Canadian investing in US. Should I open a LLP?

12 Replies

Hi, my wife and I live in Canada. She is buying her first property in the US to be a rental one. She will probably buy more 2 in the short term and thinking in doing more of it in the future.
Now the question is: what is her best option to structure her taxes? Is it to open a LLP or LLC? Or do it as an individual? (To be honest I don’t know the difference between LLP and LLC)
She has no income right now so my thought was to do it as an individual. Pay IRS the gains and also CRA. But at least as she is not making any income she would be in the lower bracket.
If she had a company there, would that mean she would only have to pay IRS as a company? And as long as the money stays in the company she would not need to pay CRA?
Any Canadian here doing the same?

Thanks a lot for the tips

Because you have the added complexity of being Canadian residents (I will presume this), you will need to consider the cross border aspects of establishing an entity to conduct activities in the US. This could potentially add substantial complexity to the decision making process. Canadian tax practioners are often reasonably well versed in US-Canadian tax issues so you should be sure to find one that is. They should be able to provide competent guidance as to choice of business vehicle (i.e., where to organize and in what form).

An LLC is a limited liability corporation and an LLP is a limited liability partnership. Most LLPs in the US are limited to professional partnerships (e.g., accounting law engineering firms) that limit the professional malpractice liability between/among the partners.

I am not an expert, and have no credentials...so this is opinion only.

The short answer is NO!  Historically the CRA (Canada's tax authority) sees LLCs as corporations for tax purposes so there is a mismatch between "personal" tax being paid in the US and "corporate" tax being paid in Canada...so the tax treaty does not allow you to reclaim US tax paid through a foreign tax credit.  Therefore, Canadians historically used LLPs.  

But in Spring 2016 the CRA said they were clarifying (I say changing) their position and that LLPs would now also be treated as corporations.  They said they would grant lenience for those who converted their LLPs to LPS before the end if 2017.

Then, in Spring 2017 after hearing a lot of feedback they said they would grandfather LLPs that already existed, within a few constraints, but that any new LLPs would be treated as corporations.

So, going forward, using new LLPs could result in double taxation.

There are a number of nuances but that is the essence as I understand it.

I should add a few points to answer the rest of your question.

The whole point of using a LLC or LLP to hold a property is containment of liability risk. If you get sued, only assets held in that entity are at risk...at least in theory. Some would say it is not foolproof, but that is the theory. There is no difference in tax payable (in the US) as a result of holding the property in an LLC or LLP. Those entities are "flow through". The only purpose of the entity is liability containment. The downsides are complexity (both the entity and the individuals require tax returns); and financing difficulty if you need a mortgage.

Now that the CRA has made it so that you will likely suffer double taxation if you use an LLC or LLP, in my opinion, it would be better to own the property in your own name(s) and buy more liability insurance.

Originally posted by @Gord Stevenson :

I should add a few points to answer the rest of your question.

The whole point of using a LLC or LLP to hold a property is containment of liability risk. If you get sued, only assets held in that entity are at risk...at least in theory. Some would say it is not foolproof, but that is the theory. There is no difference in tax payable (in the US) as a result of holding the property in an LLC or LLP. Those entities are "flow through". The only purpose of the entity is liability containment. The downsides are complexity (both the entity and the individuals require tax returns); and financing difficulty if you need a mortgage.

Now that the CRA has made it so that you will likely suffer double taxation if you use an LLC or LLP, in my opinion, it would be better to own the property in your own name(s) and buy more liability insurance.

Containment of liability is not the only reason to use an incorporated entity.   Depending on your goals, holding U.S.A. property inside a corporation may even be preferable as it allows you to control when/if retained earnings are repatriated to Canada - if you're objective is to grow your holdings, you can leave the retained earnings in the corporation to be reinvested.

An LLC is not automatically a "flow-through" entities, depending where you are operating, you may elect for an LLC to be taxed as a corporation or as a flow-through entity. If your intention is to treat it as a corporation from the outset, then the 'great surprise' of misalignment between U.S.A. taxation and the CRA does not occur.

@Roy N. I suppose you could elect to treat the LLC/P as a corporation for tax purposes in the US, and then be ok with the CRA treating it as a corporation in Canada. That may solve the double taxation issue, although there may be one o more flies in that ointment.

From a US tax perspective, at least when I reasearched it in 2009/10, there were higher tax rates for corporate income than for personal income, both for rental income and for capital gains.  That may or may not be the case now, and it may change again if Trump is successful in reducing corporate tax rates in the US.  But at the time that is why most advice was to elect partnership (personal flowthrough) treatment.

From a Canadian tax perspective I would want to check the details on how exactly to claim back US corporate tax against Canadian corporate tax.  I.e. Would the Foreign Tax Credit (a simple form attached to an individual tax return) do it?  Or would you have to maintain a corporation in Canada and file a corporate tax return?  I could be wrong buy my gut tells me the CRA would make it difficult somehow.

My guess is that very few LLC/Ps in the US are set up to treat income as corporate income. It would be interesting to know that, and if so what are any other implications of doing that besides tax rates. Do you know?

@Gord Stevenson

This is why I always encourage folks to spend a few hundred dollars and consult with an accountant and attorney who are versed in cross-boarder business and taxation as everyone's situation is a little different.

In my other (active business), we've had an U.S.A. incorporated "child" entity for many years.  The control over repatriation of capital (dividends from 100% owned child entities are repatriated to the Canadian parent with little to no taxation).   It's not a matter of claiming back tax, but a matter of having eyes-wide open when you set-up your ownership structure.

Again, what works for us and what works for you, may not be the best solution for the OP.

You have to keep in mind your wife will have to file a US tax return, form 1040NR. If investing in an LLC, there may also be withholding requirements from a tax perspective. I recommend you consult with a CPA on your options.

The LLC will provide you asset protection. In your case not being a us citizen, it would be hard for someone to sue you. The bigger issue is going to be financing. Some banks only want to lend to LLC's others want personal. I recommend checking with the larger US banks, Citi, wells etc. I think you will have the most success with TD, they do a lot of Canadian / US investment loans.

Thanks everyone.
We understand that for financing might be harder under a LLC , however, so far she is paying all without financing it.
Another option is to get a financing here in Canada on our house or something and send the money there.
In terms of consulting an accountant, we did that and so far he told us to buy it under her name and thats what we will do. However, we wanted to hear a second option, and to be honest we don’t know any specialized accountant here in Toronto. I will do a search online though.
I guess if she has a good insurance liability coverage should be enough for possible legal issues. And for taxes she would be paying IRS and the rest as income in Canada.
I wonder if she can deduct most of the rental income with costs and depreciation. Making the actual “gain” pretty low and end up staying at the lowest bracket in Canada and not owning any money to the CRA.

Originally posted by @Fan Nahi :

Hi @Arthur Neves ,

I am in a similar situation. Wondering what route did you take? Curious as wondering what would be tax effective to buy and rent property.


I am Canadian looking to buy in USA

 You should consult CPA