Blog post

Key Points

• American expat small business owners in Canada may need to file Form 5471 to report their foreign corporation to the IRS.
• Failure to file Form 5471 can result in significant penalties, even if no tax is owed.
• Proper classification of the Canadian corporation is essential to determine U.S. tax obligations.
• The Canada-U.S. tax treaty may provide some relief, but detailed reporting is still required.
• Consulting with a cross-border tax professional is crucial to ensure compliance and avoid costly penalties for American expat business owners in Canada.

If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.

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Question

Hello!

I posted in your Reddit forum, but I realize I really need to reach out to you directly to see if perhaps you might be able to assist me, and I realize I’m in I think a bit over my head.

My tax situation it seems has become possibly a bit too complicated for the accountant I have sent all my 2021 information to and everything I read online is pretty much extremely alarming. (I never cease to be shocked at how punitive and unforgiving the US govt is against the little guy when it comes to this stuff, particularly those who don’t even live there!)

I’m a US citizen and permanent resident of Canada about a year away from submitting my application for citizenship. In any case, I started a small business in Canada last year, incorporated federally, based out of my home in Ontario. My accountant is filing my first fiscal year taxes with the Canadian government and it looks like net income for the corporation is something like C$30k. I believe my accountant, who has filed US taxes for his clients for many, many years, believes that since my first fiscal year hasn’t completed for the company, my ownership of my small business doesn’t need yet to appear on my 2021 tax return but it will show up on my 2022 since in 2022, my first fiscal year ended.

Now, the US government appears to have minimum fines of US$10k per forms 5471, 8858, and 8992 that are not filed properly (I can’t think of even the most authoritarian government on Earth that operates this way against a regular person), so I get very, very nervous, the kind of nervous that keeps me up at night. The authoritarianism of the US govt already makes me nervous, so this just exacerbates it.

Through my company, I pay myself a salary, and CRA taxes are deducted from that, but over the full 12 month period ending at the end of May, 2022, the company pulled in a net profit (it may not have between its start and Dec 31 last year, if the calendar year is relevant here). I am concerned that GILTI rules require me to pay double taxation on my company income – both to the CRA and to the IRS.

Is my Canadian accountant right or wrong here about my need to file these IRS forms only after my fiscal year has ended? What is the right course of action? Am I right to be concerned about forms 5471, 8858, and 8992 not being properly filed for the company in my 2021 tax return?

I’m now toying with the idea of rolling down my Canadian company altogether and reforming it as a US company, possibly a S-corp, since most of my customers come from there and in an S-corp, the income is simply added to my personal income and I wouldn’t, I believe, see double-taxation. But, I wouldn’t have a clue where to start in terms of properly filing, in this case, my CRA taxes.

I’d like to discuss perhaps some long term planning with you and maybe see what it would take to hire your group to properly finish my 2021 US taxes and then to take me on as a client ongoing. Is there any way to book a consultation of any kind?

Thank you,

XXXX

Answer

Hi Adam

Thanks for the email and sorry to hear about all the challenges.

I can give you some of my general thoughts, however to get more in-depth into the issues below we likely need to schedule a proper paid cross-border tax consultation.

Yes, the penalties for 5471 forms and alike are terribly punitive and totally unreasonable for the everyday person. That being said they still do exist.

On the surface it does seem like you should only need to file your 5471 and other forms for the 2022 year on your 1040, however the IRS requires that companies reporting on 5471 that are Controlled Foreign Companies (CFC) report on a calendar basis. For the most part in order to satisfy this requirement we have moved all our Canadian corporations with US shareholders to December year ends. You wouldn’t have to necessarily change the year-end, however you would have to report on a calendar basis. It makes sense to change the year end so you don’t have to track 2 sets of books.

Yes, you are right, GILTI could apply, however you may also be able to receive a foreign tax credit (GILTI 1116) on your US tax return for some of the corporate taxes paid.

If you’ve extended your US tax return is might actually only be due October 15th, which would still give you time to file. However, if the extension was not made (4868) this option would not be available.

The IRS does have an international delinquent returns program that may be useful. You can read more here:

https://www.irs.gov/individuals/international-taxpayers/delinquent-international-information-return-submission-procedures

Hope that helps.

Regards

Phil