US LLC, Canadian resident owner: the CRA taxes it as a corporation

How do Canada and the US each see the same LLC?

The CRA's position is that a US LLC is treated as a corporation for Canadian tax purposes but as fiscally transparent for US tax purposes canada.ca. So the IRS taxes your client on the LLC's income, and the CRA waits for a dividend. The CRA also says an LLC that hasn't elected to be taxed as a corporation in the US is not a US resident under Article IV(1) of the treaty, because it pays no US tax itself canada.ca.

The treaty's look through rule doesn't rescue a Canadian owner. Article IV(6) looks through an LLC to the shareholders who are deemed to have derived its income if they are US residents canada.ca. Your client is a Canadian resident, so the LLC's income is not treated as theirs on the Canadian side.

Losses follow the same logic. A corporation is a separate legal entity and its shareholders cannot claim any loss it incurs canada.ca, so a startup loss that flows to your client's US return does nothing on the T1.

Why does timing decide whether the US tax is credited?

Your client, an Ontario resident, is the only member of a Delaware LLC that runs a consulting business from a US office. In 2026 the LLC nets $100,000 (all figures in Canadian dollars), and your client pays US tax on it personally. Assume that US tax is $18,000, that the LLC income is your client's only income and that the only credit is the $16,452 basic personal amount canada.ca.

If the LLC pays the $100,000 out in 2026, it goes on line 12100 as a foreign dividend, with no dividend tax credit canada.ca. Federal tax at the 2026 rates is 14% on the first $58,523 ($8,193.22) plus 20.5% on the next $41,477 ($8,502.79) canada.ca, or $16,696.01, less the $2,303.28 personal credit: $14,392.73. The credit is the lesser of the US tax paid and the Canadian tax on income from that country canada.ca.

The second column is the trap. The credit only uses foreign tax for the year in which your client is liable for it canada.ca, and US tax your client pays on an LLC's business income isn't business income tax, because your client isn't the one carrying on the business; the Folio gives the same answer for a US S corporation canada.ca. Non business income tax never carries forward, so the 2026 US tax can't follow the dividend into 2027. A deduction under s.20(12) is the only relief left, and it saves tax only at your client's marginal rate laws-lois.justice.gc.ca. A steady LLC that pays out its profit every year roughly lines up; the damage lands in years with US tax and no distribution.

Two cautions on the first column. If the cash stays in the LLC to pay the US tax, the dividend is smaller than the income and the limit shrinks with it. And because Canada sees a dividend, which is income from property, test s.20(11) before counting the full US tax: for an individual, it treats foreign tax above 15% of property income (other than real property) as a deduction, not a credit. See foreign tax credit Canada for the T2209 mechanics.

When does Canada tax the LLC's income before anything is paid out?

Normally only on distribution. Section 90(1) puts a dividend from a nonresident corporation into your client's income when it's received, and s.90(2) deems a pro rata distribution by a foreign affiliate to be a dividend, other than a liquidation, a redemption or a qualifying return of capital laws-lois.justice.gc.ca.

Passive income changes that. If the LLC is a controlled foreign affiliate earning foreign accrual property income, your client includes their participating percentage of it every year under s.91(1), paid out or not laws-lois.justice.gc.ca. An LLC holding US rental property or a portfolio usually lands there: a business whose main purpose is earning income from property is an investment business unless it employs more than five employees full time in the active conduct of the business laws-lois.justice.gc.ca.

The FAPI offset doesn't reach US tax your client pays personally. The s.91(4) deduction is built on foreign accrual tax, and that definition counts tax paid by the affiliate or by another foreign affiliate, not by the Canadian shareholder laws-lois.justice.gc.ca. The full regime is on the FAPI Canada page.

Can the LLC turn out to be a Canadian resident corporation?

Yes, if it is run from Canada. The Act doesn't define corporate residence, so the CRA applies the common law test: a corporation is resident where its central management and control is exercised, usually where the board meets, and a corporation formed under foreign law can be resident in Canada on that basis canada.ca. A single member LLC whose only manager lives in Ontario is exposed. A corporation files a T2 within six months after each year end, even with no tax owing canada.ca.

The treaty tie breaker usually can't save it. The tie breaker in Article IV(3) needs a company that is resident in both countries, and residence under Article IV(1) requires being liable to tax in the US canada.ca. A fiscally transparent LLC isn't, so it stays a Canadian resident corporation, with the US still taxing your client on the same income.

A US election to be taxed as a corporation flips this. The LLC then pays US tax on its worldwide income and becomes a US resident under the treaty canada.ca. If it was also resident in Canada, the tie breaker makes a company created under US law resident only in the US canada.ca, and s.250(5) then deems it not resident in Canada laws-lois.justice.gc.ca; the CRA notes this treaty route on its corporate residency page canada.ca. That change of status has Canadian consequences of its own, so plan it before the election is filed.

What does your client file in Canada each year?

Currency and credit rules come from the CRA's line pages canada.ca, and the T2209 and T2036 split from line 40500 canada.ca. A single member LLC is a foreign affiliate, since the test is an equity percentage of at least 1% with at least 10% held by your client and related persons laws-lois.justice.gc.ca. The T1134 is due within 10 months after the end of the reporting entity's tax year, individuals can EFILE or NETFILE it for 2021 and later years, and a supplement isn't needed for a dormant affiliate under the $100,000 cost and gross receipts tests canada.ca. Details and penalties are on the T1134 filing requirements page.

Shares of, and loans to, a foreign affiliate are carved out of specified foreign property, so a single member LLC itself stays off the T1135 laws-lois.justice.gc.ca. A minority interest under the foreign affiliate test is a share of a nonresident corporation and counts toward the T1135 cost test.