Tax-efficient strategies for Canadians buying U.S. property.
Allan Madan, CPA, CA
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:
- Establish a US LLP
- Create a US C Corporation (equivalent to Canadian Corporation)
- Assign US C Corp. as General partner of the LLP with 1% interest
- Choose limited partner(s) who will have 99% interest in the LLP. These partner(s) will enjoy limited liability protection
- 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
- File US C Corporation Return for the 1% of the property income.
- Limited Partner(s) file a Non-Resident Alien Tax Return for 99% of the property income
- 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.
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.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
Hello Allan, I felt you a voice message. We spoke last year. I have a US C corp which in turn owns 3 LLC’s that each own rental properties in Georgia. I require a Canada / US tax accountant to file my taxes. I also have some questions in setting up the GL and loan structure. The C corp is owned 50% by my Canadian company and 50% by my wife’s Canadian company.
Please call me to discuss. 9056010922
Hello,
I recently purchased a US property as an individual. I intend to hold on to my US property for a few years but plans do change. Could you briefly clarify the concepts of short-term and long-term capital gains tax rates so as to help me understand the tax consequence on the sale of this property?
Thanks,
Lin
Hi Lin,
Capital gains on assets held for one year or less are taxed at the marginal income tax rates in effect for the year, which can range from 10% to 35%. If you are in a high tax bracket, you will pay significant taxes on the sale of your property.
Capital gains on assets held for longer than one year are taxed at a special long-term capital gains rates. If your total income (including capital gains) puts you in the 10 or 15% tax brackets, you will be pay no tax. If your total income (including capital gains) places you in the 25% or higher tax bracket, you will be taxed at the 15% rate.
So it is beneficial to hold on to your property for at least 1 year before selling.
Regards,
Allan Madan and Team
Can the LLP structure be formed in any part of the US?
Hi Taylor,
In the US, each state has its own unique laws governing the creation and operation of LLPs. There are some states in which LLPs can only be formed for professional purposes (lawyers, accountants, etc.) and not for holding real estate. Those states are California, New York, Oregon, and Nevada.
Regards,
Allan Madan and Team
Hi, I am a Canadian resident with ownership in one real estate property in the U.S. As I am not an American citizen, will there still be U.S. estate tax upon my death?
Thanks,
Gloria
Hi Gloria,
As you are aware, U.S. estate tax is normally required to be paid upon the death of an individual with U.S. situated assets. However, a U.S. citizen or resident with a taxable estate less than or equal to $5.25 million (2013 figure) will not be subject to tax as a unified credit of $2,045,800 can be claimed by the taxpayer.
Non-U.S. citizens and residents are allowed a reduced estate tax exemption amount as they are permitted to transfer only $60,000 of U.S. “situs” assets (ex. real estate) free of U.S. estate tax. They are entitled to only a $13,000 unified credit.
Answer continued in the comment below:
Luckily for Canadians, the Canada-U.S. tax treaty provides a basic unified credit exemption like the one offered to U.S. citizens and residents. This means a taxable estate less than or equal to $5.25 million (2013 figure) will not be subject to tax as a unified credit of $2,045,800 can be claimed by the Canadian. However, Canadians must remember that the exemption has to be prorated based on the value of the U.S. “situs” assets compared to the value of the estate as a whole.
In summary, the tax treaty between Canada and U.S. allows Canadians to decrease their estate tax liability by claiming the unified tax credit equivalent to the greater of:
1) $13,000 and
2) $2,045,800 x value of U.S situs assets/value of worldwide assets
Regards,
Allan Madan and Team
Hi,
Thank you for your article. Please explain the tax filing requirements for individual investors in a LLLP.
Many thanks,
Vaughn
Hi Vaughn,
Each individual partner must file a Non Resident US Return (1040NR) and pay US Federal and State income taxes on their share of the partnership’s profits.
In addition, each partner must complete and submit form W8-BEN to the general partner and property manager. By doing so, you are informing all the relevant parties that you are a non-resident of the US.
Regards,
Allan Madan and Team
Hi, can I purchase a US property through a US corporation?
Hi Lisa,
Yes, you can purchase a US rental property through a US C-corporation. However, you will be taxed twice. The first instance of tax occur when the corporation pays tax on the rental profits. The second instance of tax will occur when a dividend is paid from the US-Corporation to you.
In order to avoid double taxation, we recommend that you purchase US rental properties using a LLLP.
Regards,
Allan Madan and Team
Hello,
How much US income tax does each investor have to pay on US rental profits?
Thanks,
Dorothy
Hi Dorothy,
The amount of tax paid depends on the rental profits earned. The higher the profit, the greater the tax rate. Please use the following tax rates to calculate your US personal tax liability:
– 10% on taxable income from $0 to $8,925, plus
– 15% on taxable income over $8,925 to $36,250, plus
– 25% on taxable income over $36,250 to $87,850, plus
– 28% on taxable income over $87,850 to $183,250, plus
– 33% on taxable income over $183,250 to $398,350, plus
– 35% on taxable income over $398,350 to $400,000 plus
– 39.6% on taxable income over $400,000.
Regards,
Allan Madan and Team
This article is very helpful. Can you please also answer who signs on behalf of the LLLP?
Thanks.
Hi Ruby,
The general partner signs on behalf of the LLLP. This includes the purchase agreement when the property is purchased by the LLLP.
Regards,
Allan Madan and Team
How do I transfer money to the LLLP to make my initial investment?
Hi Shuaib,
There are two ways that you can transfer money to the LLLP
a) By way of an interest bearing loan
b) By subscribing for units of the LLLP
Regards,
Allan Madan and Team
Hi Allan,
Is there a limit on the number of properties that a LLLP can own?
Thank you for your help. 🙂
Hi Rita,
Generally speaking, there is no limit on the number of US properties that a LLLP can own. However, we recommend that a LLLP own only one property at a time. This is because if one property fails, it will affect the other properties too, if they are all owned by the same LLLP.
Regards,
Allan Madan and Team
How am I taxed in Canada on the US rental profits earned?
Bruce
Hi Bruce,
You will include your share of the partnership’s (LLLP) profits in your Canadian taxable income, and pay Canadian income tax at your marginal tax rate.
In order to avoid double taxation, you can claim a Foreign Tax Credit for the US taxes paid on the rental profits.
Regards,
Allan Madan and Team
Hi Allan,
I will be borrowing money from a Canadian bank to fund the purchase of a US rental property. Can I deduct the interest paid?
Thanks.
Hi Rogers,
If the partnership (i.e. LLLP) borrows money from a Canadian lender to purchase a rental property, then the partnership can deduct the interest paid.
However, if you borrow money from a Canadian lender to invest in the partnership (i.e. LLLP), you cannot deduct the interest paid on your US tax return. You can deduct the interest paid on your Canadian personal tax return.
Regards,
Allan Madan and Team
Can you please explain which forms I need to complete in the 1st year of owing a US rental property personally?
Thanks – KATIE
Hi Katie,
You should complete the following forms:
– W7 – Application for IRS Individual Taxpayer Identification Number
– W8-ECI – Certificate of Foreign Person’s Claim That Income is Effectively Connected with the Conduct of a Trade or Business in the United States
– 1040NR – US Non Resident Alien Tax Return
Regards,
Allan Madan and Team
I’m a Canadian who owns a US rental property and my property managers is withholding 30% of the rents that he collects on my behalf. What should I do?
Hi Fernando,
Immediately complete form W-7, Application for IRS Individual Taxpayer Identification Number. Check off box (h) on form W-7 as the reason you are submitting form W-7. In the space provided, write “Exception 1(d) rental income.”
Next, complete form W-8ECI – Certificate of Foreign Person’s Claim That Income is Effectively Connected with the Conduct of a Trade or Business in the United States. Form W8-ECI should be provided to the property manager so that he will stop withholding tax from your rental income.
Regards,
Allan Madan and Team
Madan Chartered Accountant,
How often do I need to file form W8-ECI to stop withholding tax?
Brock
Hi Brock,
Form W8-ECI must be filed once to stop withholding tax. It does not have to be completed each year.
Regards,
Allan Madan and Team
Hi Allan,
As a Canadian owner of US real estate that’s rented to tenants, do I have to file an election to be taxed on the net rental income earned?
Cheers,
Mary
Hi Mary,
Yes. With your first US tax return (1040NR), attach the appropriate election to be taxed on the net rental profits earned. Otherwise, you will be taxed at a rate of 30% on the gross rental income.
Regards,
Allan Madan and Team
What’s the difference between a LLP and LLLP?
Hi Andy,
A LLP is a limited liability partnership and a LLLP is a limited liability limited partnership.
A LLP has both general partners and limited partners. The limited partners are at risk only to the extent of their initial investment and are not liable for debts or obligations of the partnership. The general partner is responsible for the all of the partnership’s debts and obligations.
With a LLLP, the general partners are responsible for debts and obligations of the entity, but they are not liable for the negligence or misconduct of other partners. The limited partners are only at risk for their initial investment in the LLLP.
Note that each State’s treatment of a LLP and LLLP may differ. As such, you should consult your local accountant or lawyer to determine the proper treatment.
Regards,
Allan Madan and Team
If a corporation tax rate is about 15.5%, isn’t it better for me to invest in US real estate though a Canadian corporation?
Hi Taylor,
While it is true that corporations enjoy a much lower tax rate than individuals, the CRA recognizes that individuals would use corporations to earn investment income. The CRA then levels the playing field by imposing a high rate of tax for corporations earning investment income, so that they pay the same amount of tax as individuals.
Corporations pay a larger amount of tax on passive income called Aggregate Investment Income, which covers rental income earned from property. The combined federal and provincial tax rate for Ontario on investment income through a corporation is 46.17% in 2013. Part of this is refundable, when the corporation eventually issues a dividend to its shareholders.
Regards,
Allan Madan and Team
I have a Canadian company that is dormant. Can I use this company as the general partner of the LP?
Hi Dimitri,
Yes, you could use a Canadian company as the 1% general partner of the partnership. However, we don’t really recommend this method as now the entity is exposed to 2 taxing authorities – CRA and the IRS whereas if a US corp is utilized, it will only have the IRS to worry about.
Regards,
Allan Madan and Team
Dear Sir,
Do you recommend an ownership structure that will allow me to avoid estate tax?
Thank you!
Hi Eliza,
There a few solutions to the US estate tax:
1. Ownership through Canadian Corporation – you can hold US property (i.e: real estate or stocks) through a Canadian corporation rather than personally.
2. Ownership through Canadian Partnership – you can hold US property through a Canadian partnership (which will be taxable in the US as a corporation) with a dummy corporation as the general partner (assumes all risk) and a holding company (you as shareholder) as the limited partner.
3. Ownership through Cross Border Trust – as the trustee and/or beneficiary, you will control a US corporation, which will in turn own the US property.
Each of the above structures is increasing complicated and provides additional insulation from US estate tax. This is a very complicated branch of estate planning and as such you should consult a tax expert.
Regards,
Allan Madan and Team
I own a rental property down in the US that I am planning on selling in a few years. What would happen to the depreciation expense that I’ve taken on the property that I am selling?
Hi rob81,
Assuming that you have sold the property for a higher amount than the original cost, then all of the depreciation expense you have taken will have to be reported as income and you will be subject to US tax on the amount.
Regards,
Allan Madan and Team
Hello,
I own a rental property in the US on which I pay federal, state, and property taxes. Is it true that I can claim a credit for foreign taxes paid in the US?
Thanks in advance,
Cecil
Hi Cecil,
Yes, you can claim a foreign tax credit (FTC) on your Canadian tax return for foreign taxes paid. However, only federal and state taxes are eligible for FTC; property taxes cannot be claimed as a FTC. Property taxes can only be deducted in calculating rental income.
Regards,
Allan Madan and Team
Hi Alan
I purchased a property using a LLC. I don’t want double taxation. What can I do?
Hi Jon,
You can consider converting your LLC to a LLLP. This way, the rental income will flow directly to you personally as a partner and will help you avoid double taxation. The conversion process is different for each state and as such, you should consult a professional before proceeding.
Regards,
Allan Madan and Team
Hi,
Thank you so much in advance for this helpful information.
I am Canadian citizen and resident in Ottawa, ON. My brother is American Citizen and is a resident in Boston. I am considering buy a rental house with him (50-50 partnership). I understand that the best form of legal entity for me as Canadian is LLP. can you please explain to me why do I need to create a US C Corporation and assign to it 1% of the shares? is this good for the case if I am buying the investment property alone? what is the benefit for US C Corporation anyways? also if I buy other investment properties together with my brother…do you recommend to put each property in an LCC all under an LLP? is this something you can help me setup or I should use my brother’s local attorney? If I end up using my brothers attorney do you provide services to do my tax in the US & Canada or Canada only?
Thank you so much in advance,
Cheers,
Hans
Hi Hans,
The purpose of the US C corporation is because the Limited Partnership needs a general partner who is in charge of actively managing the affairs of the partnership and bare the full liability responsibility in case of default, lawsuit, etc. As such, we encourage a C corporation to act as the general partners since corporation offers limited liability protection to its shareholders.
Also, since the corporation will only act as the manager and to limit liability, we allocate only 1% of the income to it. The rest of the income will go to limited partners such as yourself and your brother.
This works in both cases in which you yourself is the sole investor or you and your brother both are.
If you buy additional investment properties, depending on the size of the investment, we recommend setting up separate Limited Partnership or just keeping several investments under one partnership.
What are the pros/cons of a US LLP w/ a 1% C-Corp general partner you recommend in the article, and an LLLP structure like the one discussed in the comments?
Additionally, if I want to use money that’s currently in a Canadian Corp w/ active business income and I don’t want to withdraw to incur personal taxes, what would be the best way to structure an investment in US ppty?
Could I create a Canadian HoldCo, pay a dividend from my active business corp to the HoldCo, then use the structure you describe in the article, but with the Canadian HoldCo instead of an individual as the LP of the US LLP? Would this have any negative tax consequences vs. being a partner in the US LLP as an individual?
Thanks!
Hi,
I am a Canadian with US commercial real estate properties. My properties are held in a Limited Partnership. A C corp was created and is the General partner. In the LP’s Certificate of Limited Partnership, it mentions that the C-Corp is the only partner. There is no mention whether kind of partner it is and it’s percentage of ownership. How do I ensure that the LP has the C-Cop as the 1% General partner and my husband and myself as the 99% limited partners ? (do I need to have the lawyer draw up some paperwork and submit it to the IRS or other parties ?) Also, if the C-Corp is the General partner owning 1% and my husband and I are the limited partners, is there a need to withholding tax under 1446 ? if withholding tax needs to be taken, is there a way to avoid it ? Thanks
Hi Nathalie,
IRC 1446 stipulates that US partnership income allocable to non-US partners is subject to 39.6 withholding tax that must be remitted quarterly to the IRS. Form 8813 is a voucher that you can attach to your payment (check). This amount is credited on each partner’s tax return, similar to a tax installment payment.
In practical terms, the partnership’s depreciation shield and expenses should reduce the partnership’s taxable income to close to $0, in which case IRC 1446 will not matter.
The Partnership Agreement should list the names of each partner and their roles (general vs limited). If you don’t have one, speak with your lawyer to have it prepared.
Hi Nathan,
Thanks for your questions. A LLLP is preferable in those states that allow this structure because you don’t have to file a corporate tax return for the general partner. There is no general partner in the LLLP structure. However, some tax accountants worry that the LLLP may not be recognized by the CRA as a flow-through entity because of its unique nature; I have not seen any comments from the CRA in this regard.
I suggest that you make a tax-free loan from your active business corporation in Canada to a new Canadian corporation owned by you and/or family members. Remember to charge interest on the loan at the CRA’s prescribed rate of interest, which is presently 1%. The new corporation can become a limited partner in the Limited Partnership and also make a loan at market rates to the Limited Partnership. In this case, you will not be a limited partner yourself.
Hi Madan,
Can I as individual form LLP with C corporation (in which myself is only shareholder) as general partner.
thanks
Harry
I am about to purchase a condo in Florida.How should I structure it from the get go to avoid any complications later on & on the on
going bases.I will be renting it through a property management company and it will be in my and my spouse`s name.I am also planning to use it occasionally from time to time.
Thank you.
Hi Imran,
Consider purchasing the property through a Limited Partnership in order to reduce your risk and avoid double taxation.
Hi Harry,
The recommended structure for holding US real estate is a Limited Partnership (LP) and not a Limited Liability Partnership (LLP).
You can be the sole shareholder of the US-Corporation, which is the General Partner in the partnership, and you can also be the sole limited partner.
Hi,
I’m confused after the response you made to Harry. The article mentions that the best way is through an LLP with a general partner being a C-Corp. Now you’re mentioning an LP? Is that your new recommendation?
I’m Canadian currently living in the US and looking at buying some land for farming with a US citizen. Thinking I might be a non-resident in the near future, I was looking at creating either an LLLP or an LLP with both my partner and I being limited partners. The C-Corp would be the general partner with 1% stake in the LLP. Do you see this as the best way? Did the CRA decide on the fate of the LLLP as a flow-through entity?
Thank you, great thread.
Hi Frank,
I recommend setting up a LP + C-corp structure to purchase US real estate as a Canadian investor. The LP has a clear distinction between general partners (e.g. C-corp) and limited partners (e.g. individual partners). The CRA as not commented on the flow-through attribute of a LLLP as far as I am aware.
As a Canadian, if my Canadian partner and I set up an LP + C Corp structure to purchase US real estate where my partner and i own 99% of the partnership and our C-Corp the remaining 1% but we both own 100% of the C-corp, how do we prepare our Canadian tax returns ? do we need to fill our the partnership return where a Business number is required ? do we include the partnership’s income and expenses on the T776 ? Do we need to fill out a T1135 ? What happens to business training where we cannot deduct it as CEC on the T776 ? can we deduct the CEC somewhere else on the T1 ?
Hi Julie,
Thanks for your questions. Report your share of foreign partnership income from a rental operation on line 126 of your T1 return. The income included on line 126 should be reported in Canadian dollars.
You should also complete form T776 (which flows to line 126) to report the gross income and expenses (in Canadian dollars) for each foreign property that you own. If you have multiple properties, then complete a separate rental form (T776) for each property; OR report the amount from the K1 slip (in Canadian dollars) on a single form T776 adjusted for the difference between depreciation computed under IRS rules and CRA rules. The latter approach will save you time.
Report the CEC deduction for the year on form T776 under other expenses. Complete form T1135 to report your share of the partnership’s specified foreign property.
Hi Allan,
As a Canadian, I currently have several LLC’s (some from Georgia & Michigan), with several houses in each LLC. I have not been able to file my taxes ever since I started buying properties since the last 3 years. I am planning on filing for the 3rd year and working my way back.
To avoid double taxation, I want to open an LP and put each of the LLCs are a general partner. Making myself as the Limited partner, how would the irs know I am a 99% while the LLCs are 1%?
Hi Maisa,
There’s really no way to avoid double taxes in this situation. A Limited Partnership should have bought the properties initially. If you transfer the properties from the LLC to a new LP now, the LLC will realize a capital gain (which would flow to you) presuming the properties went up in value.
The double taxation problem will not be solved by making the LLC a general partner.
Hi Allan,
1. What is the best entity to buy real estate in Canada as a US citizen from California?
2. If I buy a rental property in Canada from USA what kind if tax I should pay on the profit after the property is sold with gain.
3. Do have to pay tax to Canada and USA both?
Hi John-La
As a US citizen from California who is buying property in Canada, you can either purchase the property in your name or through a Canadian corporation. The benefit of purchasing it personally is that it’s simple and the tax compliance costs are lower. Also, you can claim a foreign tax credit on your US return for the Canadian taxes paid. Note: California does not recognize the tax treaty between Canada and the US, so you won’t be able to claim a foreign tax credit on your Californian return.
The benefit of buying the property through a Canadian corporation is that your liability is limited to your initial investment; your personal assets are not at risk. Also, you only pay tax in the US on dividends paid by the corporation to you. The corporate earnings are not taxable to you.
Hi Allan,
I can use my California Corporation to buy property in Canada or I should get a Canadian Corp? How about LLC?
Hi John-La,
Do not use a LLC. You will be double taxed. Consider using a C-corporation to purchase a property in Canada, or buy it in your personal name.
Hi Allan
Since I live in California and wants to buy property in Vancouver B.C the corporation can be California corporation or should be Canadian corporation?
Hi John-La,
It should be a Canadian corp; we can set this up for you
I am a Canadian and my friend suggests that I use a US C-corp to own a US rental property. Should I do it this way or what is the best way for a Canadian to own a US rental property?
Allan thanks in advance.
I need to ask you as I have US rental on my name.
Which form to report in Canada rental income and expenses and also where to enter foreign tax credits.
Hi Hassan,
Enter income and expenses in respect of a rental property on form T776, Statement of Rental Activities. Claim a foreign tax credit on form T2209.
Hi Allan,
I am a canadian citizen & already own 2 rental properties in Florida outright. Thus i already file US taxes yearly. However, an opportunity has come up for many properties in Indiana with a friend who is a US citizen. I would like to purchase them so i limit my liability and avoid estate taxes as my estate coulb be higher than the upper limit for deductions. How could i structure the deal?
Thanks!
Frank
Hi Frank,
Thanks for your question. If your primary motive is to save estate taxes, then consider purchasing a US property through a C-corporation formed in the US. Otherwise, consider a LP which will result in lower taxes. Both provide for limited liability protection.
“Hi Allan,
I am a Canadian citizen & already own 2 rental properties in Florida outright. Thus I already file US taxes yearly. However, an opportunity has come up for many properties in Indiana with a friend who is a US citizen. I would like to purchase them so I limit my liability and avoid estate taxes as my estate could be higher than the upper limit for deductions. How could I structure the deal?
Thanks!
Frank
Hi Frank
Thanks for your question. If your primary motive is to save estate taxes, then consider purchasing a US property through a C-corporation formed in the US. Otherwise, consider a LP which will result in lower taxes. Both provide for limited liability protection.
“Allan thanks in advance.
I need to ask you as I have US rental on my name.
Which form to report in Canada rental income and expenses and also where to enter foreign tax credits.”
Hi Hassan,
”
You can recover the withholding taxes deducted by filing a non-resident US return. If your final US tax liability as per your US return is less than the taxes withheld at source, you will receive a refund for the difference.”
If I am setting up a LP structure to own a rental property, is it possible to make the 1% general partner a LLC instead of a C-Corp? I think the LLC would be easier to set up and file taxes for each year. I understand I would be double taxed on the LLC share (1%) of the profit, but this is acceptable to me since it is a small amount. Is there a downside to this approach?
Hi Jack,
Since it’s only 1%, you can use a LLC as the general partner.
If I’m planning on purchasing real estate to rent in a specific state, and I’ve settled on a LP with a US C-corp or LLC as a general partner as the business structure. Do I need to set up the LP and C-corp in the state where I’ll be purchasing the property? If no, are there recommended jurisdictions?
Hi, Lain. Yes, setup the LP and C-Corp (or LLC) in the state where you will be purchasing the real estate. We can help you with this.
It appears that on May 26, 2016, CRA confirmed that it will treat U.S. LLLP’s and LLP’s as corporations for Canadian tax purposes.
How do you see Canadians structuring their purchase of US real estate after this date?
Hi, Gary. You should setup a Limited Partnership in the US (LP). This is recognized by both the IRS and CRA as a partnership.
My wife and I are both Canadian citizens with the bulk of our retirement money in a Canadian Corp. We want to buy a house in Florida and am aware of the CRA’s taxable benefit for rent, which is fine. What I’m concerned about is double tax if the Canadian Corp has to file 1120-F.
So 2 questions:
1. Does tax treaty between the 2 countries eliminate double taxation?
2. The form requires reporting dividend, interest and other income — but this is Income from US sources. This company holds investments, stocks, bonds, ETF’s etc. If they’re all traded on the TSX is that income from US sources in the eyes of the IRS?
Thanks very much.
Hi Tom, I am assuming that this is a personal use property that you will be purchasing in Florida. If this is the cause, then I suggest that you pay fair market value rents to your Canadian corporation should your Canadian corporation purchase the Florida property.
Your Canadian corporation will have to file a US corporate tax return (1120-F) and pay US income tax on the profits made during the year. It will also have to file a Canadian corporate tax return. In order to avoid double taxation, your Canadian corporation can claim a foreign tax credit for the American corporate taxes paid.
On the US corporate tax return, only American sourced income will be reported – rents and related expenses in respect of the Florida rental property. On the Canadian corporate tax return, American and Canadian sources of income will be reported, since the corporation is resident in Canada.
Can you please tell me the approximate formation costs and approximate annual costs for a cross border trust used by a Canadian to purchase a property in the US?
Thanks
Hello, thank you in advance.
What are the pros and cons of setting up an LP + Corp in Ontario vs Florida? This is to buy a rental property.
Will the LP and the Corp have to file taxes in both countries independently of where they were registered?
Thank you!
Hi Jessica, the US LP and C-corp should be established in the State where the properties are situated. The US LP will file an annual US partnership return and allocate its yearly profit to the general partner (C-corp) and limited partners (usually Canadian individuals).
The C-corp will file a US corporate tax return (1120) and pay US income tax on its share of the partnership profit. The limited partners will file US non-resident returns (1040-NR) and pay US income tax on their share of the partnership profits. If the limited partners are also residents of Canada, then they also have to file Canadian tax returns and pay Canadian income tax on their share of the partnership profit. To avoid double taxation, the Canadian partners can claim foreign tax credits for the American taxes paid on their Canadian returns.
Hello,
Can the limited partner of the US LLP be my Canadian Holdco?
Hi Chris,
Yes, your Canadian holding corporation can be a limited partner of a US Limited Partnership.
Hello… what is the best way in 2020 to purchase a rental property in Michigan being a Canadian citizen? paying the least amount of tax with the least amount of risk
Hi Andres,
The best way in 2020 for a Canadian to purchase US real estate with the objectives of avoiding double taxation and limiting liability is through a US Limited Partnership.
Hi There,
Thanks for a great article. I am Canadian citizen and interested in buying rentals in OH. Is this rules still valid for 2023 or has changed? if it is still valid I would like to start the process with you. Please advise
Hi Husam,
A US LP is still valid, but do not use a US LLP or US LLLP. A US LLP and US LLLP are treated as foreign corporations by the CRA and could result in double taxation.