Canadian Buying a Florida Business: The Purchase Structure, the E-2 Visa, the Entity, and the Canadian Tax on the Profits

A Canadian buying a Florida business makes three decisions at once — the visa, the entity, and the residency — and they constrain each other. The visa comes first: a Canadian who wants to run the business in person needs a U.S. immigration status that permits it — the E-2 treaty investor visa is the common route for Canadians (a substantial investment in a real, operating U.S. enterprise that the investor will develop and direct, owned at least 50 percent by Canadian nationals — Canadian citizens, not permanent residents of Canada; there is no minimum dollar amount, and the investment is judged substantial in proportion to the cost of the business under the State Department's proportionality test), and the E-2's structure requirements shape the purchase: the investment must be committed and at risk (funds in escrow for the closing, the business purchased — not merely planned), the business must be more than marginal (it must have the present or future capacity to generate more than a minimal living for the investor and family, or to make a significant economic contribution — typically jobs — generally within five years of starting normal business), and the ownership must be held by Canadian nationals (a Canadian corporation can be the owner if Canadian nationals own at least 50 percent of it — the country of incorporation is irrelevant, and ownership is traced to the individual owners); a Canadian who will only own the business and have U.S. managers run it doesn't need a visa to own it, but can't work in it without one. The purchase structure: most small business purchases are asset purchases — the buyer's new entity buys the equipment, inventory, the customer relationships, the trade name, the lease assignment, and the goodwill — with the price allocated among the asset classes on Form 8594 (filed by both buyer and seller — the allocation determines the buyer's depreciation and amortization: equipment on the depreciation schedule with section 179 or bonus, inventory as cost of goods sold, goodwill and a non-compete as fifteen-year section 197 intangibles — the section 197 guide); a franchise purchase adds the franchisor's transfer approval and fee (the franchise owner entity guide); a stock or membership-interest purchase (buying the seller's entity) carries its history (liabilities, tax exposures — the entity's own unpaid sales and reemployment tax stays with it; the Florida documentary stamp tax guide's controlling-interest rule if the entity holds real estate) and no step-up in the assets' basis for a corporation; Canadian buyers are advised toward asset purchases for the clean start and the step-up — but Florida's successor liability statute (s. 213.758) makes a buyer of more than half of a business's assets liable for the seller's unpaid sales and reemployment tax unless the seller produces the Department of Revenue's receipt or certificate of compliance (or a Department audit clears the seller), and the buyer may withhold part of the price to pay the tax. The entity — the cross-border choice: the entity that owns the Florida business determines who files what in each country. A U.S. C corporation owned by the Canadian individual: the corporation pays U.S. federal tax at 21 percent and Florida corporate income tax on its Florida income (above the exemption — the Florida corporate income tax guide); dividends to the Canadian owner carry 15 percent U.S. withholding under the treaty (W-8BEN — the W-8BEN guide) and are foreign dividends in Canada (taxed at the Canadian owner's rates with a foreign tax credit for the withholding — the corporate tax isn't creditable to the individual); salary paid to the owner-employee (on the E-2) is deductible to the corporation and U.S.-source wages to the owner. A U.S. LLC owned by the Canadian individual: disregarded in the United States, a corporation in Canada — the hybrid mismatch (the Canadian resident owning a U.S. LLC guide) — generally avoided unless it elects corporate status (then it's the C corporation above). A U.S. C corporation owned by the Canadian's Canadian corporation (a CCPC): the U.S. subsidiary's active business income is exempt surplus in Canada, so dividends to the Canadian holding company are received tax-free there (with 5 percent U.S. withholding under the treaty — the Canadian company expanding to Florida guide), and the Canadian owner pays Canadian tax only when the holding company pays them dividends — deferral for profits reinvested; a common structure for Canadians who keep Canadian residency and hold other Canadian business interests (and an E-2 works through a Canadian company at least 50 percent owned by Canadian nationals, with the Canadian owner-manager coming as the enterprise's E-2 executive or manager). An S corporation: not available — an S corporation can't have a nonresident alien shareholder or a corporate shareholder; a Canadian who becomes a U.S. resident (below) could later elect S status, but not before — and an owner who meets the substantial presence test while the treaty's tie-breaker keeps them a Canadian resident computes U.S. tax as a nonresident (Reg. 301.7701(b)-7), with the S corporation rule for that case reserved in the regulations, so the election waits until Canadian residency ends. The residency question: a Canadian who moves to Florida on an E-2 to run the business typically becomes a U.S. tax resident (the substantial presence test — the snowbird guide — at 183 days) and, if they sever their Canadian residential ties, a non-resident of Canada (the NR73 guide — the departure tax on their Canadian property, the RRSP's treaty treatment — the RSP guide); as a U.S. resident with no Canadian residency, the business's profits are taxed once, in the United States — and the S election becomes available (a U.S. resident alien can be an S corporation shareholder), so a Canadian who has moved converts the C corporation to S status (or the LLC to S) for the single level of tax (the S corporation vs LLC guide); a Canadian who keeps Canadian residency (a snowbird owner, or an owner whose family stays in Canada) remains taxed in Canada on worldwide income, and the structure has to deliver the profits with the foreign tax credit or the exempt surplus working. The Florida layer: the entity registers with the Division of Corporations (the Florida annual report guide), the Department of Revenue (sales tax, reemployment tax), the county and city (local business tax receipts), and the county property appraiser (tangible personal property) — the Florida guides; the business pays Florida corporate tax only if it's a C corporation (the Canadian's pass-through, once U.S. resident, pays none). The bookkeeping: the purchase agreement and Form 8594; the asset schedule by class with the elections; the entity's classification in each country; the owner's salary and dividends; the Form 5472 if the U.S. corporation is 25 percent foreign-owned (the IRS's form — every year); the E-2's investment documentation; the owner's residency day counts; the Canadian side's T1134 (for a foreign affiliate held by a Canadian) and foreign tax credits. The errors: an LLC formed for the Canadian buyer by a U.S. broker; a stock purchase that inherited the seller's sales tax liability; the Form 8594 allocation left to the seller; Form 5472 never filed for the foreign-owned corporation; the S election attempted before the owner was a U.S. resident; and the Canadian residency assumed to end at the move without severing the ties.

Key takeaways

• The visa comes first: the E-2 treaty investor visa requires a committed, at-risk, more-than-marginal investment owned at least 50 percent by Canadian nationals — and it shapes the purchase.
• Asset purchases are the Canadian buyer's usual choice — a step-up in basis, a clean start, the price allocated on Form 8594 — while a stock purchase inherits the seller's history (including Florida sales tax liabilities).
• Entity: a U.S. C corporation owned directly (dividends at 15 percent withholding, taxed in Canada with a credit) or through a Canadian holding company (exempt surplus, 5 percent withholding, deferral); a U.S. LLC only with a corporate election; no S corporation while the owner is a nonresident alien.
• A Canadian who moves to Florida and severs Canadian ties becomes a U.S. resident — then the S election is available and the profits are taxed once, in the United States (plus the Canadian departure tax on leaving).
• The foreign-owned U.S. corporation files Form 5472 every year; the Florida registrations (annual report, sales tax, reemployment, local business tax, tangible personal property) apply to any entity.
• A Canadian who keeps Canadian residency is taxed in Canada on the profits — the structure has to make the credit or the exempt surplus work.

The Canadian buyer's Florida business file

Visa: E-2 requirements; investment documentation. Purchase: asset or stock; Form 8594 allocation; franchise transfer if applicable; successor liability review. Entity: C corporation (direct or through a Canadian holding company); LLC only with an election; S only after U.S. residency. Residency plan: U.S. days; Canadian ties severed or kept; departure tax. U.S. filings: 1120, Form 5472, payroll, owner's return. Florida: annual report, sales tax, reemployment, local business tax, tangible personal property. Canada: T1134; dividends; foreign tax credits. The entity and the residency plan decide how many times the profits are taxed.

Worked example

A Calgary couple buys a Fort Myers pool service company for US$540,000 as the investment for an E-2 visa: an asset purchase (US$180,000 to trucks and equipment, US$20,000 to inventory, US$340,000 to customer routes and goodwill — the Form 8594 allocation negotiated with the seller), made by a new Florida C corporation owned by the couple (not an LLC — the broker's suggestion was declined after the desks explained the hybrid problem); the corporation files Form 5472 as a foreign-owned corporation, registers for sales tax (the pool chemicals it sells) and reemployment tax (four technicians), and pays Florida corporate tax on its income above the exemption. Year one: the husband works the business on his E-2 (a U.S.-source salary through the corporation's payroll); the couple are still Canadian residents (their house in Calgary, their children in university there) — the corporation's profits stay in it, the salary is taxed in the United States with a foreign tax credit in Canada. Year three: the couple sell the Calgary house and move to Florida permanently — U.S. residents under the substantial presence test, non-residents of Canada after severing their ties (the departure tax's deemed disposition of their investments — including their shares of the Florida corporation, taxed on the growth since the purchase; their RRSPs left under the treaty's deferral); the corporation elects S status for the following year (both shareholders now resident aliens), and from then on the pool company's profits are taxed once, on their U.S. returns, with no Florida personal income tax. A Toronto buyer of a similar business through a Florida LLC paid tax in both countries on the same profits for two years before unwinding it.

Official sources

The IRS explains: “Corporations file Form 5472 to provide information required under sections 6038A and 6038C when reportable transactions occur with a foreign or domestic related party.” — Internal Revenue Service, About Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, https://www.irs.gov/forms-pubs/about-form-5472

The IRS explains: “You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year.” — Internal Revenue Service, Substantial presence test, https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

Practitioner note

A Canadian buying a Florida business makes the visa, the entity, and the residency decisions together, and the entity an American broker suggests — the LLC — is usually the wrong one for a Canadian owner. Our desks structure the purchase as an asset deal with the Form 8594 allocation negotiated, place it in a U.S. C corporation owned directly or through a Canadian holding company while the buyer is a Canadian resident, file the Form 5472 the foreign-owned corporation owes every year, and plan the S election for the year the owner becomes a U.S. resident — because that election is what turns two countries' tax on the profits into one.

See also: For related guidance, see structuring an E-2 business as an LLC or a C corporation and the best U.S. entity for a Canadian owner; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle Canadian purchases of Florida businesses — E-2 investment structuring coordination, asset versus stock purchase analysis, Form 8594 allocations, cross-border entity selection and holding company structures, Form 5472 compliance, residency transition and departure planning, S election timing after U.S. residency, and Florida registrations. See pricing or book a call.