Tax Guide for Canadians Buying U.S. Real Estate

Allan Madan, CA
 Mar 26, 2012
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Hello real estate investor, my name is Allan Madan; I’m a chartered accountant and tax expert in the Toronto, Mississauga and Oakville regions of Ontario, Canada. This short write-up aims to serve as a concise tax guide for Canadians buying U.S. Real Estate.

There is no dearth of people who wish to know about the tax implications of investing in US real estate, and this is because it’s the perfect mix; the Canadian dollar is high, U.S prices are at unprecedented historic low levels, and rents are pretty good.  This tax guide for Canadians buying U.S. Real Estate will focus on the four best methods.

infographic-for-canadian-tax-guide
The good and bad options for Canadians buying American Real Estate

Through an LLC – Tax Guide for Canadians Buying US Real Estate:

The first is through an LLC (Limited Liability Corporation). Despite what you’ve heard in your seminars by American gurus, this is not the right way to invest for a Canadian. This works well only for U.S. residents or U.S. citizens. By way of background, an LLC allows for limited liability protection, which means that in the event of a lawsuit your personal assets aren’t at risk.  Also, an LLC does not pay any income tax.  Instead, shareholders or members of the LLC are responsible for all tax liabilities.

LLCs do not work well for Canadians because LLCs are treated as foreign corporations by the Canada Revenue Agency (CRA). This means that any tax paid on the income earned by a LLC is not credited to you on your Canadian personal tax return. Additionally, any cash distributed from the LLC’s profits to you, will be subjected to dividends tax in Canada. As you can see, you’re being taxed twice.

Although the numbers may vary based on the figures involved, Canadians residents operating an LLC on rental properties may have to pay upwards of 70%-80% in taxes on their property income or capital gain.  This figure is further compounded by the increase in the dividend tax rate that is coming into effect in 2014.  Please see our article should I pay myself salary or dividends as a business owner for more information regarding this increase.

Just how do we go about buying a U.S. property then? This brings us to the second tax structure for Canadians acquiring American real estate.

Under Your Own Name:

You buy the property in your own name. In this particular case you file a U.S. tax return  known as the 1040-NR which is due on June, 15th.  On this tax return you will report the gross rents collected and the expenses paid. Expenses are tax deductible and they include

• Property taxes
• Utilities
• Insurance
• Mortgage interest
• Depreciation
• Repairs
• Fees paid to your property manager
• Supplies
• Travel
miami-beach-real-estate
While you pay tax in the U.S. on the net rental income, you also include the net rental income on your Canadian return. Sounds like you’re being double taxed? You’re actually not, because you will receive a foreign tax credit on your Canadian personal tax return for the US taxes paid.  More information regarding the foreign tax credit can be found at the Canada Revenue Agency website.

If there is more than one individual investing in the U.S. real estate property, you could have all of the investor’s names listed on the title of the deed of purchase. This means that each person would file his/her own 1040-NR US return and their own personal tax return in Canada.  Each investor involved would include their share of the rental profits on their tax returns.

With a General Partner:

The third structure discussed in this tax guide for Canadians buying US Real Estate is a little more complex and we’ll go through it in detail.

This structure has 3 main components:

1. Limited partnership that owns the American property
2. A Canadian corporation that is a general partner in the limited partnership. The general partner bears all of the risk.
3. Individual investors known as limited partners.  Limited partners are only at risk for the amount they invest.

What’s great about this structure is that it’s  classified as a flow-through for tax purposes.  This means that the partnership does not pay tax, but the investors are responsible for paying all tax liabilities.

In addition, any U.S. taxes paid will be credited to you on your Canadian personal tax return, thereby avoiding double taxation.  Additionally, the majority of the risk is borne by the general partner.  This structure works great when you have two or more individuals investing in the U.S. real estate.

Through a Canadian Trust:

Holding American real estate through trust is a great option to avoid U.S. estate tax as part of a tax plan for Canadians buying US real estate.  The structure of a trust involves a settlor (the person who provides assets to the trust) and the trustees (the people who hold and becomes ‘owners’ of these assets and administers them for the benefit of the beneficiaries).  The trustees can use the funds from the trust to acquire real estate assets which will then be registered under the trust’s name.

The advantages are that the trust continues to exist even following the death of the individual(s) so it does not trigger U.S. estate tax.  Additionally, Canadian capital gains tax will not be triggered and foreign tax credits will remain available if there is any capital gain when and if the property is sold.

The only problem is that the Canadian trust must be established prior to the offer and purchase of the targeted real estate property.  So it is essential to plan far ahead.

C Corporation

The last option is through a corporation.  There are two types of corporation structures in the United States, the first is the small business corporation also known as an S corporation and the general corporation otherwise known as a C Corporation.  We will focus on C Corporations since S Corporations do not allow foreign ownership.

A ‘C Corporation’ is generally a good structure to acquire many different assets; unfortunately for Canadians buying real estate, it is not one of them.  This is because of the number of different layers of taxes that will be levied:

  • Corporate Tax – The first is that any income earned by the corporation is subject to tax at the corporate rate.
  • Personal Tax – The individual(s) that are paid either dividends or salary will also be taxed at the personal level.  [Dividends are a not deductible expense for a C Corporation). Unlike in Canada, there is no American dividend tax credit to offset the double taxation.
  • Withholding Tax – Additionally, dividends paid to Canadians are also subject to a 15% withholding tax.  Therefore, there are three layers of tax which can potentially accumulate to a significant amount.

On top of these taxes, capital gains from a C Corporation are taxed at their full amount as opposed to the usual 50%.

Additional Ownership Options:

Community Property and Community Property with Rights of Survivorship

There are additional tax guides for Canadians buying US real estate depending on the state.   Several American states allow for ownership through the usage of community property laws which concerns the distribution of property that is acquired by a married couple.  The two types of structures for this are:  (1) Community property, and (2) Community property with the rights of survivorship.

In community property structures, both the husband and wife own a half-interest each in the property.  They can each pass or transfer their ownership stake within their property by will to any person or trust upon their death.

The structure for community property with survivorship is the same but with one key difference.  When one of the spouses dies, the surviving spouse will automatically have entire ownership of the property.  So the transferring of ownership in this structure can only be passed on to either spouse and not to another individual or entity (trust).  Once one of the spouse controls 100% of the property then they are able to transfer it upon their death.

These community property structures apply for the following states: Texas, New Mexico, Nevada, Louisiana, Idaho, California, Arizona, Washington and Wisconsin.

Estate tax may also be applicable for both structures depending on the value of the US assets and the worldwide assets (see blow).

Non-Resident US Estate Tax for Canadians:

Estate tax is a common issue and an important part of any tax planning guide for Canadians buying and owning American real estate.  When an individual becomes deceased, their assets including real estate properties are subjected to estate tax prior to their distribution.  Canadians who are neither Americans citizens nor US green card holders are only subjected to estate tax on their US situated assets upon their death.

As a Canadian you will only be subjected to estate tax upon your death, if the value of your assets based in the United States is greater than US $60,000 and the value of your worldwide assets is greater than $US 5.25 million.  In this situation, you will likely not be subject to estate tax if the fair market value of your assets is below these figures.

If your assets are above these figures, your estate tax liability can be further reduced through the ‘unified credit’ that is available for Canadians.  This tax credit is different for Americans and Canadians.  The amount for 2013 is equal to $2,045,800 but for Canadians this number is calculated on a prorated basis.  So the new calculation is based on the ratio of the value of your US estate assets compared to your worldwide assets and then multiplied by the initial unified credit amount of $2,045,800.  If you still have excessive amounts of tax liability after this credit, the graduated tax rates seen here in appendix B will apply.

Example:

John purchases a home in the United States for US $4,000,000 and his total worldwide assets are $10,000,000.  His ratio is 40 percent (4,000,000/10,000,000).  This 40 percent is then applied to the unified credit amount for 2013 ($2,045,800) to calculate his unified tax credit for Canadians.  The result is that John now has a credit of $818,320 (40% x $2,045,800) which he can use to reduce his estate tax liability.

Additionally, the treaty also allows any estate taxes paid to be eligible for foreign tax credits when filing Canadian income tax.

Estate taxes can prove to be a real headache, so the best strategy would be to avoid it altogether.  The best option is to ensure that the value of your worldwide estate is under the $5.25 million.  Consider splitting ownership of your assets amongst your spouse, family members and even trusts to minimize your worldwide estate.

Disclaimer

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.

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Comments 83

  1. so im guessing your talking about an LLP (Limited Liability Partnership) correct me if im wrong but doesnt an LLP also protect you against law suits as well. Please shed some light on this

    1. Yes, I’m referring to a Limited Liability Partnership. In some states, it’s referred to a Limited Liability Limited Partnership – leave it to lawyers to make simple things very complex! A LLP protects the limited partners from lawsuits, so their personal assets are not at risk.

      This is a cost effective structure, that we set up for our clients.

  2. Nice video. I am confused about the diagram you showed. Why does the holding company own only 0.01% of the LP? Why would a holding company own so little?

    1. The holding company only owns 0.01% because we want the holding company to only receive an insignificant portion of the income from the Limited Liability Partnership. That’s because the holding company is a general partner and is therefore at risk in the event of a lawsuit. Limited partners are protected.

  3. thanks for the post. I have two questions:

    1. if the Canadian corp owns only 0.01% of the US LLP, who owns the rest of the LLP?
    2. LLP in US(ex Florida) is very expensive to register(around 1k) and annual report(around 500). Would it be still worth to do this structure?

    1. Hi Vivian,

      Limited Partners (individuals) would own the rest.

      Yes, as it minimizes legal liability and tax.

      Thank you !

      -The Team at Madan CA

  4. I want to revise my first question. What is the goal to have the canadian corp? if it only have 0.01% of the US LLP, how could it take all the risk? And all other Canadian LPs in your graph, do they mean Canadian individuals(not company)? How does the tax work in this structure. Let’s say my husband and I are two Canadian individuals holding 99.9% of the US LLP. And then we set up another Canadian corp to hold 0.01% of the US LLP. Is this the structure you indicated? What is the tax benefit of this structure? Could you give more details please? Thanks a lot!

    1. Hi Vivian,

      Thank you for your inquiry !

      The Corporation is a separate legal entity. Assigning the corporation a nominal partnership in the LLP as a General Partner allows it to take on the legal liability while keeping limited partners protected.

      That is the very structure we indicated. Further, the revenue or income received by the corporation can be directly paid to you and your husband.

      We will be more than happy to assist you in this process. We have countless client for whom we have created corporate structures that are actively investing in the US Real Estate Market.

      Thank you for your inquiry !

      -The Team at Madan CA

  5. 1. Why wouldn’t you just use set up the US LLP in the state (that allows it) you are purchasing your property? It takes care of the liability and the flow thru?

    2. How would you modify third structure to account for estate tax?

    1. Hi KT,

      It would be a state based LLP.

      Estate Tax refers to tax imposed on the taxable estate of a deceased individual as outlined in a will. This ventures off into succession planning. Usually, for US properties, if the estate is left to a spouse or a registered charitable organization, the estate tax will not apply. There is an imposed upper limit of about $5M (this can vary from time to time).

      Thanks.

      -The Team at Madan CA

  6. I bought a vacation house in Florida. Now I pay their local Property tax.

    Do I have a break in my Canadian taxes?

    I’m a Canadian, living mostly in Canada.

    Thank you!

    1. Hi Jaime,

      Property tax paid is tax deductible when calculating net property income from the US property for Canadian tax purposes.

      Thank you !

      -The Team at Madan CA

  7. I’ve seen structures that have a Canadian corporation that is the shareholder of a US corporation which in turn sets up separate LLCs for each real estate acquisition/investment. Would this be one way to avoid the issue you raised with respect to using an LLC and double taxation that can arise when a Canadian entity (individual or corporate) owns an LLC directly?

    Thanks,

    1. Hi Jason,

      The structure that you proposed will result in double taxation. Firstly, the US corporation will pay tax on the profits earned from the real estate investment. Second, the Canadian corporation will pay tax on any distributions (i.e. dividends) received from the US corporation. Finally, withholding tax will be levied on the distributions paid from the US corporation to the Canadian Corporation.

      Cheers,

      Allan

  8. Amin..

    If i want to own multiple properties.. could I open Multiple LLP’s (one for each one) and have the canadian corporation be the GP of each for the 0.01?

    I was originally advised by someone to go
    Canadian Corporation –> American LP —> American LLC for each individual property.

    We would be looking to purchase multiple properties at once. Thoughts?

    1. Hi Matthew,

      Thanks for your inquiry!

      You need to set up an LP or LLP for each property. You will then need to set up a Top Tier LLP that will own all the LLPs that own the properties (second tier LLPs) and your corp will be a 1% General Partner in the top tier LLP.

      In terms of where to establish the LLPs, they should be established in the state in which the properties are located. The corp should also be preferably established in that state (or at least in the US) as a C Corp or a S Corp. C Corp is like a Canadian corporation in the sense that it is a stand-alone entity which pays tax separately (this would be preferred). An S Corp (not preferred) is like a pass-through entity, where the partners pay tax on the individual level (this is like a Canadian Partnership).

  9. Hi Amin:
    With your structure is one still allowed a 1031 exchange when selling a property in a LLP?

    Also with Jason’s example above with Can-Corp,——U.S. Corp—–LLC. I though that the Can Corp would be able to invoice for Management fees to the U.S. Corp

    Thanks
    John

    1. Hi John,

      Thanks for your inquiry.

      In terms of the 1031 exchange, LLCs in the US can choose from a variety of taxation types including an S corp, corporation, partnership and disregarded entity. The one I will focus on is the disregarded entity as that will be the type of LLC giving you benefits that only apply to individuals such as the 1031 real estate exchange exception rule. The disregarded entity is not really an election but actually the default tax status for single-member LLCs meaning they would not qualify for partnership taxation because no partners exist.

      Basically, the LLC owning the property will need to be single-member and ensure the default “disregarded entity” status is set in order to be eligible for the 1031 rule.

      With Jason’s example, you can charge a management fee to the US corp to reduce its income, however the standard rate is approximately 10% of the monthly rent rate which is not sufficient to substantially reduce the income and the effect of double taxation. Should the management fee be higher, it will raise red flags with the IRS.

  10. I have a rental property in Hawaii and filed last year using a US accounting firm. They told me that, as my mortgage was in Canada ( a dedicated line taken against my principal residence) that the interest was not deductible when filing my US return.Also they told me that my trip to Hawaii to outfit the rental was not a deduction but rather had to be added to my Adjusted Cost Base of the rental asset. Your thoughts?

    1. Hi Terry,

      First of all, it is correct that for US tax purposes, only interests paid on US mortgages are deductible when calculating rental income/loss. Therefore, the mortgage you took out in Canada won’t be deductible.

      Secondly, it depends on the nature of your trip to Hawaii but based on your information, it appears that the trip was incurred to prepare the property for rent. As such, the cost of the trip should be added to the Adjusted Cost Base of the rental asset.

      If you have any other inquiries about US rental properties, please do not hesitate to contact me and my team.

      – Allan

  11. “Tax Guide for Canadians Buying US Real Estate | Canadian Tax Accounting Blog” was indeed a wonderful
    blog, can not wait to browse alot more of ur postings.
    Time to waste numerous time online lol. I
    appreciate it ,Hong

  12. Hi Allan,

    Interesting video.

    Please confirm if my understanding is correct. For the LLP vs personal names options, from a total tax payout, the total tax pay out in Canada + US is the same for us since under both scenarios.

    Our total tax pay out is then just our personal tax rate here in Canada?

  13. Hello,

    Do the rules for double taxation if you own a US LLC change if you are a dual US-Canadian citizen residing in Canada?

    Thanks,
    Rischard

    1. Hi Richard,

      Unfortunately, the answer is no. The CRA will treat LLC as a corporation for Canadian tax purposes regardless of your citizenship status.

      – Allan and his team

  14. Thanks for the post!
    How will the following structure be taxed by Canada CRA?

    Open an LP first. Then Open an LLC and use the LP as one of the members of the LLC.
    LLC will own the propertes in Florida. So the LLC will pass the income from properties to member of LP.

    Will the canadian who is member of the LP be taxed as partnership?

    1. hi Scott,

      Thank you for your question. One possible problem with your suggestion is that the CRA might take the position that the LP is only there to avoid the negative consequence of Canadian holding an interest in a LLC and therefore, treat it as if the Canadian taxpayer directly owns the LLC (in substance, this is true).

      – Allan and his team

  15. Nice video!
    I have rental properties in FL. If I firm a LLLP holding US properties, how does CRA treat LLLP for tax purpose?
    Do you think it’s a good idea for a Canadian to hold a LLLP?

  16. Hi Amin,

    I am in the process of purchasing a property here in Florida. We are buying this property merely as a vacation home, we are not looking to rent it out in any way. What would be the best way to structure this, should I be purchasing the property in my own name or LLP? The lawyer here said it might be best to register it as a incorporated US company, but I am concerned about FIRPTA and how I can limit the 10% withholding. No one here seems to have a straight answer.

    Please let me know what you think I should as soon as you can.

    Thanks,
    Darren

    1. Hi Darren,

      Thank you for your question. If you are not looking to rent out the property in any way, then it may simply be best to purchase them yourselves individually. The cost and time to maintain a LLP structure may not be worth it. Furthermore, if it is your corporation/Partnership that owns the property, you will have to pay the fair market value of rent to the entity every time you use the property.

      With regards to FIRPTA, you can reduce the 10% withholding tax if you can prove that your expected US tax liability arising from the sale will be less than the 10% withholding. This is done by applying for a ‘Withholding certificate’ to the IRS before the closing date.

      – Allan and his team

  17. Hello SuperAmin
    I like your video would like to setup an appointment and discuss my situation and structure i can create to serve it.

  18. Hey Allan,

    Great article! If I set up a limited partnership as you’ve suggested, what are my tax filing responsibilities?

    Thanks!

    CK

  19. Hi Allen,

    Do treaty benefits not apply to the LLC it’s self and if that LLC was operated by one member or by one cooperation then
    Double taxation would apply from CRA , but if you are a member of an LLC and you have had taxes withheld at source in the USA , then you would get treaty benefits

    Mostly I am taking this from TD securities ruling with CRA

    It has been the CRA’s long-standing position that a fiscally transparent LLC (a LLC that is disregarded or treated as a partnership for U.S. federal income tax purposes) is not entitled to Treaty benefits because it is not itself liable to U.S. income tax, and thus is not a U.S. resident for the purposes of the Treaty. This contrasts with CRA’s position that members of a partnership may claim Treaty benefits for the partnership’s income because the partnership is not a separate person for these purposes

    1. Hi Jonathan,

      Thank you for your post. Yes the CRA has a practice in which it allows treaty benefits to apply to US members of LLC in certain situations. However, the CRA does not extend the treaty benefits to Canadian residents that are members of a LLC.

      Thank you!

      – Allan

  20. Does holding real estate rental property through trusts or asset protection trust provide any sort of taxation benefits either in Canada or the United States?

    1. Hi Michelle,

      Since trusts are still classified as individuals for tax purposes, they are subject to the same personal income tax rates. The one good benefit is that trusts are allowed to deduct income payable to the beneficiaries of the trust. Since the beneficiaries are the ones who pay the tax on their income, the tax payable on the rental income may be reduced by using the tax rates or tax status of the individual.

      Best Regards,

      Allan Madan and Team

      1. Hi Allan,

        I have dual-citizenship in Canada and the United States, would it matter where I establish the trust in terms of tax implications?

        1. Hi Chrissy,

          Certain types of trust have tax implications when they are initially established, though this varies and many of them do not. The Canada-US Tax treaty should make the tax implications for most trust establishments the same in both countries, so it’s not too important where you first set it up. It would be best to consult a lawyer who specializes in trust to ensure the best legal structure for your trust.

          Best Regards,

          Allan Madan and Team

      2. If there is more than one individual on the trusts who are taxed at different marginal tax rates due to income difference, which rate would the trust would be subjected to?

        1. Hi Cruz,

          This is a complicated matter with varying factors, please contact me directly so I can better assess your situation.

          Best Regards,

          Allan Madan

  21. I’ve heard there are different types of trust structures, which one would be the most beneficial for tax and non-tax purposes?

    1. Hi Kyle,

      There are many types of trust utilized for many different financial purposes. Testamentary Trusts which come into play after someone dies have some tax benefits. They may provide some relief for beneficiaries in higher marginal tax brackets. Income payable to a beneficiary will be included in the beneficiary’s tax return, and taxed at that beneficiary’s marginal rate. The trust may elect to deduct, in whole or in part, the income payable to the beneficiary. The deducted portion will then be taxed (as not payable) at the low marginal rate of the trust, and not in the hands of the beneficiaries. Also, a beneficiary receiving Old Age Security (OAS) payments will not be able to receive the maximum OAS pension * if trust income pushes them above the net income threshold of $69,562. So, an election is made by the trustee to tax a portion of the beneficiary’s income in the trust. With this election, they receive less taxable income and are able to remain below the claw-back threshold of OAS pension.

      Best Regards,

      Allan Madan and Team

  22. Hi Allan,

    What if the property was purchased before the establishment of a trust? Is it possible to restructure the ownership into a trust? thanks.

    1. Hi Huy,

      It is possible but it involves a change in ownership that would result in tax implications relating to possible capital gains. Since you are legally transferring ownership from a different entity to a trust that would become the registered owner. Even if there is no capital gains, there are still other fees including estate and property taxes that you must pay. So it is best to establish the trust prior as to avoid further headaches and complications.

      Best Regards,

      Allan Madan and Team

  23. Hi Allan,

    Is the capital cost allowance/depreciation rate the same for real estate property in the United States as it is in Canada? does it differ on the State? type of Real Estate property?

  24. Hi Allan,

    For rental properties in the United States, can I claim the same business expense’s as I would in Canada? including maintenance and repair fees, insurance etc.?

    1. Hi Thompson,

      Yes the same business expenses that you can claim in Canada are also applicable to rental properties in the United states including maintenance and repair fees, insurance etc. For other specific expenses relating to your property, I would consult with the CRA to see if they deductible.

      Best Regards,

      Allan Madan and Team

    1. Hi J.J.,

      The short answer is no since each limited partner is taxed at their own personal income rates, so you are not responsible for it. If you wanted to reduce overall taxation, it would probably be best to find limited partners who fall within the lower marginal tax rate.

      Best Regards,

      Allan Madan and Team

    1. Hi Arielle,

      The United States has something called the ‘Expatriation Tax’ which is their equivalent to our departure tax. The only difference is that this tax is applicable to US citizens who give up their citizenship as oppose to residency status like in Canada.

        1. Hi Mahmoud,

          Deferral on the expatriation tax is similar to the deferral for Canada’s departure tax. A tax deferral agreement between the individual and the IRS must be signed and periodically renewed according to the terms provided in the agreement. You can elect to defer by providing adequate security, however it’s important to note that there is interest on the tax deferral.

          Best Regards,

          Allan Madan and Team

    1. Hi Timonthy,

      FIRPTA simply imposes a 10% withholding tax, the buyer is responsible for this tax and must ensure that 10% of the sale price is withheld.

      Best Regards,

      Allan Madan and Team

  25. Hi Allan,

    I have a real estate property in Florida that I am planning on selling in the near future. I understand that I may be subjected to withholding tax on the sale of my property, my question concerns whether there is any possibility to avoid paying withholding taxes?

    thank you

  26. Hi, Sirs:

    If I purchase a real estate in USA through a LLC which is formed by me only and when I sell the property held by the LLC and at the same time, I wind up the LLC after the property is sold, how does RCA treats the LLC for Canadian tax purposes?

    1. Hi Zheng,

      This is a bad idea! The CRA will treat the proceeds from the sale (received by you) as a foreign dividend, and you cannot claim a foreign tax credit for the US taxes paid. This will result in double tax. Lesson for the future: Canadian residents should not use LLCs to hold US real estate.

      Allan Madan, CPA, CA
      Tel: 905-268-0150

    1. Hi Nick,

      Thank you for your question. The percentage that you would receive as a return when purchasing property is dependent on your over all income as a Canadian. For example if you were to rent your property that you have purchased in U.S, you will have to claim the total income you make via renting that property and subtract the costs of maintenance from that amount. The amount that you come up with will have to be claimed in Canada and based on your total income from other aspects, the percentage of tax returned will be calculated. Please keep in mind that there is no specific percentage of return that can be calculated without knowing the exact amount of income an individual makes. Hope that give you a better idea.

      Thank you,
      Allan Madan Team

  27. With regards to minimizing the tax impact of buying real estate in the U.S, what are some types of ownership?

    1. Hi Joseph,

      The three main types of ownership are individual direct ownership, indirect ownership through a Canadian corporation, and having ownership through a Canadian trust.

      Thank you for your question, hope that helps.
      Madanca

  28. I am a Canadian citizen, and I own a couple properties in the United States. I’m thinking of selling some in order to free up some money, but am worried at the tax hit I might face. What are some steps I can take to minimize this? Is the gain I make on the property on the property also taxable? If so, how can I reduce gains taxes?

    1. Hi Zachary,

      Normally, a sale of a U.S. property by Canadians would trigger a 10% withholding tax that is sent by the buyer or the buyer’s agent to the IRS. This is calculated as 10% of the purchase price, and not the gain on the property. Keep in mind, paying a withholding tax doesn’t remove your responsibility to file a U.S. tax return. This 10% is treated as an installment on taxes owing. If you do sell, you’ll need to fill out form 1040NR (U.S. Non-resident Alien Income Tax Return).

      If you want to minimize this tax, you can sell to someone who plans to use the property as a principal residence or by applying for a withholding certificate. In the first case, if you keep the selling price below $300,000 USD and the person plans to occupy the property as a primary resident, the IRS will waive the 10% withholding tax. If you estimate that the U.S. tax owed will be less than 10% of the sale price, you can apply for a withholding certificate. This will tell the buyer how much money to withhold. The gain on the sale will still attract tax, and you will still need to file a tax return to report the gain or loss to the U.S. government.

      Gains on the property are also taxed. You calculate your gains by taxing the net proceeds from the sale and subtracting your cost base. To minimize the net proceeds, make sure you’re including all selling fees. These include commissions and fees. As for the cost base, make sure you are not only adding the original cost but any major improvements to the property.

      Regards,
      Allan Madan and Team

  29. Hey Allan, I’m a 45 year old Canadian who is thinking of buying property in the U.S for investment purposes. I’ve done some research and have heard of an estate tax, but I’m not sure how it works. Could you tell me how the IRS calculates the estate tax? I’m pretty sure the numbers change every year.

    1. Hello Yannick.

      The IRS imposes an estate tax on Canadians who own American property when they die. You’re certainly right that the numbers change, and they do so almost every year. For 2014, the number for worldwide estates is $5,340,000, and the number for U.S. property is $60,000. If your estate or property is over these limits, then the tax is triggered. The estate tax has a top rate of 40% for 2014. When buying, your goal should be minimizing the effect of the estate tax.

      If the value of your property is below the threshold above, you should consider ownership by an individual. Even if these are exceeded, you may decide to invest in real estate if the costs for other ownership vehicles is higher than the exposure to the estate tax. As the threshold is set individually, you can split the ownership of the property between other people in your family. There are several techniques available that would minimize the size of the taxable estate and maximize the number of available exemptions.

      Regards,
      Allan Madan and Team

  30. Hi Allan,

    I’ve recently experienced an increase in my business’ profits. Though I am a Canadian resident, my family is from California. Therefore, I am thinking of buying a home in Sacramento, California to be closer to them. I would be using the house for a few weeks a year, and will not be renting it. What is the best way of going about this? What are some tax implications I might face?

    1. Hello.

      The most important thing to note in your situation is the length of your stay in the U.S. Since you are not a U.S. citizen, you should complete a substantial presence test. This will determine if you have to file a 8840 Closer Connection Statement or a 1040 return. In terms of taxes, the major implications will come

      with the selling of the property. In this situation, you would have to report the capital gain. Though you are allowed an exemption on your principal home, you are not allowed it on a second one. You need to report your capital gain to both the CRA and IRS, and they are taxed differently.

      To file a return in the U.S., make sure you get an Individual Taxpayer Identification Number (ITIN).Similar to your SIN number, this is assigned to people who are not citizens or residents of America. Since you aren’t renting out the property, you don’t have to file form T1135. However, remember that as a Canadian citizen you have to report your worldwide income. Making sure that you are in compliance with both countries may be tedious, but it is worth it in the end because you avoid hefty penalties and fines.

      Regards,
      Allan Madan and Team

  31. Hello,

    My wife and I have a rental property in America. We used to live there, until we moved back to Canada. My question revolves around what forms to use. We have previously used an accountant, and they used T776 to report the rental income and related information. Do we need to use this form or do we report the T1135?

    1. Hello Issac.

      If you directly hold US property that costs more than $100k, you must submit a T1135 (Foreign Income Verification Statement). Submitting a T776 (Statement of Real Estate Rentals) does not eliminate this requirement. To determine where your property is in relation to this threshold, take its fair market value of on the day you rented it out. You then take the conversion rate found http://www.bankofcanada.ca/rates/exchange/, and convert it to Canadian dollars.

      Regards,
      Allan Madan and Team

  32. Hello,
    I’m Canadian resident and I bought 2 US properties under corporation last year. I am thinking if i transfer ownership 2 houses to individual under my name and my husband. If i do that the corporation have to pay capital gain? is this a good to transfer ownership 2 houses to individual?

    Thanks,

    1. Hi Vivian,

      Yes the corporation would have to pay capital gains tax. The corporation would have to report this capital gain on the US 1120 Corporation return even if the corporation itself is Canadian.

      Regards,

  33. Hi Allan,

    If we form a llp to buy real estate, do we have to pay a 35% withholding tax on sale of the property? I was told by an account in las vegas that we will have to withhold 35%.

    Thank you.

    1. Hi Frank,

      If a US Partnership with a Non-US partner sells assets. A section 1446 withholding tax applies on the foreign partner’s allocable portion of the capital gain.

      If the foreign partner is a corporation (eg. Canadian corporation), then the withholding tax rate is 35% of the gain allocable to that partner
      If the foreign partner is other than a corporation (eg. Individuals, trust, etc), then the withholding tax rate is 39.6% of the gain allocable to that partner.

  34. I’m buying a US foreclosure property in Georgia (won’t close for 30 days).

    I want to pay with the funds in my business corporation. Based on everything I’ve read, it seems like the best way to do this would be to setup another CanCo, pay dividend from my existing business corp to CanCo, then setup a US LP (or LLP?) with a US LLC as a 1% GP and the Canco as 99% LP.

    I need to confirm if this is the right way to go for my situation and setup the correct structure before closing. Let me know when a good time for a call would be.

    1. Hi Jordan,
      Thanks for your email. Your main objective is to invest your corporate retained earnings into purchasing Georgia real estate without paying income taxes on the amount invested.

      I recommend that you take the following steps:
      (1) Create a new Canadian Corporation (it can be owned by you and/or family members for income splitting purposes)
      (2) Make a tax free loan from your existing corporation to the newly created Canadian corporation (with interested charged at the CRA’s prescribed rate of 1%)
      (3) Form a limited partnership (LP) in the state of Georgia
      (4) Setup a C-Corp or LLC the will act as the general partner in the Georgia Partnership, having a 1% ownership interest in the LP
      (5) The new Canadian corporation will make an interest-bearing loan to the LP and will also have a 99% ownership in the LP as a limited partner

      Not only this plan help you avoid paying tax on your initial investment, it separates your real estate business from your existing business in Canada, which in turn reduces your risk.

      If you would like us to setup this structure for you, please let me know.

  35. I have an LLC in the states. Would it be a good idea to set up a USLP down there? From what I have been reading, the CRA accepts a USLP as a pass-through. Am I right?

    1. Hi Steve

      LLC’s cause double tax for Canadians. You should consider selling the property from your LLC to a USLP, which is recognized as a flow-through entity by both the IRS and the CRA. Note that this sale could result in capital gains tax, but by doing so, you will stop any further double taxation from occurring.

  36. Could he keep the LLC but create an LP and have the LP own the LLC to avoid double taxation? If yes, would the LP have to be a USA LP or the Canadian one?

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