When Your Canadian Corporation Becomes a CFC: Form 5471, Subpart F, GILTI, and the High-Tax Exception

Short version: What Is a Controlled Foreign Corporation (CFC)?

A US citizen or green card holder who owns a Canadian corporation is a US shareholder of a foreign corporation, and if US persons own more than half of it, the corporation is a controlled foreign corporation. The consequences are annual: a Form 5471 with its schedules, a possible Subpart F inclusion of the corporation's passive income, and a possible inclusion of the corporation's active income under the GILTI regime (renamed net CFC tested income for years beginning after 2025). Canada's relatively high corporate tax rate means the high-tax exception often eliminates the inclusion, but the filing obligation remains and the penalty for missing it starts at $10,000.

Key takeaways

• A foreign corporation is a CFC if US shareholders (US persons owning 10% or more by vote or value) together own more than 50% by vote or value on any day of the year. Attribution rules count shares owned by family members and related entities.
• Every US shareholder of a CFC files Form 5471 annually. The penalty for a missed form is $10,000 per form per year, and the statute of limitations on the shareholder's entire return stays open until it is filed.
• Subpart F taxes the CFC's passive income (interest, dividends, rents, royalties, certain gains) to the US shareholder as earned, whether or not distributed.
• The GILTI regime (net CFC tested income after 2025) taxes the CFC's remaining active income to the shareholder as earned, with a 40% deduction and a 90% foreign tax credit under the post-2025 rules for corporate shareholders and individuals who make the section 962 election.
• The high-tax exception excludes income taxed by the foreign country at more than 90% of the US corporate rate (18.9%). Canadian corporate rates on active business income above the small business limit exceed it; income taxed at the small business rate does not.

Becoming a CFC

The typical path is a Canadian who owns a professional or holding corporation and becomes a US person (a green card, a move that meets the substantial presence test, or discovering long-standing US citizenship). The corporation loses CCPC status for Canadian purposes when its controlling shareholder ceases to be a Canadian resident, and it becomes a CFC for US purposes the same day.

Attribution matters: a US citizen who owns 40% and whose Canadian spouse owns 60% is treated as owning 100% for the CFC test in many configurations, and files Form 5471 accordingly.

Form 5471

The form has filer categories that determine which schedules apply; a US shareholder of a CFC typically files as a Category 4 and 5 filer with Schedules A through R, including the income statement and balance sheet in the corporation's functional currency and translated to US dollars, earnings and profits, Subpart F and tested income computations, and related-party transactions. The IRS's penalty regime is automatic on late filing, and abatement requires reasonable cause.

Subpart F

Passive income earned by the CFC (foreign personal holding company income: interest, dividends, rents, royalties, gains on passive assets) is included in the US shareholder's income in the year earned, at ordinary rates. A Canadian holding company with an investment portfolio produces Subpart F income every year. The high-tax exception applies if the Canadian tax on the passive income exceeds 18.9%; Canadian investment income in a corporation is taxed at about 50% (refundable in part on distribution), so the exception is often available, but the refundable portion complicates the calculation.

GILTI, now net CFC tested income

The corporation's active business income (tested income) is included in the shareholder's income. Corporate shareholders and individuals who make the section 962 election get a 40% deduction under the post-2025 rules (previously 50%) and a foreign tax credit for 90% of the Canadian tax (previously 80%). Without the election, an individual includes tested income at ordinary rates with no deduction and no indirect credit.

The high-tax exception, elected annually, excludes tested income taxed by Canada at more than 18.9%. Canadian active business income taxed at the general rate (about 26.5% combined) qualifies; income taxed at the small business rate (about 12% or less) does not. A Canadian corporation that has lost CCPC status no longer gets the small business rate, so its income is taxed at the general rate and generally qualifies for the exception.

The exit

Many US citizens with Canadian corporations wind them up before or shortly after becoming US persons. A liquidation while the shareholder is still a Canadian resident allows the capital dividend account to be paid tax-free and the remaining surplus to be taxed as a Canadian dividend. After the shareholder is a US person, the liquidation is taxable in the US under section 331 as a sale of the shares, and the CDA has no US equivalent. The wind-up decision belongs on the Canadian departure checklist, before the residency date.

Worked example

A Toronto dentist with a professional corporation holding $600,000 of retained investments moves to Florida and becomes a US resident.

• CFC. The corporation is a CFC from the residency start date. Form 5471 annually.
• Subpart F. Investment income of $24,000 a year is Subpart F income; Canadian tax at about 50% exceeds 18.9%, so the high-tax exception can apply on election.
• Tested income. Practice income ended on departure; no tested income.
• Better path. Wind up the corporation before departure: pay the CDA tax-free, take the balance as a Canadian dividend taxed once, arrive in Florida with no CFC.

Official sources

"Certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations file Form 5471 and schedules to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations." — Internal Revenue Service, About Form 5471, https://www.irs.gov/forms-pubs/about-form-5471

"A CFC is a foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively, within the meaning of section 958(a) and (b)) on any day of the tax year of the foreign corporation, more than 50% of: (1) The total combined voting power of all classes of its voting stock, or (2) The total value of the stock of the corporation." — Internal Revenue Service, Instructions for Form 5471, https://www.irs.gov/instructions/i5471

Practitioner note

The high-tax exception saves most Canadian corporations from a US inclusion, but it does not save the shareholder from Form 5471, and the form is the expensive part: several thousand dollars a year in preparation and $10,000 a year in penalties if missed. The cleanest answer for most clients is to not own a Canadian corporation as a US person, which means winding it up before the residency date.

See also: Planning a move? See the Canada-to-Florida guide and browse every corridor by city, province, and state.

Next step

Fairlight prepares the Form 5471 filings, the Subpart F and tested income computations with the high-tax exception election, and the pre-departure corporate wind-up analysis. See cross-border pricing or book a call.