Purchasing a US Property? How you structure it does matter.
Properties situated in the United States have long been popular with Canadian Real Estate Investors, and perhaps never more so than the last 5 years. With property prices still at somewhat low levels following the mortgage crisis and resulting financial meltdown that our neighbours to the south experienced in 2008 to 2011, we continue to have clients approach us and ask our advice about the best way to purchase a US property.
To answer that question, there are 3 general areas we need to address:
- Tax planning
- Asset protection
- Estate Planning
In terms of tax planning, the absolute best way to hold a property in the United States for most of the clients we serve is personally (or as a partnership, if more than 1 person is investing). This is due to the fact that, as Canadian residents, we are required to report on our individual tax returns our worldwide income. Rental income, which will be taxed first in the United States, is therefore be subject to tax in Canada. Luckily, there is something called the Canada-U.S. Tax Treaty which will allow for the deduction of any taxes paid in the United States on your Canadian tax return, thereby avoiding the dreaded “Double Taxation”.
If a property, on the other hand, is purchased either through a Corporation or – please avoid this one—an LLC, varying degrees of double taxation will apply, as only a portion of the taxes paid in the United States will be deducted in Canada (in the case of Corporate ownership), or none of the taxes will be deductible in Canada (in the case of an LLC owning the property).
The second area that needs to be addressed is Asset protection. The United States is highly litigious: as soon as you cross south of the border and encounter billboard after billboard advertising for personal injury lawyers, you’re probably quite aware that anyone who conducts business there is probably a target for lawsuit in some way or another. Given that fact, owning property as an LLC or a corporation will provide you with limited liability, which means essentially that, if you are sued because someone slips and falls on your property, your personal assets aren’t at risk. Personal ownership on the other hand does put your personal assets at risk.
So now owning that property personally as we advise doesn’t seem as attractive, does it? Perhaps not, but don’t run to the Secretary of State of Delaware just yet (Delaware is notorious with Canadians as being agreeable, both in low taxes and reporting flexibility, for incorporating their companies). Instead, why not simply purchase liability insurance for your properties, thereby providing you effectively with the limited liability you’re looking for?
The United States differs from Canada in that, upon death, there is an estate tax payable. This means that any properties held personally will be subject to the estate tax, but only if the deceased’s estate is worth more than $2 million. In 2015, that estate tax ran as high as 40%!
Now, it may be that you surpass that $5.34 million threshold, in which case we advise that the property be held in a cross-border trust. Such a structure will provide assurances that, upon death, any US held assets inside the trust will escape the dreaded US Estate Tax, as well as requisite probate fees.
Needless to say, every individual investor has a different set of circumstances and level of comfort. For some, the tax disadvantage of corporate ownership of an income property is mitigated by the peace of mind of knowing they can’t lose the pillow under their head in a lawsuit. For others, the costs required to set-up a cross border trust are easily absorbed knowing that their assets will pass to their families with no tax implications. Whatever the situation might be, speak to a Real File Chartered Professional Accountant before you purchase that property, because how you purchase it DOES matter.
Allen Ming, CPA, CA
Real File CPA