Comparing Tax Implications: Canadian Corporation vs. US Corporation
Deciding whether to own a corporation in Canada or the US as a Canadian resident involves more than just jurisdictional preference. The choice significantly impacts your overall tax liability, which in turn affects your financial decisions. Let's explore the tax implications of operating a corporation in both countries to help you make an informed decision.
Introduction to Corporate Taxation
For Canadian residents, owning a US corporation can lead to complex tax issues. One of the key considerations is the applicability of the Canadian income tax rules and US corporate tax laws, which can differ significantly.
Canadian Corporation vs. US Corporation: A Comparative Analysis
1. Ownership of US Corporations
As a Canadian resident, owning a US corporation can be challenging due to the US tax rules for non-resident aliens. These rules can create additional compliance burdens and tax liabilities, particularly for an S corporation, which can only have US resident shareholders.
2. Tax Implications of a Canadian Corporation
Operating a Canadian corporation provides a simpler and more favorable tax environment. The corporate tax rate in Canada is generally lower than that in the US. Additionally, there are fewer compliance hurdles and more tax incentives accessible to Canadian corporations.
Tax Rate Comparison
The corporate tax rate in Canada stands at 15% on the first $500,000 of taxable income, and 21% on income above that (as of the latest data). In contrast, the corporate tax rate in the US has a progressive structure, with lower rates on smaller profits and higher rates on larger profits.
3. Ownership of a C-Corporation in the US
For a Canadian resident, owning a US C-Corporation can be a double-edged sword. The corporate tax rate in the US is 21%, which is relatively lower compared to the Canadian rate. However, this advantage is often negated due to double taxation. The corporation pays taxes on its profits, and shareholders pay taxes on dividends, leading to higher overall tax liability.
Tax Double-Edged Sword
For instance, if a Canadian owns a US corporation and earns profits, the corporation will pay a 21% tax on its income. Then, any dividends distributed to the owner are subject to US and Canadian tax, which can result in a tax rate that is actually higher than the Canadian rate once all taxes are accounted for.
4. Personal Tax Consequences
Furthermore, distributing profits from a US corporation back to a Canadian individual can have significant tax implications. The corporation in the US cannot take a net operating loss deduction in 2018–2019, and any profit that remains in the US corporation is subject to US taxes. This necessitates a thorough review of personal and corporate tax obligations to manage the overall tax burden effectively.
Recoupment of Taxes
Leaving money in the US corporation means you cannot recoup the taxes paid via a net operating loss deduction, which can increase your overall tax liability by 21 points above your personal income tax rate in Canada. Therefore, it is crucial to weigh the long-term tax impacts and decide on the best structure for your business.
Conclusion
Given the complexities and potential for increased tax liabilities, it is often more advantageous for a Canadian resident to own a Canadian corporation. This approach simplifies compliance, reduces double taxation, and offers better tax advantages within the Canadian framework.