Canadians Using LLCs to Purchase U.S. Real Estate

Published: January 7, 2015 at 10:26 by Renate Harrison

Many Canadians wish to purchase a vacation home or investment property south of the border. However, few carefully consider how they will structure the purchase and its tax implications before buying.

Many U.S. lawyers suggest buying properties intended for rental purposes through a limited liability company (LLC). LLCs are popular in the United States since they shield their owners from any personal liability and they allow for flow-through taxation (that is, the LLC does not pay taxes, the taxes flow through to the individual member). However, they create tax problems for Canadian owners who may end up paying taxes on their rental income twice, once in the United States and once in Canada.

Canadians are required to declare income earned from U.S. real estate on both a U.S. income tax return and their Canadian income tax return. Under U.S. law, LLCs are a flow-through entity, which means all the income generated in the LLC is attributable to its owner. So, if the owner is the Canadian investor, the investor will be taxed directly at the individual tax rate. The Canada Revenue Agency, 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.

The Canada-U.S. tax treaty protects Canadians from double taxation, since the taxes paid in the United States can be credited against the taxes owed on the same income in Canada. However, when different entities, in this case, a corporation and an individual, pay tax on the same income, those credits are not transferable.

A better option for Canadians might be a limited partnership (an LP). Structured properly, an LP will provide its owner with pass-through taxation, the liability protection of an LLC and, since it is treated as the same entity for tax purposes in both the U.S. and Canada, it will allow its owner to claim credit in Canada for taxes paid in the U.S.

If you have any questions about how to structure your U.S. real estate purchase, contact harrison@harrison.pro.