Canadian Starting a Business in the US: The Tax Guide

A Canadian starting or buying a business in the US faces a set of decisions that are different from those facing a US domestic entrepreneur, because the entity choice, the tax treatment, and the reporting obligations depend on whether you are a US tax resident, a non-resident, or somewhere in between. The wrong entity structure can trigger double taxation, unexpected self-employment tax, or a permanent establishment in Canada that pulls the US profits back onto a Canadian return. The right structure depends on your immigration status, whether you plan to live in the US or operate remotely from Canada, and how you intend to take money out of the business.

Entity choice: LLC, C-corp, or S-corp?

The decision tree starts with your residency status.

Canadian non-resident (living in Canada, operating the US business remotely or through a manager):

A C-corporation is almost always the right answer. The C-corp is a separate US taxpayer, pays the 21% federal corporate tax on US-source business income, and you receive dividends taxed at the 15% treaty withholding rate (Article X of the US-Canada tax treaty). Total combined rate on distributed profits: approximately 33% (21% corporate + 15% on the remainder). This is comparable to the Canadian small business rate plus personal tax on dividends.

An LLC is a problem for non-residents. The default US treatment of a single-member LLC is a disregarded entity (the income flows to your personal return). But you are a non-resident, so:

• You file a US 1040-NR reporting the business income.
• Canada does not recognize the LLC as transparent (CRA treats it as a corporation), creating a mismatch: the US taxes you on the flow-through income, Canada sees a foreign corporation with undistributed income, and the foreign tax credit mechanism breaks down.
• This is the US LLC tax trap, and it is expensive to unwind.

Canadian who has moved to the US (green card, TN, E-2, L-1):

If you are a US tax resident, an LLC (taxed as a sole proprietorship or partnership) or an S-corp election is viable, because the flow-through income is already on your US 1040. The choice between LLC, LLC with S-corp election, and C-corp depends on the same factors as any US domestic business:

• LLC (disregarded or partnership): Simple, single level of tax, full pass-through of losses. Subject to self-employment tax (15.3% FICA) on net earnings unless you elect S-corp status.
• LLC with S-corp election (Form 2553): Reduces self-employment tax by splitting income between a reasonable salary (subject to FICA) and distributions (not subject to FICA). Requires you to be a US resident and eligible for S-corp shareholder status (no non-resident alien shareholders).
• C-corp: Double taxation on distributed profits (21% + dividend tax), but retains earnings at 21% and provides flexibility for future investors, venture capital, or an exit. Better if the business will reinvest most of its profits.

Getting an EIN

Every US business entity needs an Employer Identification Number (EIN) from the IRS. If you are a Canadian without a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN):

• C-corp or LLC: The entity applies for its own EIN using Form SS-4. If the responsible party does not have an SSN or ITIN, you cannot use the online application. You must fax or mail the SS-4 and wait for the IRS to assign the EIN (typically 4 to 6 weeks by mail, 5 to 10 business days by fax).
• You personally: If you need an ITIN for your personal 1040-NR filing, you file Form W-7 with the IRS.

The EIN application guide for Canadians walks through the full process.

State registration and nexus

A US business must register in the state where it is formed and in every state where it has nexus (a physical or economic presence that triggers state tax obligations).

Formation state. Delaware, Wyoming, and Nevada are popular for their business-friendly laws, but forming in a state where you do not operate means you register (and pay fees) in two states: the formation state and the state where you actually do business. For most cross-border businesses, form in the state where the business operates.

State income tax. If you are a non-resident operating through a C-corp, the corporation pays state income tax in the state where it has nexus. If you are operating through an LLC (as a US resident), the flow-through income is subject to state income tax in the state of operation. No-income-tax states (Florida, Texas, Washington, Nevada, Wyoming) avoid this layer, but Washington has a long-term capital gains tax and a B&O (gross receipts) tax.

Sales tax. If the business sells taxable goods or services, you must register for sales tax in every state where you have economic nexus (typically $100,000 in sales or 200 transactions per year, following the Wayfair decision). This is separate from income tax nexus.

Visa and immigration considerations

E-2 Treaty Investor visa. The E-2 allows a Canadian to live in the US and manage a US business in which they have made a “substantial investment.” There is no statutory minimum investment, but $100,000+ is the practical floor for most businesses. The E-2 creates US tax residency (substantial presence test), so the entity and tax analysis follows the “US resident” path above. The E-2 visa tax guide covers the first-year tax mechanics.

TN visa. The TN is for specific professional occupations and does not directly support business ownership. A TN holder can own a US business as a passive investment, but actively managing the business while employed by another company on the TN raises immigration compliance questions.

L-1 visa. The L-1 allows intracompany transfers, which means you must have an existing business relationship between a Canadian entity and a US entity. This is common for Canadians who already have a Canadian corporation and are opening a US subsidiary.

No visa (remote operation from Canada). You do not need a US visa to own a US corporation or LLC. You need a visa to work in the US. If you manage the business entirely from Canada, you do not need work authorization. But “managing from Canada” must be real: if you are entering the US to attend meetings, negotiate contracts, or supervise employees, you may need a visa and you may be creating a permanent establishment.

Canadian reporting obligations

As a Canadian resident who owns a US business, you have several Canadian reporting requirements:

Form T1135 (Foreign Income Verification Statement). If the cost amount of your specified foreign property (including your ownership interest in the US entity) exceeds $100,000 CAD at any point during the year, you file a T1135 with your Canadian return.

Form T1134 (Information Return Relating to Controlled and Non-Controlled Foreign Affiliates). If you own a US corporation and meet the foreign affiliate test (generally 1%+ ownership of a corporation in which you and up to 4 related persons own 10%+), you file a T1134. The penalties for late filing are $25 per day, up to $2,500 per return.

FAPI (Foreign Accrual Property Income). If the US corporation earns passive income (investment income, rental income, income from services provided to related parties), that income may be attributed to you currently under the FAPI rules in ITA 91, regardless of whether the corporation distributes it.

Reporting dividends. Dividends from a US corporation are foreign income on your Canadian T1. You report the dividend, claim a foreign tax credit for the US withholding, and pay Canadian tax on the difference. The combined rate (US withholding + Canadian personal tax less FTC) is comparable to receiving dividends from a Canadian corporation.

US reporting obligations

If you own 10% or more of a US corporation (including through a Canadian holding company), the US may require:

Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations). If you are a US person (citizen, green card holder, or resident) who owns a Canadian corporation, you file 5471 for the Canadian corp. If you are a non-resident, Form 5471 does not apply to your US corp (it is a domestic corporation, not a foreign one), but it applies to any Canadian corporation you own.

Form 5472 (Information Return of a 25% Foreign-Owned US Corporation). If you are a Canadian who owns 25% or more of a US corporation and there were reportable transactions between the corporation and you (or related parties), the US corporation files Form 5472 with its 1120. The penalty for failing to file is $25,000 per form.

Effectively Connected Income. If you are a non-resident and the US business generates income effectively connected with a US trade or business, you file a 1040-NR (for a flow-through entity) or the corporation files a 1120 (for a C-corp). The C-corp route keeps the filing obligation at the entity level.

What about buying an existing US business?

If you are buying an existing US business (rather than starting one), the entity and tax analysis is the same, but the purchase structure adds considerations:

• Asset purchase vs stock purchase. An asset purchase gives you a stepped-up basis in the assets (depreciable for tax purposes under IRC 197 for goodwill and intangibles). A stock purchase gives you a basis in the shares but no step-up in the underlying assets. Buyers generally prefer asset purchases; sellers generally prefer stock sales.
• Purchase price allocation (Form 8594). In an asset purchase, you and the seller must agree on the allocation of the purchase price across asset classes. This allocation determines your depreciation and amortization deductions going forward.
• Due diligence. Verify the target’s tax compliance (open audits, sales tax nexus, payroll tax liabilities) before closing.

What should I do next?

Start with two decisions: where will you live (US or Canada), and how much will the business earn. Those two facts drive the entity choice. If you are staying in Canada, the C-corp is almost always right. If you are moving to the US, model the LLC, S-corp, and C-corp scenarios on your specific numbers.

• Why a US LLC is a tax trap for Canadians, the entity mismatch explained
• Check-the-box election, how to reclassify a flow-through entity
• E-2 visa first-year tax guide, the tax side of the treaty investor visa
• T1134: do I file for my US company?, the Canadian foreign affiliate reporting
• T1135: foreign income verification, the $100K threshold for foreign property
• EIN for Canadians, how to get the number
• US-Canada tax treaty explained, the framework behind all of this

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.