Vancouver , Bc · Member since 2017 · 73 posts · 13 votes
just like the title says should I purchase homes in my personal or under entities like an LLC.
I have read if I use an LLC I will get double taxed in the USA and in Canada
Does anyone know if this is true or not I am trying to find a CPA to help me with this
If anyone has a CPA who works on both sides of the Border let me know
thank you
@Akash Y. - i am FAR from an accountant - but i've met with several good accountants (about ynon-real estate questions regarding business between Canada and USA) and Roy is right, you definitely want to speak with a tax professional. Everyone's situation is different and I know that certain US corporate entities are better than others with regard to real estate....I'm not even going to try to offer up advice as i'm not qualified - but more to ensure you seek expert help.
Please note, I am not an accountant nor am I qualified to give you such advice.
This is just my two cents after gathering information from brief conversation here and there.
To my understanding, an LLC in the US (if used as a flow-through entity) would be taxed similar to that of a Sole Proprietorship in Canada (against your personal income).
The only time a Canadian would be double taxed is upon withdrawing/transfering funds from the US LLC to yourself in Canada.
But from what I've heard, tax is treated differently if the funds withdrawn from the LLC were earned and withdrawn in the same year.
If such a statement is true, they say the tax applied to the US filing would be matched to the tax applied to your Canadian filing. Depending on the amount being taxed, it can be as much as a 10% tax savings.
In layman's terms (if I've understood correctly); if you are an employed Canadian earning a living in Canada, it would be understandable that your income would most likely be much greater in Canada than that of the income being made on the LLC (eg. simply earning monthly cashflow from a rental tenant).
Upon withdrawing funds from the US LLC, you would be potentially increasing your income to a higher tax bracket in Canada, but since your US income would most likely be lower than your CAD income (eg. $10K USD rent vs $75K CAD salary), the amount you happened to withdraw from the LLC would be taxed in Canada at the lower taxed rate from your US tax filing. (Sorry if that sounded confusing)
This would be a tax break in Canada, but unfortunately you can't avoid having such income subject to double taxation. The strategy here is to pay less Canadian tax in those circumstances.
I was told that the only possible way around this is if you were to go to the US and simply spend those earnings from the LLC within the US while on vacation, shopping trip, etc.
Interestingly, I was also told that if you were to invest as a limited partner in an LP doing a property investment with multiple investors, you would actually receive a K1 form for your US taxes which could then be applied as a discount towards your Canadian tax filing.
Anyway, as suggested by the others in this thread, you should definitely seek advice from a tax professional with experience to validate the information above.
Please also note, I am not sure how the above would apply to a flip as you would be subject to capital gains in the US. I do not know if the same flip would be recognized in Canada and also become subject to capital gains yet again.
I would suggest doing a web search on local accountants and simply call them up to ask if they have clients who currently invest in US real estate for whom they've filed taxes for. With tax season done, they should have the time to answer your questions.
Good luck and please keep us posted on your findings!
Gary G. thanks a lot for the valuable info. I will have to make some phone calls. If I find someone in Ottawa that can help me, rest assured, I will definitely post it on this thread.
The CRA does not recognise an LLC as being a disregarded body or passthrough entity and, as you commented, treats it as a corporation (in most aspects). The risk in this instance is that you will not receive full credit for U.S.A. taxes paid when repatriating income from your LLC because Revenue Canada considers it to be a foreign dividend rather than income taxed in your hands.
Meanwhile the IRS taxes your LLC as a corporation or a flow-through entity depending on the election made.
Sorry, I should have clarified that I was speaking from the angle of an LLC being disregarded as an entity, separate from it's owner (Single-member LLC), which would therefore be taxed as a sole proprietorship (prepared with a Schedule C and brought over to an entry in your personal return), unless elected to be taxed as a Corporation.
Ultimately, it will be inevitable that funds withdrawn from a US LLC bank account (or any US bank account for that matter) would be subject to tax if brought back to Canada as the CRA requires you to claim foreign income.
But with the existence of the US to Canada income treaty, I was hoping a Canadian would be able to claim a foreign tax credit or even better, qualify for tax exemption if US income doesn't exceed $10K USD.
Once again, this is all from casual conversation and some reading. But I've actually sent some questions out to a few accountants in hopes of getting full clarity in such a circumstance.
I will update this thread accordingly when I get my responses.
In the interim, I'm interested in what other Canadians happen to find from details provided by the accountants they have reached out to.
The so called "double taxation" is primarily a concern if you try to treat an LLC as a flow-through entity (there are a few additional concerns with using LLCs for real estate that need to be taken into account as well).
If your plans allow/call for U.S.A. corporation - maybe as a 100% child of a Canadian corporation - then you would elect to have an LLC taxed as a corporation - which is the manner in which the CRA recognises it.
Everyone's situation and road map are a little different, so you should seek out an accountant - and probably an attorney - with cross-boarder business / real estate experience before you start purchasing in the U.S.A.
What I have understood so far is, that only GP and LP are considered flow-through partnerships in Canada. So advise being given out is to create a LP, and join as limited partner(s), and have a LLC with 1% share as general partner (which assumes the liability risk).
Another option is to hold the LLC holding the property in the LP. Still trying to confirm the viability.
Other complex options involve creating Canadian corporations and US corporations, but these are overkill for an investor who is just starting out.
just like the title says should I purchase homes in my personal or under entities like an LLC.
I have read if I use an LLC I will get double taxed in the USA and in Canada...
Is this a rental or a fix flip strategy? How you are taxed can vary dramatically in each case.
On the US side of things, whether you utilize an LLC or your personal name is almost moot from a tax standpoint.
Based on current US treaty with Canada, you do want to check with the CRA if you can get any foreign tax credit for taxes you would have already paid on US income.
Sometimes you only get double taxed by both countries if you do not claim the credit but the country where the income is earned/generated usually gets first dips.