When a Canadian Professional Corporation Works, and When It Doesn’t, for U.S. Citizens
Written by: Dean Moro, BComm, CIM®, CRPC™ & Carson Hamill, CIM®, CRPC™, FCSI®: Cross-Border Portfolio Managers at Snowbirds Wealth Management
In Canada, incorporating a professional practice is almost reflexive. Physicians, lawyers, consultants, and other regulated professionals are routinely advised to set up a professional corporation to access the small business tax rate, defer personal income tax, and build long-term wealth inside the company.
For Canadian citizens, that advice is usually sound.
For U.S. citizens living in Canada, such planning is inherently much more complicated.
What appears to be a straightforward Canadian tax-planning strategy can, under U.S. tax law, collapse into a compliance burden that reduces the benefits of income tax deferral, accelerates U.S. tax, and creates cash-flow mismatches that taxpayers or their Canadian tax professionals may not anticipate until years later.
The problem is not incorporation itself.
The problem is that Canada and the United States are solving two very different policy objectives and the professional corporation sits squarely in the collision zone.
- ⚖️Two Tax Systems, One Corporation, and a Fundamental Mismatch
- 🚩The “Bonus-Out” Default - and Why It’s a Red Flag
- 🏗️When Retained Earnings Can Still Make Sense
- ⚠️The Real Risk: Default Advice Applied to the Wrong Taxpayer
- 🧭Proper Planning, Determines the Outcome
⚖️Two Tax Systems, One Corporation, and a Fundamental Mismatch
From a Canadian perspective, a professional corporation is a domestic operating business. Active business income up to the small business limit is taxed at preferential rates, allowing professionals to retain surplus earnings for reinvestment or future retirement planning.
From a U.S. perspective, when the U.S. Tax Cuts and Jobs Act passed in 2017, this introduced significant changes to how U.S. citizens residing in Canada owing Canadian corporations are taxed. Once a U.S. person owns 10% or more of a non-U.S. company and especially where U.S. persons collectively control the entity - the U.S. anti-deferral regime comes into play.
Under the Controlled Foreign Corporation (CFC) rules, certain categories of income may be taxed annually to the U.S. shareholder whether or not any money is distributed. Depending on the facts, this can include Subpart F income or amounts captured under the Global Intangible Low-Taxed Income (GILTI) regime. Under the recently passed One Big Beautiful Bill Act (OBBA) the GILTI regime is now know known as Net CFC Tested Income (NCTI).
The practical consequence is straightforward but often missed in early planning discussions:
The Canadian tax deferral that motivates incorporation may not exist at all for U.S. taxpayers.
🚩The “Bonus-Out” Default - and Why It’s a Red Flag
Faced with this complexity, many cross-border accountants default to a conservative solution: eliminate corporate taxable income entirely.
Under the so-called “bonus-out” strategy, the professional pays themselves a salary or bonus sufficient to reduce corporate income to zero. With no retained earnings, the U.S. CFC rules generally become irrelevant. The income is taxed personally in Canada, with foreign tax credits often offsetting U.S. liability.
From a compliance standpoint, this works.
From a planning standpoint, it raises a critical question: If all profits must be extracted annually, what is the corporation actually accomplishing?
The core benefit of incorporation - tax deferral and accelerated capital accumulation - disappears. The professional incurs higher accounting costs, additional filings, and ongoing complexity in exchange for little more than administrative formality. At that point, incorporation is not a wealth-building strategy. It is a costly holding pattern.
🏗️When Retained Earnings Can Still Make Sense
The conclusion many professionals draw from this analysis - that incorporation is always a mistake for U.S. persons - is also wrong.
At higher income levels, particularly where annual earnings materially exceed personal spending needs, the Canadian small business rate can create a meaningful deferral advantage if the U.S. tax overlay is managed correctly.
This is where planning becomes decisive.
There are circumstances in which U.S. shareholders can make certain U.S. tax elections that effectively align the U.S. tax treatment of retained corporate earnings with corporate - rather than individual - taxation. When structured and administered properly, this can significantly reduce or eliminate the additional U.S. tax on undistributed Canadian corporate income.
These strategies are not automatic, not intuitive, and not “set-and-forget.” They require:
- Precise income modeling,
- Complex annual U.S. tax compliance,
- and coordination between Canadian and U.S. tax advisors or ideally a cross-border tax advisor who understands how each tax system views the same dollar of income.
Without that integration, retained earnings simply shift the problem forward in time rather than solving it.
⚠️The Real Risk: Default Advice Applied to the Wrong Taxpayer
The most common failure in this area is not aggressive planning. It is default planning.
Professionals are frequently incorporated for tax purposes because “that’s what everyone does,” with U.S. citizenship treated as a disclosure item rather than a design constraint. Years later, they discover that:
- U.S. tax has been accruing on income never distributed,
- foreign tax credits do not line up cleanly,
- and unwinding the structure is often much more expensive than building it correctly in the first place.
In those cases, the professional corporation is neither a trap nor a solution - it is simply misaligned with the taxpayer’s reality.
🧭Proper Planning, Determines the Outcome
For U.S. citizens living and working in Canada, the professional corporation is not inherently good or bad. It is highly dependent on each individuals circumstances.
At lower income levels, or where full annual extraction is required, incorporation often fails to justify its cost and complexity. At higher income levels, with proper cross-border coordination, it can still function as a legitimate tax deferral and income accumulation vehicle.
The dividing line is not the corporation itself.
It is whether U.S. tax law was considered at the design stage or only after the fact.
That distinction determines whether incorporation becomes a quiet liability or a controlled, intentional planning tool.
🚀Ready to Plan Your Cross-Border Move?
If you are planning on moving to the USA from Canada, don't leave your finances to chance. Raymond James Snowbirds Wealth Management specialize in cross-border financial planning, investments, and wealth management, working closely with your tax accountants and lawyers to ensure a fully integrated strategy.
🌎About Snowbirds Wealth Management
Snowbirds Wealth Management focuses exclusively on the cross-border market.
Gerry Scott, along with Dean Moro and Carson Hamill, provides investment solutions for:
- Americans living in Canada
- Canadians living in the U.S.
Licensed in both countries, our team helps minimize tax burdens when moving assets across the border.
👉 Schedule Your Introductory Cross-Border Strategy 📞Call Here
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