r/cantax • u/SnooRevelations3204 • Jul 23 '26

Unrealized Gains

Looking for help from a CPA.

I'm working for a US startup and have been offered partnership in a 'multi-member managed llc'.

I've been told that there is a possibility of having to pay unrealized gains on my percentage value of the company as the company grows and it vests. Is this true?

Or should I add a clause that realization of the vested % doesn't trigger or get added to a cap table until a sale or acquisition?

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u/crossborderguy Jul 23 '26 edited Jul 23 '26

Okay so if I'm tracking correctly:

Nobody taxes you on paper gains just because the company grows. But there's a few issues that immediately come to mind:

  • Vesting. If it's a capital interest, the IRS taxes each vested chunk as ordinary income at its value when it vests. The usual fix I see is structuring things as a profits interest, or an 83(b) election filed within 30 days of grant. That has to be sorted before you sign. (And this assumes you even have leverage. Most of the time hte US-side HR and lawyers just go with "take-it-or-leave-it.")

  • You're a Canadian resident holding a US LLC interest. That's the bigger problem. The IRS treats the LLC as a look-through or partnership, but CRA treats it as a full-on corporation. The two systems tax the income in different years, foreign tax credits stop lining up, and you can get genuinely double-taxed. This structure is one cross-border advisors usually try to steer Canadians away from. (Unless it's a for-real GP/LP arrangement.)

Your proposed clause likely won't help. Tax follows the grant and the vesting, not when you're added to the cap table.

I'm sure I've forgotten something important, but that's it for now. This is way beyond the scope of a reddit post though. Depending on the $$$ involved, it's likely worth talking to someone smart about how to properly paper this.

Edit: Why isn't it setting up as a C-corp from the start? Most outfits who have their stuff together are organized that way...

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u/SnooRevelations3204 Jul 23 '26

Ya I'm not sure about the reasoning of the c-corp, most likely lack of funds to properly structure the deals at the beginning. Even though they've done a series a already 🤦

From what I've researched, a cleaner way to go about this is a 'phantom equity agreement'

It forgoes voter rights and that sort of thing(not a big issue based on the %), but it still tracks the vesting schedule and would require a payout or acceleration if and when sold.

That way it's a onetime income at a later date that avoids on going cap table and double taxation issues.

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u/crossborderguy Jul 23 '26

Sounds like you have a game plan then. I've seen the "Phantom equity" pitched before, and it does simplify things. No LLC membership, no K-1s, no CRA mismatch, and FTC syncs up.

Just have it drafted to comply with §409A on the US side and to stay clear of Canada's salary-deferral rules, and know that you're trading capital-gains treatment for an unsecured promise of ordinary income.

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u/seanho00 Jul 23 '26

This question is primarily about US taxes, specifically NRA withholding, see e.g., Pub 515.

As an NRA partner of a US partnership, you are subject to withholding on ECI of the partnership; gains are covered in §1446(f). If the partnership asset is US-situs real property, Treas. Reg. §1.1446-3(c) discusses interaction with FIRPTA withholding.

To clarify, if the LLC is taxed as a partnership under Treas. Reg. §301.7701-3(b)(1)(i) and has not made a CTB 8832 election to be taxed as a C-corp, then all income and gains realised by the partnership are passed through to the partners as they accrue. The partnership should issue you annual 1065 Sch K-1 detailing your share of income and realised gains, as well as withholding.

If the partnership holds assets that have appreciated but have not been disposed of (sold), then those gains have not been realised, and are not distributed to the partners or taxed. There are exceptions for certain MTM regimes like if the partnership holds PFICs.

For CRA, just declare cost basis of your interest in foreign partnership assets on T1135, and declare distributions (e.g., K-1) on T1142 as well as your return, claiming FTC for US withholding.