Moving a Business From Canada to Florida: The Corporate Departure Tax, Continuance, the New U.S. Company, and the Owner's Own Emigration

Short version: Moving Your Business Entity to Florida After a Move

A Canadian business owner who moves to Florida faces two departures at once — their own and the corporation's — and the corporation's is the harder one. The four routes. Route one — continue the corporation out of Canada: corporate statutes allow a Canadian corporation to "continue" into another jurisdiction (an export continuance under the corporate statute — CBCA section 188 or OBCA section 181, with shareholder approval and the Director's authorization — into a U.S. state that accepts it; Delaware (DGCL section 388) and Florida (Fla. Stat. ss. 607.11920–607.11924) both let a foreign corporation domesticate), becoming a U.S. corporation under state law; for Canadian tax, the corporation ceases to be resident in Canada and is deemed to dispose of all its property at fair market value immediately before (section 128.1 — the corporate emigration rules — the CRA's page), realizing its unrealized gains (goodwill, appreciated real estate, investments), and pays the corporate departure tax — an additional 25 percent "branch-tax-like" tax (section 219.1 — reduced to 5 percent by the treaty for a corporation continuing to the United States — section 219.3 substitutes the treaty's rate on dividends from a wholly-owned Canadian subsidiary to its parent, 5 percent under Article X(2)(a), unless a main reason for the move was to reduce the tax) on its net surplus (the fair market value of its property less its liabilities and the paid-up capital of its shares) — effectively taxing the retained earnings as if distributed; for U.S. tax, the domesticated corporation is a U.S. corporation going forward, with a basis question (the U.S. rules on inbound reorganizations — the corporation's assets keep their historical basis in most cases, and the U.S. shareholders who are now U.S. residents may have an inclusion — the domestication is an F reorganization (section 368(a)(1)(F)), and under the section 367(b) regulations (Treas. Reg. §1.367(b)-3) a shareholder who is a U.S. person at the time and owns 10 percent or more includes the "all earnings and profits amount" attributable to their shares as a deemed dividend, while a smaller U.S. shareholder with shares worth US$50,000 or more recognizes any gain or elects the inclusion; a shareholder not yet a U.S. person has no inclusion); this route is expensive for a corporation with large retained earnings or goodwill, and rarely chosen for a small business with a large surplus. Route two — sell the assets to a new U.S. company: the owner forms a Florida corporation (or an LLC once a U.S. resident — the S corporation vs LLC guide) and the Canadian corporation sells it the business's assets (equipment, inventory, customer relationships, the brand) at fair market value — the Canadian corporation realizes its gains in Canada (taxed at the corporate rates — the goodwill's gain partly as a capital gain), the U.S. company gets a stepped-up basis in what it bought (amortizing the goodwill over fifteen years — the section 197 guide), and the Canadian corporation is left holding the sale proceeds and its retained earnings — to be distributed to the owner (a dividend — taxed in Canada as a non-resident's dividend at the Part XIII rate, 15 percent under the treaty once the owner is a U.S. resident — the NR301 guide; and in the United States as a dividend, with the Canadian withholding as a foreign tax credit) or wound up (route four); the transfer pricing on the sale to a related U.S. company must be arm's length (both countries can challenge it). Route three — keep the Canadian corporation: the owner moves; the corporation stays a Canadian resident (a corporation incorporated in Canada after April 26, 1965 is deemed resident regardless of where it's managed — paragraph 250(4)(a); managing it from Florida doesn't make it a U.S. resident, because the United States looks to the place of incorporation, and the treaty's tie-breaker for a dual-resident company does the same — Article IV(3)); the Canadian corporation keeps operating (employees and customers in Canada), and the owner — now a U.S. resident — owns a controlled foreign corporation: Form 5471 every year, net CFC tested income (GILTI's successor under P.L. 119-21) on its active income and subpart F on its passive income (the U.S. citizen owning a Canadian corporation guide — the same regime applies to a U.S. resident alien), with the section 962 election as the planning lever; its dividends to the owner carry 15 percent Canadian withholding (treaty) and are U.S. dividends to the owner; the corporation loses its CCPC status if it becomes controlled by a non-resident (the small business deduction lost — the subsection 125(7) definition excludes a corporation controlled, directly or indirectly in any manner whatever, by non-residents, and the change of status triggers a deemed year-end under subsection 249(3.1)), so its active income is taxed at the general rate (about 26 to 27 percent); the owner's management of the Canadian corporation from Florida raises the corporation's U.S. permanent establishment question if the owner concludes contracts or the Florida home becomes a fixed place of the corporation's business (the Canadian employer with U.S. employees guide's home office point). Route four — wind it up: the Canadian corporation sells its assets (to the new U.S. company or to a third party) and distributes everything to the owner in liquidation — the liquidating distribution is a deemed dividend to the extent it exceeds the shares' paid-up capital (taxed in Canada at the resident or non-resident rate depending on timing — winding up before the owner leaves Canada taxes it as a Canadian resident's dividend at the graduated rates with the dividend tax credit; after, at the 15 percent treaty rate on the non-resident — the timing decision that can matter by six figures — and winding up after departure stacks the Part XIII tax on top of the departure tax already paid on the shares, whose value is that same surplus; the resulting loss on the shares can be carried back against the departure gain only if they are taxable Canadian property — subsection 128.1(8) — so a company holding cash and investments leaves the surplus taxed twice); the U.S. treatment of a liquidation received after the owner becomes a U.S. resident is an exchange, not a dividend — a distribution in complete liquidation is treated as payment for the stock (section 331), a capital gain or loss measured from the owner's U.S. basis (the basis question below), even though Canada taxes the same distribution as a deemed dividend. The owner's own departure tax: the owner ceasing Canadian residency is deemed to dispose of their property at fair market value (the NR73 guide) — including the shares of their Canadian corporation (a capital gain on the shares' appreciation, with the lifetime capital gains exemption available for qualified small business corporation shares if the conditions are met at the time — the exemption is C$1.25 million for dispositions after June 24, 2024, indexed to C$1,275,000 for 2026; the company must be a CCPC with 90 percent or more of its asset value in active business assets at the departure date and more than 50 percent throughout the preceding 24 months, and the shares held by the owner or a related person for those 24 months — a valuable planning tool for the departure), unless they elect to defer the tax with security; the departure tax on the shares and the corporation's own taxes on its route interact (the share value reflects the corporation's surplus, which the corporate departure tax or the dividend will tax again — the double-tax risk that planning avoids — and the planning has to happen before departure, because the pipeline techniques Canadian estates use after a death are largely closed to a non-resident: section 212.1 treats a non-resident's sale of shares to a related Canadian corporation as a dividend to the extent the payment exceeds paid-up capital); the U.S. basis in the shares: the United States doesn't automatically step up the shares' basis to the departure value — the treaty's Article XIII(7) election (the ACB guide) aligns the bases so the gain Canada taxed isn't taxed again by the United States. The choice in practice: a service business whose value is the owner (consulting, professional services) often uses route two or four — sell or distribute, start fresh in Florida; a business with Canadian operations and employees that will continue uses route three (keep the Canadian corporation, accept the CFC regime and the general rate) or route two for the U.S.-facing part only; route one is chosen rarely, for a corporation with little surplus or with a U.S.-focused business. The bookkeeping: valuations of the corporation's assets and shares at the departure date; the corporate and personal departure computations; the sale agreements and their transfer pricing; the liquidation's paid-up capital and deemed dividend computation; the Article XIII(7) election on the first U.S. return; Form 5471 if the Canadian corporation is kept. The errors: the owner moving first and planning later (the liquidation's dividend taxed at the wrong rate, the capital gains exemption missed); continuance chosen without computing the corporate departure tax on the surplus; the Canadian corporation kept without anyone noticing it lost its CCPC status; the U.S. side's CFC filings never started; and the Article XIII(7) election missed (the departure gain taxed twice).

Key takeaways

• A Canadian corporation can't simply move: continuing it out of Canada deems a disposition of all its property and adds a corporate departure tax on its surplus (5 percent under the treaty for a continuance to the United States).
• Selling the business's assets to a new U.S. company realizes the gains in Canada, gives the U.S. company a stepped-up basis, and leaves the Canadian corporation with cash to distribute or wind up.
• Keeping the Canadian corporation makes the U.S.-resident owner a controlled foreign corporation shareholder (Form 5471, net CFC tested income — formerly GILTI — subpart F, the section 962 election) and costs the corporation its CCPC status and small business rate.
• Winding up before or after the owner leaves changes the dividend's rate — Canadian resident graduated rates with the dividend tax credit, or the 15 percent treaty rate on a non-resident.
• The owner's own departure tax reaches the corporation's shares — the lifetime capital gains exemption may shelter qualifying shares, and the Article XIII(7) election keeps the United States from taxing the same gain again.
• Plan before the move — the timing of the owner's departure, the corporation's route, and the distribution decides how many times the surplus is taxed.

The business owner's Canada-to-Florida move file

Valuations at the departure date (assets and shares). Route: continuance (corporate deemed disposition and departure tax), asset sale to a U.S. company (arm's-length price), keep (CFC regime; CCPC status lost), or wind up (deemed dividend; timing). Owner: departure tax on shares; lifetime capital gains exemption; deferral election and security; Article XIII(7) election on the first U.S. return. U.S. side: new entity; Form 5471 if the Canadian corporation is kept. The sequencing — which happens first — is the plan.

Worked example

A Toronto marketing consultant, sole shareholder of a CCPC with C$1.4 million of retained earnings (cash and investments) and goodwill tied to her personally, moves to Miami. The desks model four routes. Continuance: the corporation's deemed disposition and the corporate departure tax on its C$1.4 million surplus — expensive for a business that is essentially her. Keeping the corporation: a CFC with mostly passive income (the investments — subpart F) and no CCPC status — a poor fit. The plan chosen: before her departure date, the corporation pays her a large dividend while she is still a Canadian resident (taxed at Ontario's non-eligible dividend rates with the dividend tax credit — the dividend tax credit guide), using the lifetime capital gains exemption's analysis on her shares (the corporation's cash and investments fail the 90 percent active-asset test at the departure date and the 50 percent test over the prior 24 months, so the exemption isn't available — and a dividend now, with the corporation's dividend refund on its investment-income tax, costs less than leaving the surplus in the shares to be taxed by the departure tax and again on a later wind-up); the corporation is wound up after the remaining assets are distributed; her departure tax on the shares is small because the shares' value has been distributed; she forms a Florida LLC for her consulting (a disregarded entity — she is now a U.S. resident and the LLC's income is her own, with no Florida income tax) and her clients sign new contracts with it. A colleague who moved first and wound up her corporation a year later paid departure tax on shares whose value was the undistributed surplus, then the 25 percent Part XIII rate on the liquidation dividend (her NR301 not yet given to the corporation — the extra 10 points recoverable only by a refund claim) — the same surplus taxed twice in Canada — and then U.S. tax on the liquidation too, with only a partial credit.

Official sources

The CRA states: “There is a 25% departure tax liability under section 219.1 that applies for the tax year considered to have ended because the corporation emigrated from Canada to take up residence in a new jurisdiction.” — Canada Revenue Agency, Residency of a corporation, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/businesses-international-non-resident-taxes/residency-a-corporation.html

Publication 597 explains: “This publication provides information on the income tax treaty between the United States and Canada. It discusses a number of treaty provisions that most often apply to U.S. citizens or residents who may be liable for Canadian tax.” — Internal Revenue Service, Publication 597 (10/2015), Information on the United States–Canada Income Tax Treaty, https://www.irs.gov/publications/p597

Practitioner note

A Canadian corporation can't move to Florida the way its owner can — continuing it out of Canada deems a sale of everything it owns and taxes its surplus on the way out, and keeping it makes its U.S.-resident owner a controlled foreign corporation shareholder with a company that has just lost its small business rate. Our desks model the four routes — continue, sell the assets to a new U.S. company, keep, or wind up — together with the owner's own departure tax and the lifetime capital gains exemption, and set the sequence before the moving truck is booked, because the same surplus can be taxed once or three times depending on which happens first.

See also: For related guidance, see what triggers the Canadian departure tax and a Canadian corporation after its owner moves to the U.S.; 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 business emigration planning — corporate continuance and section 219.1 departure tax analysis, asset sales to new U.S. entities with arm's-length pricing, retained Canadian corporations under the CFC regime, wind-ups and deemed dividend timing, owner departure tax with lifetime capital gains exemption review, Article XIII(7) elections, and new Florida entity setup. See pricing or book a call.