Doing Business In The U.S.
Your clients are expanding into the U.S. Do you know the tax implications? Custom written for CPAs who need to choose the right structure, avoid costly missteps, and keep clients compliant on both sides of the border.
Dean Smith
The U.S. is Canada's most common expansion market, but most CPAs are underprepared for the tax implications. From choosing between a U.S. corporation and LLC, to understanding permanent establishment, nexus, and treaty exemptions, the stakes are high and the errors are costly. Learn the structures, rules, and cross-border mechanics to guide your clients into the U.S. market with confidence.
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ABOUT THE COURSE
This program walks through the complete Foreign Tax Credit calculation from start to finish. You'll learn the pooling formula structure, how to classify business versus non-business income, when and how to source expenses against foreign income, and the country-by-country calculation requirements. The course covers common scenarios including partnerships, LLCs, rental properties, and capital gains across multiple jurisdictions.
You'll also master the practical skills that matter most: assembling proper documentation for CRA verification, handling timing mismatches between foreign and Canadian tax years, identifying when to file objections, and communicating complex calculations to clients. By the end, you'll have both the technical foundation and practical strategies to handle FTC claims efficiently.
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Foreign Tax Credit: Complete Guide for CPAs
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Doing Business In The U.S.
Seminar Snapshot
Course Syllabus
Types of U.S. Business Activity and the Threshold Progression
How U.S. tax exposure builds step by step as Canadian businesses increase their presence south of the border
Why Canadian Businesses Expand to the U.S.
- U.S. as the world's largest consumer market and natural expansion target
- Free trade, foreign exchange advantages, and comparable tax rates
- Americans prefer dealing with U.S. entities — foreign ownership is generally sufficient
- Business reasons vs. tax reasons for establishing U.S. presence
The Five Levels of U.S. Business Activity
- Employee performing services in the U.S.: possible personal income tax, treaty exemption if conditions met
- Representative making casual visits: generally no U.S. tax, but order-taking or contract execution can trigger liability
- Nexus to a U.S. state: state-level tax only, varying rules state by state
- Branch office or fixed place of business: federal and state tax plus 5% branch profits tax
- Established U.S. entity (corporation or LLC): federal and state tax, dividend withholding on repatriation
Beware the Slippery Slope
- How casual visits escalate into permanent establishment without proactive planning
- No Canadian tax-free rollover exists to incorporate a U.S. P.E. of a Canadian corporation after the fact
- Why early identification and proactive structuring is critical to avoid costly reversals
U.S. Tax Basics and State Considerations
Federal and state tax rates, nexus rules, apportionment, and which states to avoid or favour
Federal Tax Rates and Withholding
- U.S. federal corporate rate: 21%; state and local tax varies nil to 13%
- State and local tax deductible for federal purposes (not for individuals)
- Dividend withholding: 15% standard rate, reduced to 5% where Canadian corporation holds 10%+ of voting shares
State Nexus and Income Apportionment
- State of incorporation does not determine state tax liability — nexus to the state does
- Physical nexus vs. economic nexus: how each type triggers state-level obligations
- Apportionment formulas: single-sales factor vs. weighted three-factor (sales, labour, capital)
- California's unitary tax: a large market that cannot be ignored and carries significant complexity
Choosing Where to Establish
- No-income-tax states: Florida, Texas, Nevada, Washington — common choices for setup
- High-tax states to avoid where possible: California and New York State/City
- State tax chart covering all U.S. jurisdictions included in course resources
U.S. Corporations: Structure, Ownership, and Repatriation
How U.S. corporations work, how Canadian tax applies, and why corporate ownership beats personal ownership
U.S. Corporation Fundamentals
- Incorporated under state law with no federal incorporation option
- Corporate structure similar to Canada: shareholders, directors, officers, annual filings
- Multiple share classes permitted; limited liability with common director liability exposure
- Taxable on world income; federal and state tax apply
Canadian Tax Status of a U.S. Corporation
- Foreign affiliate (FA) if a Canadian owns 10%+ of any share class
- Controlled foreign affiliate (CFA) if controlled by five or fewer Canadians or non-arm's length non-residents
- Determining active vs. passive income: when FAPI applies and what it covers
- Active business income not imputed to Canadian shareholder; exempt surplus dividend received tax-free
- Key FAPI categories: rental, royalties, services, financial services, investment income, capital gains
Individual vs. Corporate Ownership: Repatriation Comparison
- Individual ownership: 21% U.S. corporate tax, 15% withholding, Canadian personal tax with FTC — overall rate approximately 63%
- Corporate ownership: 21% U.S. corporate tax, 5% withholding, eligible dividend to individual — overall rate approximately 54%
- Corporate structure advantages: lower tax, tax deferral if funds retained in Canadian corporation
- Canadian corporation ownership is the standard approach for U.S. active business income
Financing a U.S. Corporation: Thin Capitalization and Debt Rules
Why capitalizing a U.S. subsidiary the Canadian way can trigger unexpected tax consequences
Thin Capitalization and Earnings Stripping Rules
- U.S. thin capitalization rules: debt deemed equity if substance-over-form tests fail
- 3:1 debt-to-equity safe harbour; earnings stripping rules limit interest deductibility
- If debt is recharacterized as equity: interest becomes a non-deductible dividend subject to withholding
- U.S. does not allow tax-free repatriation of share capital — ordering rules: earnings and profits first (dividend), then capital (tax-free), then balance (capital gain)
Common Mistake: The Interest-Free Loan
- Case study: U.S. corporation incorporated with $10 equity and $200,000 interest-free loan from Canadian parent — a very Canadian approach that fails in the U.S.
- Result: thin capitalization applies, loan treated as equity, repayment triggers deemed dividend up to earnings and profits on hand
- 5% withholding tax on deemed dividend; best practice is to charge market interest and use commercial repayment terms
The U.S. LLC: Structure, Taxation, and Pitfalls for Canadians
Why LLCs are widely used in the U.S. but present significant complications for Canadian business owners
LLC Basics and U.S. Tax Treatment
- Income flows through to owners like a partnership; owners taxed at their applicable rates
- Limited liability with relaxed corporate formalities compared to a corporation
- Can elect to be taxed as a corporation, but flow-through treatment is generally preferred
- Foreign individual owners: 37% federal withholding quarterly on estimated earnings; foreign corporations: 21%
- Withholding applies regardless of actual distributions — a key reason LLCs are often avoided by Canadians
Three Ownership Structures for a U.S. LLC
- LLC owned by a U.S. corporation: income flows to U.S. corp, treated as if U.S. corp earned it directly
- LLC owned by a Canadian corporation: flow-through for U.S. purposes, treated as a branch; foreign corporation for Canadian purposes, distributions are exempt surplus dividends; 5% branch profits tax applies
- LLC owned by an individual: 1040NR filing required, graduated U.S. personal rates, potential 20% labour cost deduction, U.S. tax generally lower than Canadian personal tax
Why Canadians Avoid the LLC
- No access to Canada-U.S. Treaty: LLC could be deemed Canadian resident if mind and management is in Canada
- No permanent establishment article protection: income allocation to Canada is uncertain without treaty
- No recourse to MAP for transfer pricing disputes
- Some FAPI structures produce very adverse results — foreign tax neither deductible nor creditable
- U.S. corporations preferred because of treaty access and no quarterly withholding requirement
Income Splitting Opportunities with an LLC
- U.S. does not apply income attribution between spouses — two spouses can hold LLC units and split income for U.S. purposes
- Even high-income Canadian taxpayers may benefit: U.S. graduated rates applied only to U.S.-sourced LLC income
- TOSI caution: claiming active involvement in the LLC for Canadian purposes may imply Canadian residency or permanent establishment of the LLC
Setting Up and Operating a U.S. Business
Practical operational and tax issues to address when establishing a U.S. presence, including salary, substance, and IP
Operational Considerations on Setup
- Hiring U.S. staff: levels, employment contracts, payroll setup
- Financing: U.S. bank vs. Canadian parent loan — key implications for each
- Location selection: balancing low/nil-tax states against labour supply, market proximity, and cost
- Local substance requirement: income must be genuinely earned in the U.S. or risk Canadian reassessment
Intellectual Property and Transfer Pricing
- IP developed in Canada (brand, designs, customer data, website) must be properly valued before use by a U.S. entity
- Options: sell IP to U.S. entity or license it with a reasonable fee — Canadian corporation must receive fair value
- Risk of inadvertent sale of Canco business in substance, or appropriation of Canco property for no consideration
U.S. Salary Rules and Substance-Over-Form
- U.S. substance-over-form rules may impute a salary to a Canadian owner working in the U.S. business without taking one
- Excessive salary can be recharacterized as a disguised dividend, reducing deductibility
- Unlike Canada, salary vs. dividend is not a free choice — the U.S. requires compensation to reflect arm's length value
Other Setup Requirements
- U.S. payroll, tax account, EIN, and installment payments
- U.S. sales tax: varies by state and locality — as many as 10,000 distinct rates across the country
- U.S. banking, credit facilities, and payment systems
- Visas for Canadian employees: B1 visa for short business trips; risks of being turned away without proper documentation
Case Studies: Substance, Tariffs, and Common Errors
Real-world scenarios illustrating what goes wrong when U.S. business structures lack substance or ignore cross-border tax rules
Crock Software: When a U.S. Corporation Has No U.S. Substance
- Canadian software company sets up a U.S. corporation to receive U.S. advertising revenue, but has no U.S. office or employees
- Result: U.S. corporation likely has a permanent establishment in Canada — Canadian corporate tax plus 5% branch profits tax applies
- Failure to file in Canada leaves no statute of limitations; CRA can reassess from inception
- Key lesson: a U.S. entity without genuine U.S. substance does not shift income to the U.S.
Extravagant Corp: Bonus Extraction and Multi-Jurisdiction Issues
- Canadian owner extracts all U.S. corporation income as a personal bonus and pays U.S. personal tax
- Issue 1: part of bonus may be non-deductible to U.S. corporation, recharacterized as a constructive dividend
- Issue 2: bonus sourcing — services partially rendered in Canada mean U.S. tax may be overpaid with no Canadian FTC for the excess
- Issue 3: even if disallowed in the U.S., the bonus remains Canadian-source salary — mismatch creates FTC problems
- Issue 4: Canadian owner may lack a visa permitting work in the U.S.
Tariffs: Evaluating the Case for Setting Up in the U.S.
- Case study: Canadian manufacturer with 15% gross margin faces a 10% tariff that cannot be passed on — income eliminated
- Moving assembly and sourcing to the U.S. reduces the tariff base from 100% to 40% of sales, recovering $2.4M of lost net income
- Framework for evaluating tariff impact: can tariff be passed on, can the business model change, is U.S. production feasible
- Tax considerations are secondary to the business evaluation — structure follows strategy
Selling the U.S. Business and Exit Considerations
How to exit a U.S. investment efficiently and why the method of sale determines the tax outcome
Sale of a U.S. Corporation
- Non-residents pay no U.S. tax on capital gains from selling shares of a U.S. corporation (provided assets are not primarily U.S. real estate)
- Share sale: capital gain taxable in Canada only — the preferred outcome
- Asset sale: gain arises in U.S. corporation at regular income rates, then funds must be withdrawn — triggers additional withholding and Canadian tax
- Asset sale overall tax rate approximately 55%; a structurally poor result
Sale of a U.S. LLC
- U.S. taxes gain on sale of LLC units as capital gain at 20% federal (state tax may apply on asset sale)
- Canada provides a foreign tax credit for U.S. tax paid on the gain
- On an asset sale, LLC should be liquidated or units redeemed — avoid distributions that produce a dividend rather than a capital gain in Canada
- ACB mismatch: Canada treats LLC as a foreign corporation (ACB does not adjust for income); U.S. treats multi-member LLC as a partnership (ACB adjusts up and down)
Foreign Currency and Filing Deadlines
- Foreign exchange fluctuations (recent CDN/USD range: $0.68 to $0.84) can create significant gains and losses on intercompany loan repayments
- U.S. filing deadlines: corporations April 15, LLCs March 15, individuals April 15 (or June 15 if no employment income)
- Six-month extensions are standard and commonly used — can create timing mismatches for Canadian FTC claims
Meet Your Presenters
Michael Cadesky
Michael Cadesky is the managing partner at Cadesky Tax and a committed contributor to the tax and accounting professions since 1980, earning the title of Fellow from CPA Ontario. He is a past governor of the Canadian Tax Foundation, past chair of STEP Canada and STEP Worldwide, and past chair of the CPA Canada Tax Committee for Small and Medium-Sized Enterprises. Michael is also the co-author of 11 books on tax subjects and the author or co-author of numerous papers and articles on Canadian and international taxation.
Dean Smith
As the President of Cadesky U.S. Tax Ltd., Dean has been providing U.S./Canada cross-border planning and compliance for over 30 years. He assists private clients with their personal, corporate, and estate planning needs taking into account the unique challenges of integrating two independent tax systems.
When can I access the course?
Immediately upon purchase. All course materials are available on-demand, allowing you to start learning right away.
How long do I have access?
You have 1-year all-access to the course materials. Watch and review the content as many times as you need, at your own pace.
Does the course provide CPD?
Yes. Upon completion, you will receive a verifiable CPD certificate indicating all instructional learning hours and required details.
What's included in the course?
Full video recording of the seminar, plus slides with detailed notes for your reference. Additional resources may be included.
Can I watch on any device?
Yes. Access the course from your computer, tablet, or phone — any device with internet access.
Guides & Articles
Foreign Tax Credit in Canada: The Complete CPA Guide to Avoiding CRA Denials
Comprehensive guide covering all aspects of foreign tax credits
How to Calculate Foreign Tax Credit in Canada
Step-by-step calculation methodology and formulas
Foreign Tax Credit Expense Allocation
Proper expense sourcing and allocation techniques
How to Handle CRA Foreign Tax Credit Disputes
Objection strategies and dispute resolution tactics