My US LLC Is Now on Airbnb. What Changed for Canadian Tax? Everything, Because Canada Thinks the LLC Is a Corporation

On the US side, a single-member LLC owned by a Canadian is invisible: the rent is the owner's, the 1040-NR reports it, the section 871(d) election applies. On the Canadian side, the same LLC is a corporation, a non-resident corporation controlled by a Canadian resident, which makes it a controlled foreign affiliate, and its rental income is foreign accrual property income taxed to the Canadian owner in the year earned. The US tax the owner paid personally on the 1040-NR may or may not count as the affiliate's foreign accrual tax. The LLC also brought a new US filing (Form 5472 with a pro forma 1120), and the platform now sees a US entity and asks for a W-9. Here is what changed, and what to do.

Key takeaways

• US: a single-member LLC is disregarded; the rent is reported on the owner's 1040-NR under the 871(d) election as before; the platform, seeing a US LLC, requests Form W-9 with the LLC's EIN and issues a Form 1099-K instead of a 1042-S (and does not withhold 30%). The foreign-owned disregarded LLC must file Form 5472 with a pro forma Form 1120 annually; the penalty for missing it is $25,000.
• Canada: the LLC is a corporation for Canadian purposes. The owner's Canadian return does not report the LLC's rent as rental income; instead, the LLC is a controlled foreign affiliate, the rent is FAPI, and the owner includes the FAPI in income annually (grossed up), with a deduction for foreign accrual tax (FAT). Whether the US tax the owner paid personally counts as FAT is a technical question the CRA has addressed, and the answer depends on the facts; the CRA's general position is that tax paid by the member rather than by the LLC itself does not qualify, so without FAT the FAPI is taxed in Canada with no credit.
• Form T1134 is required annually for the foreign affiliate (with exemptions for small affiliates under $100,000 of cost).
• Distributions: when the LLC pays cash to the owner, Canada treats it as a dividend from a foreign corporation, taxed without the dividend tax credit, but to the extent the income was already included as FAPI, the dividend is paid from taxable surplus and is deductible (no double Canadian tax on the same income); the tracking is the surplus account computation.
• Sale: the LLC's gain on the property is FAPI (or a capital gain for Canadian purposes) with the same problems; a sale of the LLC interest is a sale of shares of a foreign corporation.
• Unwinding: distribute the property from the LLC to the owner (a US non-event for a disregarded entity; a Canadian deemed dividend and disposition at fair market value), or have a Canadian corporation acquire the LLC, or sell the property and dissolve. Each has a cost; doing nothing has an annual cost.

The US side

The LLC changed the platform paperwork and added a form. Because the LLC is a US entity with an EIN, the platform treats it as a US payee: Form W-9, no chapter 3 withholding, and a Form 1099-K reporting gross payouts (above the reporting threshold). The owner still files a 1040-NR reporting the rent under the 871(d) election (the LLC is disregarded, so the income is the owner's), with the 1099-K as the income source.

The new form is Form 5472. Since 2017, a US disregarded entity wholly owned by a foreign person is treated as a corporation for section 6038A reporting: it must obtain an EIN, file a pro forma Form 1120 with Form 5472 attached by the corporate due date (April 15, extendable), and report reportable transactions with its foreign owner (contributions, distributions, loans, expense payments). The penalty for failure is $25,000 per year. Many Canadians with an LLC have never filed it.

The Canadian side

Classification. Canada classifies a US LLC as a corporation because it has separate legal personality and limited liability. The owner's Canadian return therefore does not show the rent on a T776. The LLC is a foreign affiliate (the owner holds at least 1% and Canadian residents hold at least 10%) and a controlled foreign affiliate (the owner controls it).

FAPI. A controlled foreign affiliate's income from property (rent is income from property unless the affiliate has more than five full-time employees in the business) is FAPI. The owner includes their share of the FAPI in income in the year the affiliate earns it, computed under Canadian rules (Canadian CCA, not US depreciation), grossed up, and deducts foreign accrual tax multiplied by the relevant tax factor (roughly 4 for individuals). Foreign accrual tax is income tax paid by the affiliate on the FAPI. A disregarded LLC pays no US tax; its owner does, on the 1040-NR. The CRA has addressed this question and the answer depends on the facts: because the US tax on the LLC's income is generally paid by the member rather than by the LLC itself, the CRA's position is that it usually does not qualify as foreign accrual tax, with only narrow fact-specific exceptions; the analysis is technical and the documentation matters.

Distributions. A distribution from the LLC is a dividend from a foreign affiliate. To the extent it is paid from taxable surplus that was already included as FAPI, the owner deducts it (section 91(5)); the surplus accounts must be computed. Distributions in excess of surplus are taxable dividends without the Canadian dividend tax credit.

T1134. The owner files Form T1134 annually reporting the foreign affiliate, within 10 months of year-end, with penalties of $25 a day for late filing. A dormant or small affiliate (total cost under $100,000, no FAPI) is exempt from the full form; an LLC earning rent is not.

Sale. A sale of the property by the LLC produces a gain that is FAPI (income from property) or a capital gain of the affiliate; a sale of the LLC interest is a disposition of shares of a foreign corporation. Either way the Canadian result is computed under Canadian rules with the surplus accounts.

Unwinding

Distribute the property. The LLC transfers the condo to the owner. US: a non-event (disregarded entity); the owner's basis carries over; Form 5472 reports the distribution. Canada: the affiliate is deemed to dispose of the property at fair market value (FAPI on any gain), and the distribution is a dividend from the affiliate (deductible to the extent of surplus). The property is then held personally, with the ordinary T776 and 871(d) treatment going forward. Florida documentary stamp tax applies to the deed transfer unless an exemption applies.

Interpose a Canadian corporation. A Canadian corporation acquires the LLC interest; the FAPI rules then apply to the corporation (taxed at corporate rates with the FAT deduction); the owner is one step removed. Adds a corporation; rarely worth it for a single property.

Sell and dissolve. If the property is to be sold anyway, sell it from the LLC, distribute the proceeds, dissolve the LLC, and file the final Form 5472 and pro forma 1120.

Do nothing. Annual FAPI inclusion (possibly without a full FAT deduction), T1134, Form 5472, and the surplus tracking. The cost compounds.

Worked example

A Vancouver couple hold a Scottsdale condo in an Arizona LLC (formed on a US lawyer's advice) and list it on Airbnb. Gross rent $50,000; US net after depreciation $12,000; US tax on the 1040-NR $1,200; Arizona tax $300.

• US. W-9 to Airbnb with the LLC's EIN; 1099-K; 1040-NR with 871(d) reporting the rent; Arizona non-resident return; Form 5472 with pro forma 1120 by April 15 (never filed: three years of $25,000 exposure; reasonable-cause filing now).
• Canada. The LLC is a controlled foreign affiliate; FAPI computed under Canadian rules (no US depreciation; optional CCA): about $22,000 CAD; included in the couple's income; FAT deduction for the $1,500 USD of US tax if it qualifies (about $8,000 CAD of deduction after the factor); net inclusion about $14,000 CAD taxed at BC rates. T1134 annually. Distributions from the LLC tracked against taxable surplus.
• Unwind. Deed the condo from the LLC to the couple (Arizona has no transfer tax); the LLC's deemed disposition produces FAPI on the accrued gain; the distribution is from surplus. Dissolve the LLC; final Form 5472. Going forward: T776, 871(d), no T1134.

Official sources

"A separate supplement must be filed for each foreign affiliate (non-resident corporation or non-resident trust) of the taxpayer or partnership" that is a controlled or non-controlled foreign affiliate. — Canada Revenue Agency, Foreign affiliates and foreign accrual property income, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/information-returns-relating-foreign-affiliates.html

"For purposes of these instructions, a foreign-owned U.S. DE is treated as an entity separate from its owner and classified as a corporation for the limited purposes of the requirements under section 6038A that apply to 25% foreign-owned domestic corporations." — Internal Revenue Service, Instructions for Form 5472, https://www.irs.gov/instructions/i5472

"If an NRA owns or holds in interest in real property located in the U.S. and holds the property for the production of income, then the NRA can elect under Internal Revenue Code (IRC) 871(d) to treat all income from U.S. real property as effectively connected income with the conduct of a trade or business in the U.S." — Internal Revenue Service, Nonresident Aliens — Real Property Located in the U.S., https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-real-property-located-in-the-us

Practitioner note

The LLC did not change the US tax; it changed the Canadian tax and added a $25,000-a-year US form. FAPI without a clean FAT deduction is the expensive part, and the T1134 and the surplus accounts are the compliance. For a single rental owned by a Canadian resident, we unwind the LLC in almost every case and hold the property personally, in a Florida revocable trust if probate is the concern.

See also: For the full sequence of a Canadian move to Florida, see the Canada-to-Florida tax guide, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the FAPI and foreign affiliate analysis for the LLC, the delinquent Form 5472 filings, the T1134, and the plan to unwind the structure. See cross-border pricing or book a call.