U.S Real Estate
Canadians are prominent international buyers in the American real estate market, but the methods used by investors vary. Canadians can buy and own U.S. real estate either directly or through the use of various forms of business entities — corporations, partnerships, and trusts.
Let’s review some ownership structures available for foreign investors:
Direct ownership:
A foreign investor may purchase U.S. real estate individually, which involves minimal setup and helps to reduce tax and compliance concerns, saving the investor money on accounting and legal expenses. However, while owning real estate as an individual is simple to manage and allows for the use of a foreign tax credit in Canada to eliminate double taxation, it lacks the legal protection that other forms provide.
- There is no limited liability, meaning the investor has no protection against the risks of lawsuits and other claims imposing liabilities.
- Different states offer alternative direct ownership options that may be confusing (e.g. Community Property and Tenancy in Common, etc.). Additionally, some alternative options have probate costs.
U.S. Corporations
An international investor can indirectly own U.S. real estate by forming a U.S. corporation to hold the property. Using a domestic corporation specifically as a vehicle to own U.S. real estate offers benefits such as limited liability and local identity for a U.S. investment, simplifying local U.S. real estate activities.
Canadians may avoid using a U.S. corporation because the value of its shares could be included in their U.S. estate in the future, and would create a double taxation scenario for Canadian investors each year. Notably, U.S. corporations are taxed on their worldwide income after deducting operational expenditures on a net basis. The sale of real estate will be subject to the full corporate U.S. tax rate of 21% on its capital gains instead of the more favorable 0 to 20% capital gains rate individuals benefit from.
Canadian Corporation
A Canadian may choose to purchase U.S. real estate through a Canadian corporation rather than as an individual. This is typically an advantageous option for small business owners that do not wish to extract funds from the company as a dividend and pay individual tax on the distribution. In addition, since the Canada-U.S. Tax Treaty permits the Canadian entity the ability to utilize a foreign tax credit, double taxation for the Canadian company is eliminated.
Limited Partnership (LP)
U.S. Limited Partnerships are created in the course of multi-party real estate investment, possibly between Canadian and U.S. partners. LPs is a type of partnership in which each partner’s liability is limited to the amount of money they invest in the company. In addition, the LP model does provide investors with relief from double taxation as Canada Revenue Agency permits the flow through attributes that U.S. residents benefit from.
U.S. and Canadian taxation policies have an impact on the relative attractiveness of real estate for non-US investors. Choosing the proper ownership structure as Canadian investors is essential for minimizing risk, tax burden, and returns. For further information, get in touch with us at CAN-US tax and we can help you.
*This blog should be used for informational purposes only, and by no means should constitute tax advice. Every individual’s situation is different and it is recommended that a new investor should speak to a licensed tax advisor before implementing a new strategy.