Here's a question I get some version of every few months.
I'm moving from California to Vancouver later this year. I run a single-member LLC that nets about $300,000 in consulting income, and I have about $100,000 in a Roth IRA. My CPA told me the LLC is a disregarded entity, so nothing changes. It just flows through to my personal return like always. He also said the Roth is tax free, so I should keep maxing out the $7,000 annual contribution once I'm in BC. Anything else I should watch out for?
David S.
Short answer: your CPA is right about U.S. law and wrong about your life.
Nothing he told you is incorrect. It's just that every word of it stops being true the day you become a Canadian tax resident. Follow that advice into BC and you get double taxation on the business income and a retirement account that quietly stops being tax free.
Two problems. Let's take them in order.
Problem One: Canada Does Not Believe in Your LLC
The IRS lets you ignore a single-member LLC. Income flows to your 1040 and nobody thinks about it again.
The CRA does not play along. Canada does not recognize the flow-through status of an LLC. For Canadian purposes it's a corporation, full stop. Once you're a Canadian resident, that mismatch creates two separate messes.
The timing mismatch. The U.S. taxes you on the LLC's income as it's earned. Canada taxes you when the money actually comes out to you as a dividend. Those are different years. Foreign tax credits require the income and the tax to land in the same year in both countries, and here they don't. That's the double tax. It isn't a penalty or a filing error. It's just what happens when two systems disagree about when income exists.
Mind and management. You'll be running this business from a laptop in Vancouver. Under Canadian law, a foreign corporation whose central management and control sits in Canada is a Canadian resident corporation. That means your LLC is likely on the hook for Canadian corporate tax on worldwide income and annual T2 filings.
So the entity you set up to keep things simple becomes a foreign corporation that Canada thinks lives in Vancouver, and a disregarded entity that the IRS thinks doesn't exist. Same business. Two mutually exclusive answers.
Problem Two: Do Not Touch the Roth
This one is easier to fix and easier to break permanently.
A Roth IRA is not automatically tax free in Canada. Left alone, the CRA taxes the income the account earns as it accrues.
To keep the tax-free treatment you file a one-time written election with the Canadian Competent Authority under the treaty. Deadline is April 30 following your first calendar year of Canadian residency. Miss it and you're relying on late-filing relief, which is a conversation nobody enjoys.
Then stop contributing. Permanently.
A contribution or a Roth conversion made while you're a Canadian resident is a "Canadian contribution" under the treaty. That's the thing that breaks the account. Treaty protection goes away and you're left holding a taxable investment account with U.S. reporting attached. There is no cure, no amended election, no do-over.
Direct rollovers from one Roth to another Roth are fine. Contributions are not. If you have an automatic monthly deposit running, cancel it before you land, not after.
What Actually Needs to Happen
Three things, and they need to happen before you move rather than after.
- Deal with the LLC. Options are usually winding it down and operating as a sole proprietor, or standing up a Canadian corporation as the operating entity. Which one is right will turn on your client contracts, your U.S. state exposure, and what your income looks like on the other side. That's a real analysis, not a default answer.
- Kill the Roth auto-deposits. Today. Not on your move date. (You will forget to do this, and then hilarity ensues. Or tears.)
- Calendar the treaty election. April 30 following your first year of residency, and it needs to be right the first time.
One more thing worth flagging: the departure year itself has its own set of problems, including the U.S. state you're leaving. California is not known for letting go gracefully.
If you're planning a cross-border move, the time to look at this is before the boxes are packed. Once you're a resident, most of the good options are gone.
Usual disclaimer: this isn't tax advice and I'm not your CPA. It's possible, maybe probable, that something here is out of date, oversimplified, or missing the one detail that matters in your situation. Don't file a return based on a blog post. Hire someone.