If so, you may want to read this…
For Canadians investing in U.S. real property or simply doing business in the United States, one of the commonly suggested business entities is an LLC. Forming an LLC is simple. What is not so simple is to deal with adverse U.S. tax implications for Canadian residents (whether individuals or businesses) that become LLC members.
What many Canadians don’t know is that an LLC with a single member who is a foreign person (such as a Canadian tax resident) has substantial U.S. tax filing requirements. Failure to comply with such tax filing and reporting requirements or file on time may lead to substantial penalties – as much as US $25,000 per violation.
Although in general an LLC is disregarded for U.S. federal income tax purposes, the recent law changes subject LLC owner to extensive U.S. international information reporting, as if it was a separate entity.
As a background, a disregarded entity (DRE) is a business entity that is not recognized for tax purposes and is treated as a branch or division of its owner. The income, deductions, and credits of the DRE are reported on the owner’s tax return (note that the LLC member is generally subject to its own U.S. tax filing obligations). In the United States, a common example of a DRE is a single-member limited liability company (LLC) that has not elected to be treated as a corporation for tax purposes.
The key U.S. international information return that is required to be filed by the foreign single-member LLC is IRS Form 5472, Information Return of a 25% Foreign-Owned Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (as you can see, the name of the form does not suggest that such filing may be required, since a single-member LLC is treated as a DRE for U.S. federal income tax purposes). A foreign-owned DRE is generally required to file with the Internal Revenue Service (“IRS”) Form 5472. This form is used to report certain transactions between the DRE and its foreign owner or other related parties. The purpose of this form is to help the IRS identify potential tax avoidance schemes and ensure compliance with U.S. tax laws.
In addition to filing Form 5472, a foreign-owned LLC that is treated as a DRE is required to file a pro-forma Form 1120, U.S. Corporation Income Tax Return.
The filing deadline for filing a pro-forma return and Form 5472 for a calendar year end LLC is April 15. For the 2022 tax year, the filing deadline is April 18, 2023.
If you hold your U.S. investment through a U.S. LLC, you may want to check the applicable tax treatment and tax filing requirements with a qualified U.S. tax advisor. If you are interested in learning more and address your questions or concerns with respect to your U.S. investment, you can schedule an initial consultation here:
DISCLAIMER: Please note that the information contained in this article is general in nature, is current only as of the date of posting the respective information on the website, and does not (nor is intended to) provide legal or tax advice or an opinion on any matter or issue discussed. You should consult your qualified U.S. tax advisor for any advice on any matters or issues discussed in this article.