Have a Tax Question? Ask a Tax Expert
Hello,Thank you for using justanswer. I can assist you with your questions today.
1) overall, would there be significant taxation advantage for people like us to incorporate here? - I don't believe there would be a "significant" tax advantage. The main thing is that you will be paying tax in Canada and will get a foreign tax credit in the U.S. for taxes paid to Canada. Essentially you will most likely be an employee in Canada even if you incorporate your own entity. Incorporating your own entity and operating within it will make you an employee of the company.
2) How about the 'accumulated earnings tax' for the earnings retained in the company? - This would be correct for a U.S. corporation but not a foreign corporation. Foreign corporations have their own set of U.S. tax rules and there is not a similar holding company accumulated earnings tax like that for U.S. corporations. Note though that if 5% of gross income of the foreign corporation were to be derived from investment income or if there was more than 1M of investment income generated the foreign corporation would most likely generate Subpart F income which would be taxable to you in the U.S. and not in Canada. This is known as phantom income and basically is taxable even though cash is not distributed. (IRC 954c - http://www.law.cornell.edu/uscode/text/26/954)
I hope this helps, please let me know if you have any further questions.
Thank you so much for your answers which are indeed helpful.
Just hope to get a little more clarification on my first question. If I pay myself and my spouse part of the totoal earnings of my PC as divident (instead of salary) so I can pay a lower tax rate to Canada (i.e. tax advantage), would this annual personal income of mine and my spouse be taxed as regular income (instead of divident) when we file the US tax? and how about when I take the money from my PC's retained fund in the future? If that would be the case, I will lose all of tax benefits from incorporating in Canada. That was actually the key point of my first question.
Sorry for the delay.
If I pay myself and my spouse part of the total earnings of my PC as dividend (instead of salary) so I can pay a lower tax rate to Canada (i.e. tax advantage), would this annual personal income of mine and my spouse be taxed as regular income (instead of divident) when we file the US tax? - If you and your spouse, being U.S. citizens, were to receive dividends from a Canadian corporation it would be subject to "qualified dividend" income tax rates in the U.S. (assuming you hold the stock of the Canadian corporation for at least 60 days). Qualified dividends are currently taxed at 15%-20% depending on which tax bracket you are in. Also note that if your modified adjusted gross income is over 250K you will also be subject to the 3.8% medicare investment tax in the U.S.
Tax brackets - http://en.wikipedia.org/wiki/Qualified_dividend
Note that Canadian tax paid or withheld on the dividends would be eligible for a foreign tax credit in the U.S. to the extent the U.S. would tax the dividend. Meaning that you cannot take more of a foreign tax credit than what the U.S. would tax you on the income in the first place.
and how about when I take the money from my PC's retained fund in the future? - I am assuming you are speaking about the retained earnings of the company and thus it would be a dividend taxed the same as the above.
One strategy may be to take all the income of the company out via salary and bonus. Then invest it in the U.S. via tax deferred retirement accounts such as an IRA.
I hope this provides the clarity you were looking for. Please let me know if you have any further questions.