Canada-US treaty: status and the LLC problem
The Canada-US tax treaty is one of the most comprehensive bilateral treaties globally. Current version with the Fifth Protocol covers dividends, royalties, interest, pensions, residency tie-breakers, and foreign tax credit mechanics in detail.
Despite the strong treaty, Canadian-resident founders face a structural problem: the Canada Revenue Agency (CRA) treats US LLCs as corporations (opaque) rather than partnerships (transparent) for Canadian tax purposes. The US treats the same LLC as a disregarded entity (pass-through). This mismatch can create double taxation that the treaty's foreign tax credit cannot fully fix.
- Article 7 (Business Profits): protects business profits from US tax without US PE.
- Article 10 (Dividends): 0% in qualifying parent-subsidiary cases (Article 10(2)(a) intercorporate). 5% for 10%+ ownership. 15% standard.
- Article 11 (Interest): 0% in most cases under Article 11(3).
- Article 12 (Royalties): 0% for copyright and computer software. 10% standard.
- Article IV(7) (the LLC clause): specifically denies treaty benefits in some hybrid-entity situations relevant to LLCs.
Withholding rates by income type for Canadian residents
| Income type | Default US rate | Canada treaty rate |
|---|---|---|
| US-source dividends (parent-sub qualifying) | 30% | 0% |
| US-source dividends (10%+ ownership) | 30% | 5% |
| US-source dividends (standard) | 30% | 15% |
| US-source portfolio interest | 30% | 0% |
| US-source royalties (copyright, software) | 30% | 0% |
| US-source royalties (standard) | 30% | 10% |
| Business profits without US PE | Generally not taxed | Generally not taxed |
Why Canadians often pick C-Corp or Canadian Corp instead
CRA opaque treatment of US LLCs means the LLC's net income is taxed at the corporate level in the US (or US pass-through to you in CRA's view), and any distributions are taxed again in Canada as foreign dividends. The treaty's foreign tax credit helps but rarely zeroes out the double tax.
Practical alternatives Canadian founders we serve commonly use: (a) Stripe Atlas Delaware C-Corp, which CRA recognizes as a foreign corporation cleanly; (b) Canadian CCPC for local operations with cross-border invoicing; (c) US LLC with specific operating-agreement language and a cross-border CPA designing the structure end-to-end. The first two are typically simpler.
If you do form a US LLC as Canadian
- Engage a cross-border CPA before filing
- Design the operating agreement with CRA classification in mind
- Be ready to track US tax paid for Canadian FTC claims (Form T2209)
- File Canadian T1135 (Foreign Income Verification) annually if foreign property exceeds CAD 100K
- File US Form 5472 + pro forma 1120 annually ($25K penalty for non-filing)
- Track distributions vs accruals carefully (CRA timing rules differ from US)
Common mistakes by Canadian founders
- Forming a US LLC without cross-border CPA review
- Assuming the treaty solves the CRA opaque-treatment problem (it does not fully)
- Missing T1135 foreign property disclosure (CAD 2,500-25,000 penalties)
- Missing US Form 5472 + 1120 ($25K penalty)
- Choosing Wyoming LLC over Stripe Atlas Delaware C-Corp without weighing CRA implications