LLCs are Bad for Canadians (Mostly)
Canadians often ask us to incorporate LLCs. In response, our answer is always (1) LLCs do not exist in Canada and are only available in the US; and (2) incorporating a LLC for a Canadian tax resident is usually a bad idea. In this blog post we’ll explain what a LLC is, why it’s a less than ideal structure for Canadians (mostly) and a few situations where a LLC may be beneficial for Canadians.
1. What is a LLC? A LLC, or Limited Liability Company, is a type of corporate structure available ONLY in the US. LLCs don’t have shareholders (instead they have members) or shares (instead they have membership interests, represented by either a percentage or units (or both)).
2. How are LLCs taxed? LLCs are, by default, treated as a partnership for US tax purposes, meaning that profits and losses flow through to the individual members. Conversely, LLCs are treated as corporations for Canadian tax purposes.
3. Why LLCs are bad for Canadians. The ownership of a LLC membership interest by a Canadian is “bad” as LLC income is double taxed, without an available Canadian tax credit. First, LLC income is treated as partnership income for US tax purposes and taxed as such. Second, LLC income is treated by CRA as dividend income and taxed again. Problematically, no tax credit is available in Canada to negate such double taxation as the income types are not taxed the same, partnership distribution vs dividend, in addition to a timing issue.
4. Is there any case for a LLC? There are a few situations where LLCs may not result in double taxation, for example if a LLC is incorporated into a tax-oriented structure involving additional US entities to avoid direct Canadian ownership of the LLC.
As a general rule, direct ownership of a LLC by a Canadian tax resident is not recommended due to the double taxation that results. While there are options for a Canadian to take advantage of a LLC, such options involve complicated cross-border tax planning and require the assistance of experienced legal and tax professionals.