C-Corp for every deal?

Question

I’m an investor from Canada researching options for flips. My understanding so far is that a C-Corp is preferable to an LLC for a Canadian as the CRA doesn’t recognize LLCs the same as the IRS and you’ll end up being double taxed. With a C-Corp, however, there is a tax treaty that eliminates this problem.

My question then is “If you’re preference is to register a new entity for each deal, wouldn’t it be crazy to register C-Corp after C-Corp as you do deal after deal?”

Eamonn McElroy · Answer

@Caleb Heimsoth

If Omar is a Canadian citizen living in the US he is a US resident alien and his tax situation would be quite different than a non-resident alien (NRA) investing in the US...

@Price Kenney

You can have an LLC taxed as a C Corp.  LLC is legal entity that has "chameleon" like features for income tax purposes.  It can be taxed as a Disregarded Entity, Partnership, C Corp, or S Corp depending on the ownership makeup and election made.

You are correct that Canada treats all US LLCs as corporations for Canadian tax purposes.  This disparity in treatment often results in lost income tax credits or unintended tax consequences for Canadian NRAs investing in the US through LLCs taxed as Disregarded Entities or Partnerships.

Tax treaty doesn't eliminate the problem, especially if the entity holds real property in the US.  Effective and proactive tax planning does and can bring US and Canadian tax treatment into parity.  Establishing a "blocker" (i.e. a C Corp) between the NRA investor and the business is generally the best strategy, but all facts and circumstances must be considered.

Engage an effective tax CPA/EA who has experience working with NRAs who invest in the US.

A new entity for every deal may be extreme overkill.  Best to talk to an attorney and a US business insurance advisor on that issue.

Eamonn McElroy · Answer

@Anastasia G.

An NRA cannot directly own an interest in a US S Corp...  You will bust the S election.

There is a (new) loophole created under the Tax Cuts & Jobs Act that allows NRAs to own an interest in an S Corp through an ESBT.

May or may not be advisable.

Again, consult a competent tax pro familiar with similar situations.

Ashish Acharya · Answer

@Price Kenney ,

No. US C-crop would then own LLC as required for each activity if required. The LLC would finally flow through the C-corp and you would get the advantages of C-corp for being a foreign investor.

This gets complicated. You should talk to the professional.

Caleb Heimsoth · Answer

@Price Kenney. I believe C-Corp is a terrible idea for uS investors, unless being Canadian has something different im pretty sure it’s a bad idea for you to.  The person who you should ask and talk to about this is @Omar Khan.  He’s Canadian and lives in the US

Roy N. · Answer

@Price Kenney

Some good food for thought from @Eamonn McElroy above.

If you remain resident in Canada, in augmentation of Eamonn's advice, I would suggest you consult with a CPA - and possibly attorney - experienced with Canadian tax law and business organisation when holding foreign assets.

Having your U.S.A. business (and assets/properties) be held and operated within a U.S.A. corporate entity will provide you with control over the repatriation of retained earnings.  There may be further benefit, depending on your situation, for that U.S.A. corporation be a 100% child entity of a Canadian corporation: permitting favourable tax treatment of retained earnings paid from child to parent.

As already stipulated, this is not an DIY area of real estate, seek out the guidance of an experienced professional.

Chad U. · Answer

@Price Kenney  Look into setting up an LP.....most likely your best route but get advice from cross border specialists as every person's situation is different.

Anastasia G. · Answer

@Eamonn McElroy you are right, Owners of S Corp cannot be foreigners. I was giving an example for most flipping situations in US an S Corp would be the entity to go with. Even though I am a CPA and have substantial experience in tax I refer people/companies to Tax Lawyers when it comes to formation of entities.

Basit Siddiqi · Answer

@Price KenneyYou want to connect with an accountant who is very familiar with taxation as it pertains to foreign investors.A couple things to consider.1) Depreciation calculated may be different if the ultimate owner is US or Foreign.2) Corporation tax rate decreases with the most recent tax reform made "blockers" more attractive.3) use of a blocker is favorable to many foreign investors as you are not required to file a US individual tax return and not required to disclose all other personal information to IRS.However, all the facts and circumstances should be addressed before preceding so please consult with a competent accountant.

Anastasia G. · Answer

Consult with a professional who understands tax implications for foreign investors; In terms of US, few things to consider: since you will generate an active income - which is ordinary, you will need to choose entity that will save you taxes; consider how much income you expect to generate in a first few years; the state; for example with CA you have additional entity level taxes - for example tax on LLC starts at 800 per year even if you have no activity. Flipping to me is a fancy word to use remodeling/construction, in most cases LLC with S corp election would be most beneficial for tax purposes. Also consider your goals like would you want to establish Solo401k. This a learning curve, having a knowledgeable professional will save you time and money.

C-Corp for every deal?

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