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I am a Canadian, living in Canada, born in Canada to one Canadian and one Canadian/American parent, which makes me an American "Person". This means I am responsible for filing and paying taxes to both Canada and the US. The process is extremely complex, but I can't afford a cross-border accounting specialist so I do it myself.

I'm planning to start an online business where most of my clients will be in the US. I want to open a Delaware LLC where I can accept payments and conduct business.

I understand there are major tax complications when a Canadian opens a US business, let alone a Canadian/American. It's simply too overwhelming and I've already spent weeks just trying to figure out how to do the paperwork! I've barely even been able to work on the business.

So I'm considering just opening the LLC, using a US address, and simply leaving out the Canadian angle completely (i.e. not mentioning it to the CRA). One day if the business is successful, I'll be able to hire the lawyers and accountants to put it all right with the rules. Or maybe I'll just move to the US and enjoy the money there.

What are the risks? And what other options do I have? I simply cannot afford the $2000+ dollars that the cross-border accountants and lawyers are asking me for JUST to even start on my file.

I love both countries. I am not trying to escape taxes. But I am so overwhelmed trying to understand the extremely complex rules (that even the experts, in their blog posts, seem to be unsure about) that I cannot reasonably attain "compliance"

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  • One point, are you sure you want an LLC? Don't forget, those are pass-through. You may be better with a "real" corporation. Then you can just let any profits pile up there. That more perfectly fits your "sort it out in a few years if relevant" approach, just a thought.
    – Fattie
    Oct 12, 2020 at 16:00
  • Oh I didn't realize that. I thought I could just leave the profits in the LLC
    – Curious1
    Oct 12, 2020 at 17:27
  • I imagine that's much more expensive though :(
    – Curious1
    Oct 12, 2020 at 18:26
  • unfortunately yes, very much so - more expensive
    – Fattie
    Oct 12, 2020 at 18:34

2 Answers 2

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You need to commit to doing things the right way from the start, or else strongly consider whether you are able to do them at all. If you go down the wrong path, there are some mistakes that no amount of legal or accounting help can fix. There is an expression in accounting, 'There is no such thing as retroactive tax planning', which means that once legal actions have taken place, you often can't reorder them in a more tax efficient way.

This means you will need to do more self-learning, and/or hire a professional. I will do my best here to convince you of that fact:

I had a client once, US citizen and Canadian resident, who came in new to us, with a problem to solve. He had a comfortable Canadian job, and a US consulting gig on the side. He decided to incorporate an LLC, so the income would pass-through to him personally, and he thought he could avoid 'complexities' by not filing corporate tax returns. He happily filed his taxes with a bargain basement accountant in the states doing his 1040, and a bargain basement accountant in Canada doing his T1, and he even tried to properly offset his Canadian and US taxes against eachother with Foreign taxes. This means he reported his worldwide income on his US tax return [as a citizen], and his worldwide income on his Canadian tax return [as a resident]. Canada had the first right to tax his Canadian job, and the US had the first right to tax his US consulting income, and they each had the right to tax any 'overflow' on the other piece of income, limited by foreign tax credits. Of course he wanted to invest in his consulting business so he never even moved the cash from his US bank account operated by the LLC.

Ooops! His LLC income in the US wasn't actually personal income in Canada yet - because he never declared his dividends! And 2 years after he started doing this, he decided to liquidate his LLC, and sent his US funds to his Canadian personal bank account - which Canada considered the receipt of a dividend, for the first time! So the CRA happily lopped 45% off the top of that payment [because he already earned a healthy income in Canada], and even when disputing that, he was unable to actually claim the past years' taxes on the income, because the LLC accrual of personal income in the US isn't considered income in Canada, so as far as the CRA is concerned, the US taxes he had already paid were irrelevant.

He ended up paying a total of 75% in taxes on the income earned on that LLC, because no one he hired was competent enough to simply tell him to not register a passthrough entity in the US! [Even if he had declared the dividends each year, Canada might have considered that passive income and the US 'general' income, meaning there may have been a dispute over applicability of foreign tax credits, but I think in that case he could have been fine].

Do this the right way now, or face real consequences in the future.

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  • "because the LLC accrual of personal income in the US isn't considered income in Canada, so as far as the CRA is concerned, the US taxes he had already paid were irrelevant" Is there really no mechanism in place for these sorts of situations? The tax system is administered by HUMANS after all, and a simple examination of the facts would show that it obviously was income and no ordinary hard working person should be taxed at 75%, throwing years of work down the toilet. Did he really end up paying all that ?
    – Curious1
    Oct 13, 2020 at 3:48
  • "he decided to liquidate his LLC, and sent his US funds to his Canadian personal bank account - which Canada considered the receipt of a dividend, for the first time" Why didn't he just say it was a gift? Or some kind of settlement money etc ?
    – Curious1
    Oct 13, 2020 at 3:49
  • @Curious1 Tax law is complex; international tax law doubly so. The outcome was both nonsensical and immutable. And no, he didn't commit easily provable tax fraud by lying about the source of funds received into his personal Canadian account from his corporate US account.
    – Grade 'Eh' Bacon
    Oct 13, 2020 at 9:00
  • Of course tax law is complex. If they made it simple, lots of accountants and lawyers would be out of a job. Also, most of the politicians who write tax law never passed a math or science class
    – Curious1
    Oct 13, 2020 at 13:29
  • @Curious1 Further to your point, early in my career I had heard the "tax analyst's prayer" as "May taxes be complex [to need our help], progressive [to increase the impact of professional tax planning] and low [to afford our services]".
    – Grade 'Eh' Bacon
    Oct 13, 2020 at 14:17
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Note NOT an LLC.

As discussed in the comments, totally forget an LLC.

The blunt reality is you should be completely fine doing that.

(1) You are indeed a US cit., (2) You have a US address, (3) You file US taxes anyway, (4) Critically you are NOT reducing the taxes paid in any way to anyone.

You'd just be "adding a few more clicks on TaxAct .com" for the LLC hassle.

As you say, if you become the next Elon Musk†, hire a solicitor and forget about it.

Many companies (say, Facebook) are founded on utter scams and lies, and they just "sort it out later".

Note that the IRS is completely screwed w/ Corona anyway. (They are apparently currently just sending out "We'll answer you in 90 days" letters.)

† That bloke is half-Canadian BTW for those who don't know!

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  • What do you mean by "hire a solicitor" ?
    – Curious1
    Oct 12, 2020 at 17:26
  • In this case, since I reside in Canada, I'm more worried about the CRA than IRS
    – Curious1
    Oct 12, 2020 at 17:26
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    Hi @Curious1 - do you? I mean, did myself or you know precisely the definitions of some certain corporate person and what residence means blah blah. We're discussing, to put it discretely :) , an edge case here. I can only offer my judgement! I feel my point 4 is the key to what pisses-off governments, so my sheer judgement is "no worries". But that's just some guy on the internet who walks the line a lot, and is barely sober, offering advice :) Do note that your LLC idea is (again, IMO) a non-starter in the situation discussed. In short my answer only applies WRT a "real "corporation :O
    – Fattie
    Oct 12, 2020 at 17:30
  • There's a lot of paperwork involved here, and while we may frown at how long it seems to take for... ahem... more 'public' cases of likely fraud to get dealt-with, low level tax avoidance is something of a government specialty - no need to fight off any lawyers for a small business owner doing things the wrong way! This advice is harmful for a few reasons, in particular avoidance of discussion of the timing of LLC income, which is one of the worst trap a dual citizen can fall into.
    – Grade 'Eh' Bacon
    Oct 12, 2020 at 19:36
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    @Curious1 specifically on the LLC thing - pls see GEB's example - to put it in the plainest possible terms you absolutely, absolutely, absolutely cannot use an LLC in this situation. that's absolutely absolutely! Just to further drive the point home, it is "so obvious" that you cannot use an LLC (or any passthrough entity) that I (foolishly) didn't even mentioned that in the original answer. Good luck (with your full corporation!!)
    – Fattie
    Oct 12, 2020 at 19:56

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