Use of a professional corporation is more challenging where a shareholder is a U.S. citizen
Although there may be significant advantages for a Canadian-resident professional to incorporate, challenges arise where the professional (or a spouse) is also an American citizen. Perhaps the most significant challenges arise where there is a “mixed” marriage between a US citizen and a (Canadian) non-resident “alien.” If the professional is the American, the professional corporation (PC) is a controlled foreign corporation (CFC). If a family member (other than the professional) is an American, the PC may be a passive foreign investment company (PFIC) given its control by the professional. (Medical and legal corporations often qualify as PFICs because they rarely hold much in the way of active business assets.)
To help address the CFC issue in the first situation, it is suggested that the non-resident alien family members set up an investment company to which PC lends excess funds at a market rate of interest.
Ontario, Alberta and Newfoundland generally prohibit corporate ownership (e.g., through a holding company set up by alien family members) of a PC. In this context, a possibility for dealing with the PFIC issues in the second situation is to issue Neuman (discretionary) shares, having a modest value, to the U.S. spouse, who then gifts them to the professional. From a U.S. perspective, dividends paid on the shares are legally the property of the non-resident alien professional, and thus not subject to U.S. tax.
For Canadian tax purposes, the gift will cause dividends on the shares to be subject to attribution under s. 74.5(1).
There is a risk that the CRA would see this gifting strategy as abusive, and apply an anti-abuse rule [in s. 74.5(11) that would void the attribution.
…It could be argued [however] that in this case, the family member would retain the shares but for the US tax consequences of doing so. The attribution merely puts the family member in the same position as he or she would be absent the gift.
Neal Armstrong. Summary of Kevyn Nightingale, "American Professionals in Canada", Canadian Tax Journal, (2017) 65:4, 893-937 under s. 126(1).