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CRA Considers US LLCs/S-Corps

May 13, 2008

The Canada Revenue Agency Has Confirmed it Considers US Limited Liability Companies (LLCs) and "S" Corporations to be "Corporations" for Canadian Income Tax Purposes

Non-US persons that make an "investment" in the US must file a report with United States Department of Commerce when the investment is made, annually thereafter, as well as a special "benchmark" report every five years. The year 2007 is a "benchmark" year, therefore a special "benchmark" report (a version of Department of Commerce Form BE-12) must be filed for 2007. The due date is May 31, 2008. There's a potential penalty from $2,500-$25,000 for noncompliance.

For purposes of the filing requirements, an "investment" includes an operating business in the US as well as US rental real estate. It does not include a residence used exclusively for personal purposes, however for such a residence a short version of the Form (BE-12 Mini) must still be filed to claim an exemption from filing the full version of Form BE-12. Similarly, small businesses and small real estate rental operations can file Form BE-12 Mini to claim an exemption from filing the full version of Form BE-12.

No Economic Stimulus Payments for Nonresident Aliens

In accordance with legislation passed by the United States Congress, the Internal Revenue Service (IRS) is issuing "economic stimulus" payments to many individuals. To ensure all individuals entitled to the payments actually receive them, the IRS is issuing information letters to many individuals including individuals who live outside the US and receive US Social Security payments. This has stimulated some confusion as to who is actually eligible for the payments.

US citizens are entitled to the payments provided their income is not above the phase-out threshold. US residents (including green card holders living in Canada) are also entitled to the payments on the same basis, provided they are entitled to file, and do file, one of the "1040" versions of the US income tax return - e.g. Form 1040, Form 1040-EZ, or Form 1040-A.

Individuals who are nonresident aliens of the United States (i.e. individuals who must file one of the versions of US income tax Form 1040NR (e.g. 1040NR or 1040NR-EZ) are not eligible for the payments. (Nonresident aliens cannot file one of versions of Form 1040).

Canadian Tax status of us LLCs and S-Corporations

The Canada Revenue Agency has confirmed it considers US Limited Liability Companies and so-called "S" corporations to be "corporations" for Canadian income tax purposes. For the moment, "S" corporations are apparently eligible for the 5% Canadian withholding tax rate potentially available on dividend payments from Canadian corporations, provided the ownership requirements of the treaty are met.

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