🌱 Origin Series #9: The Birth of the S Corporation “A tax identity crisis.”

Somewhere between a corporation and a partnership lies the S Corporation— a uniquely American hybrid with a very specific backstory.

Let’s rewind to 1958. 📼

🏛️Post-War America: Big Business Booms

In the decades after WWII, large corporations had serious tax advantages.

Small businesses? Not so much.

To help “the little guy” compete, Congress introduced the S Corporation through the 1958 Internal Revenue Code.

🏗️ What is it, exactly?

The S Corp is a special election that lets a corporation be treated as a pass-through entity for federal tax purposes.

✅ No double taxation (like C corps)

✅ Limited liability protection

✅ Income and losses “flow through” to shareholders' personal tax returns

A win for American entrepreneurs.

But for Canadian founders? Not so fast.

💼 When Canadians encounter an S Corp... It often spells trouble.

Here’s why:

❌ Ineligible shareholdersOnly certain U.S. persons can own shares in an S Corporation.

Most Canadians—unless they’re U.S. citizens or residents—aren’t eligible, which means an S Corp cannot elect or maintain S status if a Canadian holds shares.

❌ Structuring surprises

Sometimes, Canadians unknowingly acquire shares (through inheritance, gifting, or U.S. advisors unaware of cross-border issues).

This can accidentally terminate the S election—triggering tax and compliance headaches for everyone involved.

❌ Canada doesn’t recognize the S Corp electionEven if the S Corp stays intact on the U.S. side, the CRA treats it as a regular corporation. That mismatch can lead to double taxation and denied foreign tax credits for Canadian participants.

⚠️ The takeaway?

Just because your U.S. advisor recommends an S Corp doesn’t mean it’s right for a cross-border structure.

There are other options - LLCs, C Corps, LPs.

But each comes with its own trade-offs.

So before making that election, make sure you know which system you’re playing in.