The most tax-efficient way for Canadians buying a real estate property in the US

This article will discuss the top 3 strategies used by Canadian investors when purchasing a U.S. property. The goals of these 3 methods are to:

• Minimize risk
• Minimize tax burden
• Maximize returns

Ideal Time for Canadians buying a US property
With US real estate prices near an all time low, and the Canadian dollar near an all time high relative to the US dollar, buying a property in the US has never been more attractive for Canadians. However, as attractive as the US real estate market is at the moment, one must have a sound investment plan in order to navigate through the complexity of US tax rules and regulations.

1) Direct ownership of the property by an individual
This is the simplest method of buying a US property and therefore, will relieve you of costly accounting and legal fees. However, I do not recommend this method for the following reasons:

• There is no liability protection for the investor from the risks of liabilities imposed by lawsuits and similar claims.
• Different states have different direct ownership alternatives (e.g. Community Property, Community Property with Rights of Survivorship, Tenancy in Common, etc), which may be confusing. Furthermore, certain alternatives will involve probate expenses.

Therefore, as experienced cross border accountants, we do not recommend owning a US property in your personal name

2) Ownership through a Canadian corporation
Purchasing a US Property through a Canadian corporation is probably one of the most popular methods suggested by cross-border tax accountants and other advisors. The reason being is that it is familiar and relatively easy to administer. However, one of the major disadvantages of this method is that it would create a double taxation problem for investors in the US.

By owning real estate in the US, a Canadian corporation will be deemed to be doing business in the US and must file IRS Form 1120-F: US Income Tax Return of a Foreign Corporation on an annual basis.

Here’s how double-tax arises with this method. The first layer of tax will be imposed on the corporation, and second layer of tax will be added when a dividend is paid to the shareholders. This is in contrast to the Canadian tax system which has dividend tax credits available to individuals to avoid double taxation.

In summary, we do not recommend purchasing US real estate through a Canadian corporation.

Ownership through a US Limited Liability Partnership (LLP)

As a Cross-border tax accountant for US-Canada tax, we recommend establishing a US Limited Liability Partnership for purchasing a property in the US. The benefits of this entity are:

1. It provides asset protection and legal liability protection similar to that of corporations.
2. Investors avoid double taxation as the income from the US property is taxed on the individual level.

Setting up a US LLP is a difficult and complex process and we highly recommend that every investor consult a US-Canada cross border tax expert to discuss the option. Below, I have outlined a few basic steps an investor would take with the US LLP:

1. Establish a US LLP
2. Create a US C Corporation (equivalent to Canadian Corporation)
3. Assign US C Corp. as General partner of the LLP with 1% interest
4. Choose limited partner(s) who will have 99% interest in the LLP. These partner(s) will enjoy limited liability protection
5. File Form 1065 – (Partnership Return for the US) – The LLP will distribute all of its pr operty income to its partners and pay no tax
6. File US C Corporation Return for the 1% of the property income.
7. Limited Partner(s) file a Non-Resident Alien Tax Return for 99% of the property income
8. The Limited Partner(s) file a Canadian Personal Tax Return and claim Foreign Tax Credit for the amount of the US taxes paid on step 7.