U.S. Tax Residency Rules: What Every Canadian Business Owner Expanding to the U.S. Needs to Know

U.S. Tax Residency Rules: What Every Canadian Business Owner Expanding to the U.S. Needs to Know

When Canadian business owners expand into the U.S., most of the focus goes toward business structure—setting up a U.S. entity, registering for state taxes, hiring, and keeping up with corporate compliance.

What’s often overlooked?

Your personal tax residency status and what it means for your global income and IRS reporting obligations.

Many Canadian founders assume that as long as they don’t have a green card, they’re not subject to U.S. personal tax. Unfortunately, that’s not how the IRS sees it.

If you’re spending significant time in the U.S. to grow your business, here’s what you need to know.

Why Your Visa Doesn’t Protect You from U.S. Tax Residency

U.S. immigration status and U.S. tax residency are two separate systems. You can be in the U.S. legally on a visa, like an E-2, L-1, or TN, and still be considered a U.S. tax resident if you meet the Substantial Presence Test (SPT).

That means you could be subject to U.S. tax on your worldwide income, even if you live in Canada and run a Canadian company.

The Substantial Presence Test: How Time in the U.S. Triggers IRS Residency

Under IRC §7701(b), the IRS applies two tests for tax residency:

1. Green Card Test: You’re a lawful permanent resident (i.e. green card holder)
2. Substantial Presence Test: You meet a formula based on your days spent in the U.S.

The SPT formula:

You’re a U.S. tax resident if:

1. You spend 183 days or more in the U.S. in the current year, or
2. You meet this 3-year rolling total:
3. All days in the current year
4. 1/3 of days from last year
5. 1/6 of days from two years ago

Example:

1. 2025: 130 days
2. 2024: 120 days → counts as 40
3. 2023: 120 days → counts as 20
4. Total: 190 → You meet the test

Even unintentional travel can tip you over the threshold.

How to Avoid U.S. Tax Residency (Legally)

If you're getting close to the threshold, you have two options for staying classified as a nonresident for U.S. tax purposes:

1. Closer Connection Exception (Form 8840)

If you're under 183 days in the current year, you may be able to claim that you have a closer connection to Canada by filing Form 8840. You must have a Canadian tax home and meet other criteria.

2. U.S.–Canada Tax Treaty Tie-Breaker (Form 8833)

If you're over the 183-day threshold, the Canada–U.S. tax treaty can help. Article IV of the treaty lets you “tie-break” residency back to Canada based on factors like:

1. Where your permanent home is
2. Where your family and business ties are
3. Your habitual residence
4. Your citizenship

You’ll need to file Form 8833 with your U.S. nonresident return (Form 1040-NR) to make this claim.

Why Tax Residency Matters: The Hidden Risks of Doing Nothing

Triggering U.S. tax residency without knowing it can open you up to a long list of risks:

You’ll Be Taxed on Worldwide Income

The IRS expects U.S. tax residents to report all global income, even if it’s already been taxed in Canada.

You Must Disclose Foreign Accounts and Assets

Failing to report your Canadian accounts or investment holdings can trigger steep penalties.

Required filings may include:

1. FBAR (FinCEN 114): For foreign accounts totaling $10,000+
2. Form 8938 (FATCA): For foreign financial assets (thresholds vary)
3. Form 5471, 8865, 8858, 8621, 3520, and others for business ownership, trusts, and passive investments

These aren’t optional. Filing late, even with no tax due, can still result in penalties.

Business Ownership Triggers Additional Tax Exposure

If you’re a Canadian business owner who becomes a U.S. tax resident, you may also face U.S. tax rules designed for large corporations but that still apply to you:

GILTI (Global Intangible Low-Taxed Income)

Applies to U.S. persons who own Canadian corporations controlled by U.S. owners (a CFC). You could be taxed on corporate profits even if they stay inside the business.

PFIC Rules

Own Canadian mutual funds or passive investment companies? These often qualify as Passive Foreign Investment Companies (PFICs) under U.S. law, which come with punitive tax treatment and complex reporting (Form 8621).

These anti-deferral regimes are some of the most complex parts of the U.S. tax code and often catch small business owners off guard.

What You Should Do Next

If you're building or scaling your U.S. business, tax planning can't stop at the entity level. You need a cross-border tax strategy that covers:

1. Your visa and presence days
2. Your Canadian company structure
3. Your personal tax home and reporting obligations
4. Your long-term goals (exit, relocation, or ownership shift)

Talk to Our Cross-Border Tax Experts

Our team helps Canadian business owners navigate both corporate and personal tax planning as they expand into the U.S. We’ll help you:

1. Map your days in the U.S.
2. Avoid triggering tax residency
3. Stay compliant with IRS foreign reporting
4. Optimize your structure for long-term growth and exit

Book a free call to review your U.S. exposure and build a plan that protects both your business and your personal finances.