taxes (T2209 and T2036). BC has the lowest income taxes in Canada (at the lower rates anyway) but if you're coming from Arizona you'll definitely pay more taxes.

As your tax home will be moving to Canada you will have to file a pro-rated Form 2555 or 2555-EZ every year with your 1040s. The payroll will work the same way as it does now in the US, if you actually start doing work in Canada you will need to get your LLC a business number, GST account etc. and do payroll withholding here as well on your Canadian-source income. You can't pay yourself in the US for work done here (for tax purposes) even though your company and clients are in the US.

The LLC will probably have to file a T2 as well if you have to do Canadian payroll or have business expenses in Canada etc.

A non-resident limited partnership filing in Canada is a really obscure area of tax law I have to say. If you're planning on staying in Canada forever (and that is the key point) then it may be a wiser idea to set up a CCPC and have two separate companies. There are significant tax advantages to using a CCPC that do not exist with any US corporate structure. The companies would basically invoice each other, and you would receive two different payslips from each company.

[bcbounders]

Steve,

Thanks, AGAIN, for such great information. You really are quite a font of knowledge! How did you learn all of this?!?!

The CCPC definitely sounds like a good option if we intend to have ANY business activity in Canada. I noticed that you specifically said: "If you're planning on staying in Canada forever." What's the deal with that? Are you referring to the impact of the Departure Tax? And... if so... why? What's the deal with the "Departure Tax?" (in 100 words or less, lol!)

It's a shame that Canada doesn't have an equivalent to the LLC. We don't pay ourselves (i.e. we have no payroll) - it's one of the "perks" of the LLC. All income is "pass-through" and we report it on our personal US 1040 tax forms (there ARE instances where having the LLC claim the income can be financially beneficial, but we are not in one of those situations). So... essentially, it's as if we are self-employed, but have the advantage of the legal/financial protections should something go wrong and a disgruntled client decides to sue (the US IS a litigious society! ). Plus, the LLC doesn't have any onerous documentation/filing requirements (we have to submit an annual report to our state of incorporation and file a Federal 1065 to report income, which is then taxed on our personal returns).

Thanks, again, for all of your time, Steve.

- John

[Steven]

The CCPC definitely sounds like a good option if we intend to have ANY business activity in Canada. I noticed that you specifically said: "If you're planning on staying in Canada forever." What's the deal with that? Are you referring to the impact of the Departure Tax? And... if so... why? What's the deal with the "Departure Tax?" (in 100 words or less, lol!)

There are several reasons why, the first is to use a CCPC the controlling shareholder has to be resident in Canada for tax purposes. The second reason why is the departure tax. Departure tax is essentially Canadian capital gains tax applied at the point you leave and you are deemed to have disposed of your assets at that point. This generally isn't a problem for most people as the only capital gains they have are in tax shelters like an RRSP or their home, which is exempt.

However if you have a CCPC, you started it from zero, so the entire value of it that you own is essentially a capital gain, so say you own 50% of a CCPC that is valued at $100,000 when you leave, you have to pay departure tax on $50,000. To avoid the tax you would have to wind up the CCPC - but to do that means you take possession of the assets of the company, which means you have to pay income tax on it which is double the rate of CGT.

It's a shame that Canada doesn't have an equivalent to the LLC. We don't pay ourselves (i.e. we have no payroll) - it's one of the "perks" of the LLC. All income is "pass-through" and we report it on our personal US 1040 tax forms (there ARE instances where having the LLC claim the income can be financially beneficial, but we are not in one of those situations). So... essentially, it's as if we are self-employed, but have the advantage of the legal/financial protections should something go wrong and a disgruntled client decides to sue (the US IS a litigious society! ). Plus, the LLC doesn't have any onerous documentation/filing requirements (we have to submit an annual report to our state of incorporation and file a Federal 1065 to report income, which is then taxed on our personal returns).

That sounds like an S-corp type set up, you have to be tax residents of the US to do that, although I have to admit I'm not terribly familiar with how US limited partnerships work.

The Canadian way of doing it is more complex but there are significant tax advantages over it compared to an S-corp, because in Canada the CCPC rate is way lower than the US corporate rate or the US personal rate so if you're earning more money than you want to pay out as salary you can significantly save on income taxes.

From the sounds of it you might be better off dissolving your LLC altogether, set up a CCPC and register it in the US and get an EIN for it and do it that way. It is possible to form a limited partnership in Canada (in most Provinces) but they're not common because of the way the tax system is structured, simpler to set up a CCPC, you each own 50% and the CCPC issues two T4s each year. It is a hell of a lot of paperwork though because it would also have to have a US payroll, issue W-2s, do an 1120-F every year, etc.

Or you could set up two companies but from the sounds of it the structures you're using are dependent on your tax home so I'm not sure how practical that would be.

To cut a long story short you need some heavy-duty tax advice from an accountant familiar with cross-border tax issues. Which means someone in Canada, e.g. www.ustax.ca www.serbinski.com

[bcbounders]

Steve,

Again, I can't thank you enough for your time and input. More comments after each of your quotes, below:

However if you have a CCPC, you started it from zero, so the entire value of it that you own is essentially a capital gain, so say you own 50% of a CCPC that is valued at $100,000 when you leave, you have to pay departure tax on $50,000. To avoid the tax you would have to wind up the CCPC - but to do that means you take possession of the assets of the company, which means you have to pay income tax on it which is double the rate of CGT.

Ahhh... now I understand. Thanks. That makes sense. But what if the CCPC doesn't actually have any assets (or they're minimal)? For instance... a web design company. About the only thing other than income might be a couple of computers. No office space. etc. I'm assuming that the departure tax wouldn't be such a burden in that situation.

That sounds like an S-corp type set up, you have to be tax residents of the US to do that, although I have to admit I'm not terribly familiar with how US limited partnerships work.

I doubt you have any need for knowing more about LLC's, but that's the thing - they're NOT an S-Corp OR a Limited Partnership. An LLC (Limited Liability Company), while it can be taxed like a partnership (profit passes through directly to the owners/partners), has no residency or citizenship requirements. It's a pretty sweet arrangement. All the protections of a corporation, without the hassles.

To cut a long story short you need some heavy-duty tax advice from an accountant familiar with cross-border tax issues. Which means someone in Canada.

You're right... the Canadian way DOES sound more complicated. It looks like the accounting/tax expert is good advice. I'd rather spend the money upfront to get things setup correctly. Thanks for the links... I'll check them out and start doing preliminary legwork to be sure we have all of our ducks in a row before getting moved/settled. Don't want any unnecessary surprises!

Thanks, loads, for all your help! It's greatly appreciated.

[Steven]

But what if the CCPC doesn't actually have any assets (or they're minimal)? For instance... a web design company. About the only thing other than income might be a couple of computers. No office space. etc. I'm assuming that the departure tax wouldn't be such a burden in that situation.

No it's not, but it defeats the purpose of having a CCPC. CCPCs are a structure that doesn't exist in the US, it's a proper corporation subject to corporation tax in the same way as a C-corp in the US would be, but it's subject to a much lower rate of corporation tax provided it's under the small business limit (which I think is $500,000 at the moment).

So the advantage is that if your company is reasonably profitable, say you make $200,000 but you only need say $75,000 as a salary, you can keep your retained earnings in the corporation, invest them in certain things (Canadian stock is the usual one I think) and they're subject to a much lower rate of income tax, plus because you're paying personal income tax on $75,000 rather than $200,000, you save income tax there as well. Eventually of course it has to be paid out, what most people in Canada seem to do is retire say at 55 or 60 and then just carry on paying out the retained earnings they've stuffed into whatever investment until the corporation is worth zero (you can also use this method to maximize RRSP contributions).

Thus you save heaps on income tax, and you also save because over time the tax brackets move upwards so paying it out at a future date means you're in a lower bracket.

There are various other things I've heard of people doing with CCPCs although I'm not sure they're entirely legal.

I know I spoke to an accountant here who said some CCPCs had been caught by the CRA under the General Anti-Avoidance Rule, but those were basically CCPCs owned by people who work in the oil industry who were really directly employed by an oil company. Because say, for three years they might make an enormous sum of money a year, they make maybe a million over those three years but after that they may only make a smaller sum, so they use the CCPC for income levelling to avoid paying personal income tax on a million dollars and instead pay it out to themselves over 20 years instead. Technically it's legal but it has to be an arm's length situation.

Do a web search on Canadian income trusts, that is a really controversial issue.

I think this is an "Alberta" thing because we have the lowest corporation taxes, in other Provinces it's not as big of a big deal but I suspect it still makes sense in BC.