The Section 962 Election for a US Citizen Who Owns a Canadian Corporation: Corporate Rates on GILTI, and the Dividend Catch Later

Short version: Section 962 Election Explained: Corporate Rates for You

Section 962 exists because the tested-income regime was written for corporate shareholders and then applied to individuals, and the mismatch is severe: an individual US shareholder includes the Canadian corporation's tested income at rates up to 37%, gets no deduction for it, and cannot credit the Canadian corporate tax the corporation paid, because indirect credits belong to corporate shareholders. The election changes the shareholder's status for the inclusion year only — the individual computes tax on their Subpart F and tested-income inclusions as if they were a domestic corporation receiving them: the 21% corporate rate applies; the deduction the statute grants corporate shareholders against tested-income inclusions applies (historically 50%, reduced by the 2025 legislation for tax years beginning after 2025 — the tested-income regime's rename and revised percentages are covered separately); and the deemed-paid foreign tax credit for the Canadian corporation's taxes attributable to the inclusion becomes available, at the statutory percentage (80% under prior law, 90% under the revised rules). The arithmetic for a Canadian small-business-rate corporation: tested income taxed in Canada around 11-12% (the small-business rate, which fails the high-tax exclusion) enters the individual's return; without the election, US tax at the marginal rate — say 32-37% — with no credit for the Canadian corporate tax; with the election, 21% on the inclusion after the deduction (an effective rate in the low teens), less the creditable portion of the Canadian tax, which often reduces the current US tax to a small amount or zero. The catch: earnings taxed under a 962 election are not treated as previously-taxed income in the ordinary way when distributed — when the corporation later pays the dividend, the individual includes it as a dividend to the extent it exceeds the US tax actually paid under the election (the election's tax is credited against the distribution, not the full inclusion), so the dividend is taxed a second time at dividend rates — for a Canadian corporation that qualifies for treaty-country treatment, generally the qualified-dividend rate (15-20%) plus the net investment income tax where applicable, with a foreign tax credit for Canadian withholding on the dividend. The all-in result over the cycle (inclusion year plus distribution year) is therefore corporate-style two-tier taxation: a low first tier under the election, a second tier at qualified-dividend rates on distribution — which, for most Canadian small corporations, beats the no-election alternative of a high first tier and a second tier anyway (because the non-electing individual's inclusion does create previously-taxed income, but only after paying 32-37% on it up front). Who should elect: the shareholder whose corporation earns tested income taxed below the high-tax threshold (small-business-rate corporations — the bulk of the corridor), who intends to retain earnings in the corporation rather than distribute annually, and whose marginal US rate exceeds the effective rate the election produces; who shouldn't: the shareholder who distributes everything each year (the second tier arrives immediately, and the salary-versus-dividend planning in the compensation guide may dominate), the shareholder whose corporation's income already passes the high-tax exclusion at general corporate rates (nothing to elect on), and the shareholder in a low US bracket where individual rates already approximate the election's result. Mechanics: the election is made annually on the return (a statement attached, the computation on the relevant forms — Form 1118 for the deemed-paid credit as if a corporation, the 962 tax computed separately), it can be made or not made year by year, and its record-keeping is the hard part: the electing shareholder tracks, for each year, the inclusion, the 962 tax paid, and the resulting "excess distribution" amount that will be taxed on later distribution — a ledger that runs as long as the corporation has earnings. State returns generally do not recognize the election, taxing the inclusion at state rates without the deduction or credit — a layer for anyone with a state residency. The Canadian side is indifferent: the election is a US computation; Canada taxes the corporation and the dividend on its own rules, with the treaty limiting withholding on the eventual dividend.

Key takeaways

• The mismatch the election fixes: individuals include tested income at up to 37% with no deduction and no credit for the corporation's Canadian tax; the election taxes the inclusion as if received by a corporation — 21% rate, the corporate deduction, and the deemed-paid credit.
• The arithmetic for small-business-rate corporations: Canadian tax at 11-12% fails the high-tax exclusion; the election brings the US first-tier tax to a low-teens effective rate before the credit, often reducing current US tax to little or nothing.
• The catch is the second tier: distributions of 962-taxed earnings are taxed again as dividends (generally at qualified rates for a treaty-country corporation, plus NIIT) to the extent they exceed the 962 tax paid — two-tier taxation by design, and usually still cheaper than the no-election path.
• Who elects: shareholders retaining earnings, in higher US brackets, with corporations below the high-tax threshold; who doesn't: annual full distributors, general-rate corporations that already pass the exclusion, and low-bracket shareholders.
• Annual, revocable, ledger-heavy: elected year by year on the return, with a permanent ledger of inclusions, 962 tax paid, and excess-distribution amounts that governs every future dividend.
• States mostly ignore it: state returns tax the inclusion without the election's benefits — model the state layer for anyone with a state residency.

Modeling the decision each year

Inputs: the corporation's tested income (after Subpart F is carved out), its Canadian effective rate, your US marginal rate, your distribution plans, and your state. Path A (no election): inclusion at marginal rate, no credit, previously-taxed income created for later. Path B (election): 21% on the inclusion after the corporate deduction, less the creditable percentage of Canadian tax, plus the future second-tier dividend tax on the excess-distribution amount when distributed. Compare over your realistic distribution horizon, in present-value terms. For most retained-earnings corporations at small-business rates, Path B wins clearly; for annual distributors and general-rate corporations, the model says so — which is the point of running it.

Worked example

A dual citizen in Calgary owns an engineering corporation with C$250,000 of tested income (small-business rate, about 11%) and pays himself a modest salary, retaining the rest. Without the election: the inclusion (about US$180,000) lands at his 32% US marginal rate — roughly US$58,000 of US tax, no credit for the corporation's C$27,500 of Canadian tax, and previously-taxed income for later. With the election: 21% on the inclusion after the corporate deduction — roughly US$19,000 before credit — reduced by the creditable percentage of the Canadian corporate tax (about US$18,000 at the applicable percentage): current US tax near US$1,000. The ledger records the inclusion, the US$1,000 paid, and the excess-distribution amount that will be taxed as a qualified dividend when distributed — at 15-20% plus NIIT, with a credit for the treaty-rate Canadian withholding, years from now if his retention plan holds. Ten-year present value of Path B against Path A: a five-figure annual saving compounding, the second tier acknowledged and still cheaper than the first tier he'd otherwise pay now. His state check: none — Alberta has no US state to tax the inclusion. The election is a two-page attachment each year; the ledger is the document his eventual retirement distributions will be computed from, which is why it starts in year one and never stops.

Official sources

"In general, 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

"U.S. shareholders of controlled foreign corporations" use Form 8992 to "figure their global intangible low-taxed income inclusions under section 951A and its related regulations." — Internal Revenue Service, About Form 8992, https://www.irs.gov/forms-pubs/about-form-8992

Practitioner note

Section 962 is the election most individual owners of Canadian corporations should be making and most are not, because their US preparer has never had a client with a Canadian small-business corporation. Our annual model runs both paths over the client's actual distribution horizon, makes the election where it wins (usually), and — the part that decides whether it holds up — keeps the year-by-year ledger of inclusions, 962 tax paid, and excess-distribution amounts that every future dividend will be measured against.

See also: Browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the section 962 engagement — the annual two-path model against the distribution horizon, the election statement and as-if-corporate computation with the deemed-paid credit, the permanent 962 ledger, and the state-layer analysis where relevant. See cross-border pricing or book a call.