Owning a Canadian Corporation as a U.S. Citizen

If you are a U S citizen or Green Card holder who owns shares in a foreign corporation — including a Canadian small business — you may have unexpected U S tax reporting obligations.

Failing to properly report your ownership can lead to severe IRS penalties, even if the business earns no income or pays no dividends.

What Counts as a Foreign Corporation?

A foreign corporation is any company that is organized outside of the United States. For U S tax purposes, it does not matter if you live abroad, pay foreign taxes, or consider your company small.

Examples include:

• Canadian incorporated small businesses
• Holding companies used for real estate or consulting
• Family owned businesses with non U S registration

U S Tax Forms Required

U S citizens who own 10 percent or more of a foreign corporation must usually file:

• Form 5471: Required for directors, officers, and shareholders
• Form 8938: Required under FATCA for foreign financial assets
• FBAR: Required if the corporation holds foreign bank accounts over ten thousand dollars

GILTI and Subpart F Income

The GILTI rules (Global Intangible Low Taxed Income) and Subpart F may require you to pay U S tax on the profits of your foreign corporation even if no dividends are paid.

These rules can surprise many small business owners, especially those who think their company has no U S tax link.

Penalties for Not Filing

Penalties for failing to file Form 5471 can exceed ten thousand dollars per year per form. FBAR and FATCA penalties are also significant, even for first time non compliance.

How to Reduce Exposure

• Work with a cross border tax advisor who understands both local and U S rules
• Keep accurate records of corporate income and distributions
• Consider entity restructuring or electing U S tax treatment (such as a check the box election)