LLP structure is one of the best entity for Canadian investors seeking legal liability as well as for avoiding double taxation whereas LLC is not recommended.
More and more Canadians, realizing the real estate opportunity available in the US are turning to Partnership structure for their real estate investments. However, not many Canadians are fully aware of tax implication on US Partnership. As such, this article will discuss the tax compliance side of US Partnerships and a curious case of US Limited Liability Corporation (LLC).
Limited Liability partnership (LLP)
Prudent Canadian investors understand the twofold benefits provided by an LLP: 1) LLP does not cause double taxation as do US Corporations; and 2) LLP provides asset protection for all of the partners. As such, there is no real reasons for choosing another type of Partnership for your US Real Estate investment (eg. General Partnership and Limited Partnership). For more information on the benefits of LLP entity when structuring your US Real Estate portfolio, please see my article on Best way to own a US property.
The LLP, as a Partnership are not a taxable entity. Rather, all of the Partnership income flows through to each Partner based on the % of their Partnership interest and the tax is paid by the individuals. However, the entity is still required by the US law to file a US Partnership Tax Information return annually. This form is called Form 1065 – Return of Partnership Income and must be filed by the 15th day of the 4th month following the year end. For example, if the year end of the LLP is December 31, 20×0, then the due date would be on the April 15, 20×1.
The partners, usually the Canadian investors will be required to file the Form 1040NR – Individual Nonresident Alien Income Tax Return which is due on the April 15th of the following year. On the Form, each individual’s portion of the Partnership’s income must be declared.
Finally, each Canadian investor will be required to include their portion of the US LLP’s income on their Canadian Personal Income Tax Return. The good news is that you will be able to use the US taxes paid above as a credit against the Canadian taxes.
Limited Liability Corporation (LLC)
In the United States, LLC can be treated differently depending on the number of Partners and whether or not the Partner(s) elect to be treated as a Corporation or not.
When a LLC is owned by a single Partner, the entity will be treated as a disregarded entity and essentially, the IRS will treat the entity as a sole proprietorship for tax purposes. This means that the LLC does not pay tax nor have the obligation to file any Partnership Income Tax Return. Rather, the individual Partner will report the income on his/her Personal Tax Return (Form 1040).
When a LLC is owned by more than one Partner, the entity will be treated as a Partnership for US tax purposes. This means that the entity will have the same tax filing responsibility as the LLP mentioned above.
Election to be treated as C or S Corporation
For both Single and Multi-Owner LLC, an election can be made to have the entity be treated as either a C or a S Corporation for tax purposes. In order to do so, the owner(s) must file a Form 8832 – Entity Classification Election to the IRS and annual file the Form 1120 by the 15th day of the 3rd month following the entity’s year end.
In Canada, all LLCs, regardless of their election status in the US are treated as a corporation. As such, double taxation will occur when you are a Canadian investor with a Partnership interest in a LLC and therefore, this structure is generally not advised for Canadian investors.
US Partnership taxation is a complex area of international tax and therefore, we highly recommend consulting a cross border tax expert before establishing a Partnership entity in the US.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.