GILTI and Subpart F: U.S. Shareholders of a Canadian Corporation

Owning a Canadian corporation is normal and tax-efficient for most Canadians. For a U.S. citizen or U.S. tax resident who holds the shares, however, that same company is viewed very differently by the Internal Revenue Service. Under the U.S. controlled-foreign-corporation (CFC) rules, certain categories of the corporation's income are taxed to the U.S. owner currently — in the year the company earns the money, not the year it is paid out. The result is a structure that works cleanly under Canadian law but can generate U.S. tax, U.S. reporting obligations, and a timing and character mismatch that leads to double taxation if it is not coordinated. This page explains how the rules work in both countries, how the Canada–U.S. tax treaty interacts with them, and the planning tools — principally the section 962 election and the high-tax exception — that U.S. shareholders most often consider.

Why this matters for U.S. owners of a Canadian corporation

The United States taxes its citizens and green-card holders on worldwide income regardless of where they live. When a U.S. person owns a foreign company, Congress was concerned that profits could be parked offshore indefinitely and never taxed. The CFC regime answers that concern by taxing some of the company's income to the U.S. shareholder before any dividend is declared. For a Canadian-controlled private corporation (CCPC) — the workhorse of Canadian small-business and professional planning — this is a significant issue, because the very deferral that makes a CCPC attractive on the Canadian side is what the U.S. rules are designed to claw back.

A corporation is a CFC if U.S. shareholders together own more than 50% of its vote or value. A U.S. shareholder for this purpose is a U.S. person who owns 10% or more of the vote or value. So a single U.S. citizen who owns a Canadian operating company outright, or a U.S. spouse holding a meaningful slice of a family company, will usually be caught. Once that threshold is crossed, two regimes can apply: Subpart F and the GILTI inclusion (renamed net CFC tested income, or NCTI, for tax years beginning after December 31, 2025).

The mechanics: Subpart F, GILTI/NCTI, and Form 5471

Subpart F income. Under section 951 of the Internal Revenue Code, a U.S. shareholder must include its pro-rata share of the CFC's Subpart F income in income each year. Subpart F income is defined in section 952 and centres on foreign base company income under section 954, which includes foreign personal holding company income — passive items such as dividends, interest, rents and royalties, and certain gains. For a Canadian holding company that earns investment income, or an operating company that accumulates a portfolio, Subpart F can pull that passive income onto the U.S. shareholder's return immediately, even though Canadian law lets it stay in the company.

GILTI / NCTI. The GILTI regime, enacted in 2017, sweeps in most of the CFC's remaining (largely active) earnings, called tested income. Through 2025, GILTI gave individuals a current inclusion of the CFC's tested income reduced by a deemed return on tangible assets (the QBAI, or qualified business asset investment, exclusion of roughly 10% of tangible asset basis). Beginning with tax years after December 31, 2025, the One Big Beautiful Bill Act (signed July 4, 2025) rebrands GILTI as NCTI and removes the QBAI tangible-return exclusion entirely — so more of the company's income is now subject to the inclusion than before.

The deduction and the rates. A domestic C corporation can claim a deduction under section 250 against its GILTI/NCTI. For 2025 that deduction was 50%, producing an effective U.S. corporate rate of about 10.5%; for tax years after 2025 the section 250 deduction drops to 40%, raising the effective C-corporation rate to roughly 12.6%. A C corporation is also treated as having paid a portion of the CFC's foreign income taxes under section 960 — the deemed-paid (indirect) foreign tax credit — which rose from 80% to 90% of attributable foreign taxes under the same legislation. The catch is that these benefits flow to corporate shareholders. An individual U.S. shareholder, by default, gets neither the section 250 deduction nor the indirect foreign tax credit, and is taxed at ordinary individual rates of up to 37% with no credit for the Canadian corporate tax the company already paid. That default treatment is the heart of the double-tax problem — and it is what the section 962 election is meant to fix.

Form 5471. Every U.S. shareholder of a CFC generally must file Form 5471 with their U.S. return, in one or more filing categories depending on ownership, control, and acquisitions or dispositions during the year. The penalties are severe and are assessed by entity, by year: a base penalty of US$10,000 per corporation per year for a late, incomplete, or inaccurate form, plus an additional US$10,000 for each 30-day period the failure continues after IRS notice (up to a further US$50,000), for a maximum of US$60,000 per corporation per year. Just as importantly, an unfiled or incomplete Form 5471 can keep the limitation period on the entire U.S. tax return open indefinitely, so a reporting slip can expose years that would otherwise be closed.

How the Canada–U.S. treaty interacts

The Canada–United States tax treaty allocates taxing rights and provides relief from double taxation, but it does not switch off the CFC rules. Two features matter most here. First, the treaty's residence article (Article IV) and business-profits article (Article VII) govern which country taxes the corporation's profits — Canada generally taxes the Canadian company's active business income at the corporate level. Second, the elimination-of-double-taxation article (Article XXIV) obliges each country to credit the other's tax. The friction is one of timing and taxpayer identity: Canada taxes the corporation when it earns the profit and the individual when a dividend is later paid, while the U.S. CFC rules tax the individual shareholder on the company's income up front. Because the U.S. inclusion and the Canadian personal tax can fall in different years and on a different legal person, the credits may not line up, and foreign tax credit limitation rules can leave a residual U.S. tax. The treaty's relief is real but it is not automatic alignment — making the credits actually meet requires deliberate planning, and the section 962 election is often what brings the foreign corporate tax into the picture for an individual.

The planning tools: section 962 election and the high-tax exception

The section 962 election. An individual U.S. shareholder can elect under section 962 to be taxed on Subpart F and GILTI/NCTI inclusions as though the shares were held through a domestic C corporation. The election does three things at once: it applies the 21% corporate rate instead of individual rates up to 37%; it unlocks the section 250 deduction; and it allows the indirect (deemed-paid) foreign tax credit for the Canadian corporate tax the company paid. For a CCPC paying meaningful Canadian corporate tax, that combination can reduce or eliminate the up-front U.S. tax on the inclusion. The trade-off arrives later: when the company actually distributes those earnings, the distribution is generally taxable again to the individual, with only the portion already taxed under section 962 excluded. In other words, section 962 can solve the year-of-inclusion problem while creating a second layer of tax at distribution, so the analysis has to look at the full life-cycle of the earnings, not just the current year.

The high-tax exception. Income of the CFC that is taxed abroad at a high enough effective rate can be excluded from the GILTI/NCTI inclusion under the high-tax exception. The exclusion applies broadly where the foreign effective tax rate exceeds 90% of the U.S. corporate rate — that is, above roughly 18.9% (90% of 21%). Whether a Canadian company clears that bar depends on its actual effective Canadian rate, which varies widely with the small-business deduction, the type of income, and the province. The high-tax exception can be a clean answer for a well-taxed active business, but it is an election with its own consistency rules and it interacts with Subpart F and the foreign tax credit, so it is not a default.

Common traps

• Assuming a CCPC is ‘just a Canadian company.’ The same retained earnings that defer Canadian personal tax can trigger an immediate U.S. inclusion for the U.S. shareholder. Deferral on one side can be acceleration on the other.
• Missing Form 5471. The form is required even in a year with no U.S. tax due, and a missed or incomplete filing carries automatic penalties and can hold the whole return's limitation period open.
• Letting passive income accumulate. Investment income inside the company can become Subpart F income, taxed to the U.S. owner currently regardless of distributions.
• Forgetting the FBAR and FATCA. A U.S. person whose foreign financial accounts exceed US$10,000 in the aggregate at any point in the year must file the FBAR (FinCEN Form 114) through the BSA E-Filing System, and FATCA reporting on Form 8938 may also apply. These run alongside Form 5471. See our pages on FATCA and FBAR compliance and streamlined filing procedures if past years were missed.
• Electing section 962 without modelling distributions. The election can lower current tax but expose later dividends to a second layer; the right answer depends on whether and when the company will distribute.
• Renunciation surprises. A U.S. owner who later renounces citizenship may be a covered expatriate under section 877A if net worth is US$2 million or more, the five-year average net U.S. income tax exceeds US$206,000 (2025), or tax compliance cannot be certified; the mark-to-market exit tax then applies above an exclusion (US$890,000 for 2025), and CFC shares can drive the result. Coordinate with departure tax planning before acting.

How Barrett Tax Law approaches GILTI and Subpart F for U.S. owners of Canadian companies

We begin by mapping the facts that drive the analysis: who the U.S. shareholders are, the exact ownership percentages, the company's income profile (active versus passive), its effective Canadian tax rate, and whether and when the owners expect to take money out. From there we model the inclusions under the current rules — including the post-2025 NCTI changes, the 40% section 250 deduction, and the 90% deemed-paid credit — and compare the default individual treatment against a section 962 election and, where the Canadian effective rate is high enough, the high-tax exception. We coordinate the U.S. position with the Canadian corporate and personal tax and with the treaty's relief articles, and we make sure Form 5471, the FBAR, and any FATCA reporting are handled together rather than in isolation. Where prior years were not reported, we evaluate corrective options. Our cross-border practice is led by Simone Barrett, who is admitted in Ontario and Florida. If you own a Canadian corporation and are a U.S. citizen, green-card holder, or U.S. tax resident, you are welcome to book a free consultation to talk through your situation before a filing deadline forces the question.

You can also read our overview of the firm's cross-border tax services and our guide for U.S. citizens living in Canada.

This page is general information, not legal advice. Cross-border tax depends on your specific facts and on both countries' rules, which change; figures and thresholds cited here should be confirmed for your tax year before you rely on them. For advice on your own circumstances, please consult a qualified cross-border tax lawyer.