Tools and Education

Canadian Buyers and Sellers

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Tips For Canadian Buyers

Tax Implications

Many Canadians continues to feel like this is an ideal time to purchase a vacation home or investment property south of the border. Canadians should consider how they will structure their purchase and its tax implications before signing any purchase agreement.

We highly recommend speaking with an advisor who understands both the Canadian and the U.S. rules when it comes to structuring such a purchase. Canadians can often simplify a lot of tax and legal issues associated with owning U.S. real estate by buying the property through a Canadian trust or other Canadian or U.S. entity rather than making the purchase in their own names.

Many U.S. real estate lawyers recommend buying properties intended for rental purposes through a Limited Liability Company (LLC). LLCs are inexpensive to set up and, since they act as corporations, they shield their owners from any personal liability connected with their rental property. Unfortunately, they create tax problems for Canadian owners who may end up paying taxes on their rental income twice – once in the United States and, again, in Canada.

Generally, Canadians must declare income earned from U.S. real estate on both a U.S. income tax return and their Canadian income tax return. The Canadian Income Tax Act and the Canada-U.S. tax treaty can protect them from double taxation, since the taxes they pay in the United States can be credited against the taxes owed on the same income in Canada. However, things can get complicated when different entities pay tax on the same income because those credits aren’t transferrable – the individual or entity claiming a credit in Canada must be the individual or entity that paid the taxes in the United States.

Under U.S. law, LLCs are “flow-through” entities, meaning they don’t pay taxes. Instead, any taxes owing are paid by the LLC’s owners, who declare them on their personal income tax returns. Canada, on the other hand, views an LLC as a corporation, which is liable for its own income taxes. Because Canada and the U.S. do not recognize the tax entity as being the same, there is a risk that the owners will be taxed in both the U.S. and Canada.

Expert say that a better option for Canadians is a Limited Liability Partnership. LLPs provide their owners with the personal liability protection of an LLC and, since they are treated as the same entity for tax purposes in both the U.S. and Canada, they won’t prohibit their owners from claiming credits on their Canadian income tax returns for the U.S. taxes they have paid.

Please speak with a tax professional regarding your specific needs.

Red Tape

Be prepared to furnish much more documentation for obtaining a U.S. mortgage than would typically be required in securing a Canadian mortgage.

Also worthy of consideration is that costs in the U.S. can be higher than in Canada. And, U.S. mortgage interest is compounded monthly, while in Canada it is typically compounded semi-annually.

Also, beware the foreign national premium that some U.S. banks often charge international buyers

When it's time to Sell

When selling, a foreign national needs to be aware of FIRPTA (Foreign Investment in Real Property Tax Act of 1980) which calls for the with-holding of 10% of proceeds from a foreigner's sale, until the tax ramifications can be sorted out. Essentially, the Internal Revenue Service (IRS) wants his cut out of any profits you may receive. If there's a loss, no need to worry, but FIRPTA is designed to hold back the money received until you file a US return. More information about FIRPTA can be found here.
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