Kris McEvoy, cross-border tax expert and founder of LEAP ACT, recently joined Glenn Sutherland on A Canadian Investing in the US to answer a question many Canadian investors are asking: What’s the best way to pay yourself from a US company?
Whether you’re earning income from rental properties, flips, or a business based in the US, how you bring that money home can make a big difference. Without the right structure in place, you could end up paying far more tax than necessary.
It All Depends on How You’re Set Up
There is no one-size-fits-all answer. The most efficient way to pay yourself depends on your structure and your residency.
If you’re investing through a Limited Partnership (LP), there is usually no additional tax when you withdraw money. You’re taxed on the income your LP earns each year, not on the withdrawals themselves.
But if you are using a US corporation, things can get expensive quickly. Taking a dividend directly or putting yourself on payroll from a US company can trigger tax on both sides of the border. In some cases, this can add up to 50 or even 60 percent.
A More Efficient Option
For many Canadians, the better option is to create a Canadian company that owns your US company. This structure allows you to move money across the border in a more tax-efficient way.
Here’s how it typically works:
- Your US company pays management fees or interest charges to your Canadian company
- Your Canadian company receives that income and pays you through dividends or payroll
- Because everything is happening within Canada, you avoid additional layers of foreign tax
Generally, it’s best to pay yourself from an entity in the same country where you live. If you are a Canadian resident, that usually means drawing income from a Canadian company, not directly from a US one.
What About Dividends Between Companies?
Some investors consider paying a dividend from their US company to their Canadian company. This can be an acceptable option, and under the current tax treaty, the withholding tax is usually 5 percent. However, this method may not be the most efficient and should be compared to other strategies such as management fees or interest charges.
Cross-border management or interest arrangements can often reduce the tax impact even further, but they require careful planning and documentation.
Things to Consider
- Avoid paying yourself directly from a US company if you live in Canada
- Use a Canadian company to own your US entity if possible
- Look at all the options: dividends, management fees, interest charges
- Review your structure with a cross-border tax professional before moving funds
Need Help Reviewing Your Structure?
If you’re unsure whether your current setup is helping or hurting your bottom line, we can help. At LEAP ACT, we specialize in cross-border tax planning for Canadians investing in the US.
Need help paying yourself the right way and keeping more of what you earn?
Get in touch with Kris McEvoy and book a time to talk.