The first part of this blog series highlighted the complexity of the tax regimes that affect the purchase of US real estate by a Canadian. It also underscored the value of obtaining professional tax advice. This post will highlight the possible ownership structures that could help you reduce your tax exposure when purchasing US property.
One of the major hurdles to overcome in pursuing property down south is deciding on the appropriate ownership structure. Canadians have a number of possible ownership structures for purchasing US real estate including ownership by: 1) an individual; 2) a Canadian corporation; 3) a US Corporation 4) a Canadian-resident trust; and 5) a Canadian partnership.
Individual - Ownership of US real estate directly by a Canadian individual is the simplest structure. While this approach does not shelter a Canadian from potential US estate tax, it may still be an appropriate avenue provided that other benefits are available (e.g., Treaty credits) to reduce the exposure to US estate tax. Also, when the property is eventually sold, the long term US capital gains tax rates for an individual can be more favourable than for a corporation.
Canadian Corporation - In the past, it was relatively common for Canadians to invest in US real estate through a Canadian holding corporation to avoid direct ownership of US assets for US estate tax purposes. This structure now has certain significant disadvantages, especially when the real estate is intended for personal use (e.g., shareholder benefit income inclusion on personal use of the property). Further, tax and legal compliance costs are much higher for a corporation than for individual owners of real estate.
US Corporation – American citizens sometimes advise Canadians to purchase US real estate through a US corporation without understanding the tax implications. Although a US corporation can simplify the tax withholding requirements (e.g., rental income or for the gain on a sale) and provide legal protection, this structure still exposes the Canadian to US estate tax and can be costly to maintain the structure due to ongoing tax compliance.
Canadian Trust - In certain circumstances, ownership of US real estate by a Canadian discretionary inter vivos trust can be an effective way of structuring the ownership of US real estate. Such a structure should avoid US estate tax; however, it requires relinquishing both ownership and control of the real estate to the trust. This structure can be costly to implement and is primarily intended for individuals that have US estate tax exposure after the application of all available benefits (e.g. treaty credits).
Canadian Partnership – The most complicated approach to owning US real estate is to hold it through a Canadian limited partnership. If this structure is effectively executed, it can avoid the application of US estate tax. However, this structure can cause additional uncertainty depending on the activities of the partnership because the tax authorities may ultimately determine that a partnership never existed. This would eliminate any tax planning opportunities that were available. This structure can be costly to implement and maintain, as the structure would also likely contain a corporation as the general partner. Due to the complexities surrounding this arrangement, this may be an appropriate alternative where ownership by an individual or a Canadian resident trust is not a viable option.
There is no one “right” approach that works best in all circumstances. Many factors should be taken into account in arriving at the most appropriate structure and both tax and non-tax factors should be considered. Tax considerations include the value of the property, resulting US estate tax, Canadian and US income tax consequences, among others. Non-tax factors include the level of administration required of the structure, the costs of implementation and maintenance of the structure, age of the individual, among others. If you are interested in learning more, contact CHY today.
*This blog post does not constitute tax or legal advice and cannot be relied upon as such. For advice on your particular situation, please contact CHY Accounting & Tax or another qualified tax professional.