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I am an American citizen who is a Canadian permanent resident and I want to open a business in the USA and to bring this income to Canada. I want limited liability, and of course favourable Canadian tax treatment.
The idea of a US C Corp with a Canadian holding company has come up - but I wanted to inquire about how exactly income would be brought to Canada and the tax implications of this. Lastly, is there a better business structure than this to achieve what I’m looking for?
If you are a Canadian resident and want to conduct an active business in the US, then the best structure is as follows:
- A Canadian corporation (parent company) owning a US Corporation (subsidiary company)
- You will be a shareholder of the Canadian corporation and the US corporation will carry-on the active business in the US
The following are the tax implications of such a set-up:
-The US corporate tax rate of 21% will be applied toward the business profits of the US corporation
- The after-tax corporate earnings of the US corporation can remain in a US corporate bank account or can be paid as a divided to the Canadian parent corporation
- If the funds remain in a US corporate bank account, there is no further taxation
- If the funds are paid to the Canadian corporation as a dividend, then a 5% dividend withholding tax will be deducted from the dividends paid. The Canadian parent corporation will not pay income tax on the dividends received.
- The Canadian corporation can keep the funds in its bank account or distribute the funds as a dividend to the shareholders. Dividends paid to Canadian shareholders will be classified as eligible dividends. Eligible dividends have a lower rate of tax.
The above structure will allow you to limit your liability and avoid double taxation.