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Subpart F Income/Form 5471

Hello Linda,

I am somewhat confused about "Subpart F Income" and Form 5471.
As a canadian citizen providing consulting services in the U.S via my canadian corporation, would I be liable? My understanding is that the U.S. will tax the income of my corporation regardless of whether the profits are distributed to the shareholders or not? Is this correct? The problem here is all my income will be generated by my corporation. The corporation will therefore pay corporate tax in Canada. However, the U.S. will tax the corporate income as if it were personal income. I would therefore not be able to claim a foreign business income tax credit from Canada. Would this not be double taxation considering the two countries have a tax treaty? To make things more confusing, the IRS has come out with Notice 2007-9 - "Look-thru rule for related controlled foreign corporations". This notice indicates not all income may be classified as Subpart F.

In effect I am considering whether it may be more tax efficient to provide services in the U.S. via an S Corporation since by default I have become a U.S. resident for tax purposes.

Thanks kindly.

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Form 5471 and Canadians

I,m in the same shoes than you and OMG!!!! how can they make it so complicated!!!
I'm not an expert, but here is my understanding:

As Canadian, it is not possible to have a S-Corp... (at least it was not possible in 2008 when I opened my 2 companies in USA + one 501(c)3) and I also have 2 other companies in Canada, one I owned at 100%, which owns 60% of the other company.... wow!!! USA make it a nightmare to do ONLY my personal report.. I cannot imagine doing my companies tax reports!!! A real nightmare this year being my first year as a US Tax resident!!!

Since the Canadian Corporation is in Canada, I think we will always have to submit tax reports in Canada, either way, unless you cut all connections with Canada, etc... and get a green card or the Presence Test... I think we need to stay a Dual-Resident for tax purposes.

Since there is the treaty between Canada and USA, we may have tom complete form 8833 if we want that treaty apply the foreign tax credits...

THe BIG problem I'm facing since 2008, I hired and fired 5 different accountants, because they didn't understand Canada-USA, (even if they claimed too) and just "WING IT".... which brought me this year a $10,000 civil penalty... + 5 other minor penalties.... that I have to defend myself!!! Pretty discouraging.... after paying them thousands of dollars.... :-(

SO, now that is 2 weeks I,m doing my personal tax return myself with TAXACT, and so far, it looks like I have to complete:
Form 1120, 520 for California, 5471 Category 4, Schedules A, B, C, E, F, G, H, I, J, M, (For each canadian companies), 8833, 8938, 8958, and maybe 8865 for FDE which I still didn't figured out what it is exactly!!!

Hope I didn't forget anything, or let me know if you discover something else!!! UNBELIEVABLE!!!

Please let me know if you find a knowledgeable and affordable accountant USA-Canada, I need another one for my 2 businesses in USA now...

hope we can help each other.

Regarding Tax Effeciencies

Hi again,

I would hate to be doing your returns. As I see it you have 2 corporate returns and 2 personal return. Plus the conversions between US$ & CN$. It would be much simpler to just have the one corporate return and 2 personal returns.

Plus, your Canadian corporation is most likely a personal service corporation which pays a flat 35% tax in the US. Becoming an S-Corp would eliminate that classification and your corporation's income will flow to your personal return.

So, yes I definitely think it would be more efficient to provide your services via a US S-Corp.


Canadian Corporation in US


Thanks for your question. This is a little outside my bailiwick and there are quite a few issues here, but I'll take a stab at it. :)

First, it seems to me your Canadian corporation should file Form 1120-F, U.S. Income Tax Return of a Foreign Corporation (instructions). If you do that, then any tax you pay on that return should be available as a foreign tax credit for corporation's Canadian return.

Notice 2007-9, Look-thru Rule for Related Controlled Foreign Corporations only applies to Controlled Foreign Corporations (CFC) which applies to you since you are a US resident. A CFC is a foreign corporation that has a US shareholders that own more than 50% of the value or voting power of a foreign corporation.

As far as subpart F income, there's a worksheet on page 8 of the instructions for Form 5471 that helps you figure this out. Line 1h I think is what your talking about Certain amounts received for services under personal services contracts. See the instructions for more info on this, but I'm guessing this is where the corporations income for your contract would go.

If you go through the worksheet, line 26 provides an exclusion for US source income. Based on what you've posted, income from your contract work is US Source income (which is also why your corp. should file Form 1120-F). That being the case, you get to exclude the US income. Assuming your corp doesn't have any other income, that should bring your subpart F income pretty close to zero and eliminate your concerns over double taxation.

I strongly suggest you find someone to help you that specializes in Canadian returns. There may be some treaty issues that can provide some simplification but I just don't know for sure. Go to the National Association of Enrolled Agents website to the Find an Enrolled Agent page. Be sure to select the International checkbox.

Good Luck!

Form 5471 and Canadians

Hi Linda,

Hope you can help.
I have the same problem this year... but as Canadian, I don't think we can have a S-Corp though... :-(

Looks like I have to complete the form 5471 and Schedule A-B-C-E-F-G-H-I-J-M, worksheet A, for each of my 2 businesses in Canada, really for small businesses too??? even if they are taxed by themselves in Canada and I didn't received any revenues from them, really?

Also, I understand I have to complete forms 8938, 8883 maybe?, 8858 or 8865 maybe for DFE (what is that exactly??), and maybe others that I forgot?

Please let me know and see if we can help each other on that with our researches!!!

WOW!!! completely ridiculous....

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