Tax Considerations for Canadians

6 Replies

Tax structure considerations for Canadians and US foreigners in general can be quite confusing. On the one hand, the mentor courses / boot camps / common advice (including many here on BP) is to just set up an LLC but when I've discussed it with professionals, they argue against it. I have never really understood why.

I recently was speaking with yet another specialist who put it to me this way;  

In Canada, companies are taxed the lowest and individuals the highest. In the US the reverse is true. So there is a miss-match and you end up paying more then you should.

This, if true (I think it is), now makes some sense. I also came across the following article which reviews why LLC as a structure is not the way to go.

http://www.moodysgartner.com/canadians-beware-united-states-limited-liability-companies-may-be-hazardous-to-your-tax-health/

I also found the following to be informative. It reviews a number of different structures with  the advantages / issues of each;

http://www.mondaq.com/canada/x/334102/Capital+Gains+Tax/Are+United+States+Limited+Liability+Limited+Partnerships+the+Holy+Grail

Adding anther layer of complexity is; how much are you generating in profits? If your holdings are small (i.e. a couple of SFH), the cost of setup companies, annual filings, etc. may simply not be worth the cost. Just pay the taxes and be done with it. On the other hand, if you are netting significant profits (e.g. 100K+ per year, but I really don't know where the cut off point is) in the US, the overhead may be worth cost / aggravation.

I am curious what structures Canadians are using and at the end of the day, what is the effective marginal rate they see. For every $1 of NOI, how much is sucked up by US / Cdn Taxes and is left in your pocket?

Also, if you take the time to read the articles, would you keep the same or consider making a change.

I haven't read the articles yet, but I certainly will do so soon. I'm excited you started this conversation because I was also under the impression that it was better for Canadians to form some kind of corporation to hold their US investments. I think the known and unknown tax implications prevent many Canadians from investing south of the border. Hopefully your post draws some good points from people who have done it both ways and can provide some numbers for us. Thanks, @Oren K.  ! 

This is indeed a widely debated topic amongst many tax professionals and investors alike, and an entire novel could be written on the best method to use.  There are many other things to consider besides income taxes including but not limited to: estate taxes, probate, liability protection, incapacity issues, witholding taxes on gross rental income/witholding taxes on sale of foreign property (known as Foreign Investment in Real Property Tax Act (FIRPTA)) and the list goes on.  The fact of the matter is that no one's situation is really the same, so each person's ideal setup differs.  

As to why LLC's don't work for Canadians, as explained in the articles, is that LLC's are double taxed when the income is brought back to Canada. The reason being is Canada Revenue Agency considers it a foreign corporation (not a flow through entity), and therefore a mismatch in foreign tax credits resulting in some cases of 70%+ taxation!

The most common approach to purchasing US real estate as a Canadian is by utilizing an US LLP or LLLP, with the investor as a 99% Limited Partner, and having another entity (such as Can Corp or US LLC) as the General Partner at 1% to limit liability exposure. Use of these entities in this manner allows for matching foreign tax credits, and when the money is brought back to Canada, you essentially pay income taxes at your personal rate. This structure is not cheap to setup initially, and the annual admin costs are substantial, however gives peace of mind that it offers the ultimate liability protection and most efficient tax structure.

The best advice is consulting a cross border tax specialist who also have a good understanding of US real estate laws and taxation.  I can give some recommendations if needed.  

@Oren K.  thank you for the additional information. Maybe with a bit of luck a Canadian investing abroad will pick up on some keyword alerts. I'm sure the information is all available on the CRA and IRS websites, we just need to find the guy that's done the digging already!

Originally posted by @Oren Karp:

Tax structure considerations for Canadians and US foreigners in general can be quite confusing. On the one hand, the mentor courses / boot camps / common advice (including many here on BP) is to just set up an LLC but when I've discussed it with professionals, they argue against it. I have never really understood why.

I recently was speaking with yet another specialist who put it to me this way;  

In Canada, companies are taxed the lowest and individuals the highest. In the US the reverse is true. So there is a miss-match and you end up paying more then you should.

This is true for a small Canadian Controlled Private Corporation (CCPC) with "active" income - e.g. they manufacture widgets or provide a service to folks owning widgets.   Real Estate investment/holding companies are generally classified as earning "passive" income and are taxed at the highest corporate tax rate (~44% in most provinces).

1(506) 471-4126
Originally posted by @Chad Urbshott:

This is indeed a widely debated topic amongst many tax professionals and investors alike, and an entire novel could be written on the best method to use.  There are many other things to consider besides income taxes including but not limited to: estate taxes, probate, liability protection, incapacity issues, witholding taxes on gross rental income/witholding taxes on sale of foreign property (known as Foreign Investment in Real Property Tax Act (FIRPTA)) and the list goes on.  The fact of the matter is that no one's situation is really the same, so each person's ideal setup differs.  

As to why LLC's don't work for Canadians, as explained in the articles, is that LLC's are double taxed when the income is brought back to Canada. The reason being is Canada Revenue Agency considers it a foreign corporation (not a flow through entity), and therefore a mismatch in foreign tax credits resulting in some cases of 70%+ taxation!

The most common approach to purchasing US real estate as a Canadian is by utilizing an US LLP or LLLP, with the investor as a 99% Limited Partner, and having another entity (such as Can Corp or US LLC) as the General Partner at 1% to limit liability exposure. Use of these entities in this manner allows for matching foreign tax credits, and when the money is brought back to Canada, you essentially pay income taxes at your personal rate. This structure is not cheap to setup initially, and the annual admin costs are substantial, however gives peace of mind that it offers the ultimate liability protection and most efficient tax structure.

The best advice is consulting a cross border tax specialist who also have a good understanding of US real estate laws and taxation.  I can give some recommendations if needed.  

That last paragraph is the best advice ... consult a specialist.

It is possible to structure ownership of a U.S.A. entity such that it is a child (100%) of a Canadian corporation.  This will result in the CRA collecting <=10% taxes on repatriation of retained earnings.

Here is an overview on repatriation of investment income to Canada (from the U.S.A. in the example tables).

1(506) 471-4126

@Roy N. , thanks for the link. I will take a look at it. Your previous comment is also correct with respect to active / passive. The question becomes, is there any way to legally repatriate the income as 'active' income to maintain the favourable tax treatment in the US all the way into Canada.

Still researching...

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