Avoid Double Taxation: U.S. Structures for Canadian Businesses

For Canadian business owners expanding into the U.S., entity structure isn’t just a legal formality, it’s one of the most important tax planning decisions you’ll make. The wrong structure can expose you to double taxation, deny you access to foreign tax credits, and reduce after-tax cash flow. The right structure aligns U.S. and Canadian tax systems, minimizes cross-border friction, and supports long-term business growth.

Unfortunately, many founders default to a U.S. Limited Liability Company (LLC) without realizing how these choices are treated differently under Canadian tax law. That can lead to costly mismatches, unnecessary IRS and CRA exposure, and restructuring headaches down the line.

In this article, we’ll walk through how U.S. business structure directly affects your personal and corporate tax obligations and what Canadian companies can do to avoid the most common (and expensive) traps.

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Why Structure Drives Profit in Cross-Border Expansion

When expanding into the U.S., many Canadian founders focus on sales, state registration, or immigration but overlook how their U.S. business is structured for tax. That’s a costly mistake.

Your legal entity type and ownership setup determine where your income is taxed, how much you owe, how easily you can repatriate cash to Canada, and whether you’ll get credit for taxes already paid. A poor structure can trigger double taxation, block foreign tax credits, and trap profits in the wrong jurisdiction.

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More than just a compliance box, structure is the foundation for:

1. Minimizing total tax liability across both countries
2. Preserving after-tax cash flow for reinvestment or distribution
3. Qualifying for tax planning opportunities, like the foreign tax credit, Section 1202 Qualified Small Business Stock Gain Exclusion, or Canada’s Lifetime Capital Gains Exemption on sale of small business shares
4. Avoiding mismatches between IRS and CRA rules that often blindside international founders

When tax is your biggest expense, structure is one of the few levers you control. Done right, it creates optionality, scalability, and clean exit paths. Done wrong, it creates friction, inefficiency, and unnecessary cost.

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The LLC Trap: Why It Often Backfires for Canadian Owners

The U.S. LLC is popular with American entrepreneurs, but for Canadian residents, it’s one of the most frequent and expensive mistakes.

Here’s why:

1. In the U.S., LLCs are treated as pass-through entities.
2. In Canada, they’re treated as corporations, creating a mismatch.

That means you pay U.S. tax when the LLC earns income, and then Canadian tax again when you receive a distribution.

Since Canada doesn’t grant foreign tax credit relief for U.S. entity-level corporate income tax, this structure triggers double taxation, with effective rates reaching 50–60% or more. You also lose planning flexibility and face duplicative reporting requirements on both sides of the border.

This trap regularly affects founders in:

1. E-commerce and direct-to-consumer
2. Tech and SaaS
3. Real estate
4. Manufacturing and wholesale distribution

Cross-border expansion requires structures that work within the tax frameworks of both countries. Aligning those systems from the outset avoids future penalties, preserves margins, and positions the business for scalable growth. In many cases, the optimal approach involves forming a U.S. C-Corporation with proper ownership alignment to preserve creditability, enable strategic planning, and reduce unnecessary tax exposure.

When a U.S. C-Corporation Makes More Sense

While no structure is perfect, U.S. C-Corporations often provide the best alignment for Canadian owners. Both the U.S. and Canada treat them as corporations, allowing taxes to be coordinated and foreign tax credits to apply.

Benefits of using a C-Corp include:

1. Eligibility for foreign tax credits in Canada
2. Cleaner coordination of tax reporting
3. Predictable treatment under both tax systems
4. Flexibility for reinvestment in U.S. operations
5. Support for raising U.S. capital or hiring American employees

A C-Corp also opens the door to advanced strategies such as qualifying for the U.S. Section 1202 gain exclusion or using the U.S. C-corp as a vehicle to support visa applications.

That said: it’s not a one-size-fits-all solution. A C-Corp is often ideal if you plan to:

1. Reinvest profits in the U.S.
2. Establish physical operations or U.S. staff
3. Attract American investors or prepare for a U.S.-based exit

But if your goal is to extract all profits back to Canada immediately, corporate-level tax may still reduce efficiency. That’s why structure must always be designed around your long-term goals, not someone else’s default.

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Why Ownership Structure Matters Too

Even with the right entity type, the wrong ownership structure can create new problems. Holding U.S. shares personally might expose you to U.S. federal and/or state estate tax and/or estate filings. Conversely, holding those shares through a Canadian corporation could limit your eligibility for Canada’s Lifetime Capital Gains Exemption (LCGE).

There are also implications for long-term tax planning strategies like qualifying for the U.S. Section 1202 gain exclusion or S-Corp status after relocation. For cross-border families, improper ownership can create future complications around gifting, inheritance, or succession planning.

In other words, choosing “what” to form is only part of the equation. “Who” owns it and how can either support your long-term goals or quietly work against you.

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Real-World Fixes: How We’ve Helped Canadian Businesses Clean Up Costly U.S. Structures

At Lodder CPA, we specialize in cross-border tax strategy and we see firsthand how the wrong U.S. entity structure quietly erodes cash flow and creates long-term compliance headaches. Here are a few examples of how we’ve helped Canadian businesses course-correct and rebuild for growth.

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Case 1: U.S. Eyewear Company: Double Taxed Through a U.S. LLC

A fast-growing eyewear startup was operating its U.S. business through an LLC—a popular U.S. entity, but a common trap for Canadian owners. While the U.S. treats LLCs as flow-through, Canada considers them corporations, meaning the owner paid tax in both countries with no access to foreign tax credits.

Our solution: We sold the LLC units to a newly formed U.S. C-Corp owned through a Canadian holding company. This restored alignment under the Canada–U.S. tax treaty, eliminated the double tax issue, and simplified future filings.

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Case 2: B.C. Distributor: No U.S. Presence, But U.S. Tax Exposure

This client had major U.S. sales but assumed under the U.S.-Canada tax treaties they had no tax obligations. Even though they had no U.S. presence their sales still caused U.S. state income tax exposure. Because they were very profitable Canada, it caused their U.S. state income tax to jump very high, which is based on worldwide net income as the starting point.

Our solution: We established a compliant U.S. entity, mapped state tax obligations, and implemented an intercompany pricing structure. The result was lower global tax liability, lower U.S. state tax obligations, and a stronger platform for expansion.

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Case 3: Environmental Tech Firm: GILTI Risk Hidden by Losses

This firm had racked up years of tax losses in both Canada and the U.S. But once it turned profitable, it was blindsided by GILTI (Global Intangible Low-Taxed Income) rules. The GILTI didn't allow of inclusion of losses from the previous year, which caused current year income inclusions. The U.S. began taxing Canadian profits, even when no U.S. tax credits were available, draining the business of reinvestment capital.

Our solution: We introduced a transfer pricing strategy and realigned intercompany planning to protect Canadian income from unnecessary U.S. taxation, preserving capital when they needed it most.

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Case 4: Alberta Electrical Wire Supply Company: Estate Tax and Ownership Mismatch

The business was operating through an Arizona LLC, with shares held directly by Canadian-resident individuals. Not only did this structure create inefficient cash flow and tax treatment, it exposed shareholders to U.S. estate tax risk.

Our solution: We helped wind down the LLC and rebuild under a U.S. C-Corp, with ownership structured through a Canadian corporation. This cleaned up the cross-border reporting, reduced future liability, and provided flexibility for succession planning.

These are all common traps Canadian founders fall into when expanding into the U.S.

Each of these businesses thought their structure made sense. But cross-border tax rules are nuanced, and what works domestically often breaks down internationally. Without the right setup, you could be leaking cash to double taxation, missing tax planning opportunities, or risking IRS and CRA scrutiny.

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If your U.S. entity wasn't built with Canadian tax coordination in mind, there’s a good chance it’s costing you. Fixing it now can unlock smoother cash flow, fewer reporting headaches, and better positioning for long-term growth.

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Build With Intention—Not Just Convenience

When it comes to cross-border growth, structure isn’t just about compliance, it’s a strategic lever. A well-planned structure protects margins, unlocks opportunity, and prevents silent tax drains that can undermine your U.S. expansion.

Before you form your entity, or if you're not sure your current setup is working, contact us.

We’ll walk you through your options and help you build a structure designed to support your business, not penalize it.