Starting a Business in Canada as a US Citizen or Non-Resident

A US citizen (or green card holder) who incorporates a business in Canada creates a cross-border tax structure from inception. The Canadian corporation is a controlled foreign corporation (CFC) for US purposes, which means annual Form 5471 reporting, potential current US taxation of undistributed income under Subpart F and GILTI, and a set of anti-deferral rules that interact with Canada’s corporate tax rates. None of this is disqualifying, but it must be planned for at incorporation, not discovered at the first filing deadline.

Can a US citizen incorporate in Canada?

Yes. There is no citizenship or residency requirement to incorporate a federal Canadian corporation under the Canada Business Corporations Act (CBCA). The CBCA requires that at least 25% of the directors be resident Canadians (section 105(3)), but for a corporation with fewer than four directors, at least one director must be a resident Canadian. If you are the sole director and you are not a Canadian resident, you need to appoint at least one Canadian-resident director.

• Provincial incorporation rules vary. Ontario, BC, and Alberta do not require any directors to be Canadian residents. Quebec requires a majority of directors to be Canadian residents or citizens. If you are incorporating to operate in a specific province, check the provincial requirements.

What CRA accounts do I need?

Once the corporation is incorporated, it needs a Business Number (BN) from the CRA. The BN is the corporation’s tax identity. You can apply at the time of incorporation (through the federal incorporation portal) or separately by filing Form RC1.

• Corporate income tax (RC) account. Automatically opened when the BN is issued. The corporation files a T2 return within 6 months of its fiscal year-end.
• GST/HST account (RT). Required if the corporation’s taxable supplies exceed $30,000 in any four consecutive calendar quarters (the small supplier threshold). Voluntary registration is available below the threshold and is often advantageous (to claim input tax credits on expenses).
• Payroll account (RP). Required if the corporation pays employees. The corporation withholds income tax, CPP contributions, and EI premiums from employee pay and remits them to the CRA.

What are the US reporting obligations?

As a US citizen who owns a Canadian corporation, you have four main reporting obligations:

• File Form 5471 annually. This is a multi-schedule information return (Form 5471) attached to your personal US return (Form 1040). It reports the corporation’s income statement, balance sheet, and transactions with the US shareholder. The penalty for failing to file is $10,000 per year, per form, with additional penalties for continued non-filing after IRS notification.
• Calculate Subpart F income. Subpart F captures certain passive and base company income earned by the CFC and taxes it currently to the US shareholder, even if no dividend is paid. Investment income (interest, dividends, capital gains) earned inside the corporation is typically Subpart F income.
• Calculate GILTI. GILTI captures the CFC’s net tested income minus a deemed return on tangible depreciable assets (QBAI). For a service business with few tangible assets, GILTI captures nearly all the operating income. The deemed-paid foreign tax credit under IRC 960 offsets the US tax, but only partially (80% of the Canadian corporate tax is creditable for individuals, subject to the Section 250 deduction).
• File Form 8938 and FBAR. The interest in the Canadian corporation is a specified foreign financial asset for Form 8938 purposes. The corporate bank accounts are foreign financial accounts for FBAR purposes.

Should I incorporate federally or provincially?

Federal (CBCA) incorporation gives you the right to carry on business in every province (subject to extra-provincial registration). The CBCA requires 25% Canadian-resident directors. Filing is through Corporations Canada.

• Provincial incorporation limits the corporation to one province (extra-provincial registration is needed to operate elsewhere). Ontario, BC, and Alberta have no Canadian-resident director requirement, making them simpler for US citizens acting as sole directors.
• For a US citizen operating in one province, provincial incorporation in Ontario, BC, or Alberta avoids the Canadian-resident director requirement. For operations in multiple provinces, federal incorporation is more practical.

What about the entity classification election?

By default, a Canadian corporation is treated as a corporation for US tax purposes (the default classification under Treas. Reg. 301.7701-3). You can elect to treat it as a disregarded entity (if it has a single owner) or a partnership (if it has multiple owners) by filing Form 8832. This changes the US tax treatment entirely, but it does not change the Canadian treatment (Canada still sees it as a corporation).

• The check-the-box election eliminates the CFC regime (no Form 5471, no Subpart F, no GILTI) but creates a flow-through structure where the corporation’s income is reported directly on the US shareholder’s personal return. This can be advantageous or disadvantageous depending on the facts. The election cannot be reversed for 60 months.

What should I do next?

Before incorporating, model the tax position under both the default corporation classification and the check-the-box election. The CFC regime adds compliance cost and potential current US taxation, but the Canadian small-business deduction (15% combined federal-provincial rate on the first $500,000 of active business income) may offset it. If the corporation will have significant passive income, the Subpart F inclusion makes corporate deferral less effective.

• CFC rules for US citizens with Canadian corporations, the full CFC analysis
• Check-the-box election for a Canadian corporation, the entity classification alternative
• Form 5471: do I file it?, the annual information return
• Transfer pricing cross-border, the arm’s-length rules if you have related entities in both countries
• Self-employed and cross-border, the sole proprietorship alternative to incorporating

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