Canadian Investor needs general info about investing in the U.S.

[Tanna Brodbar]

Hi everyone,

My partner and I are in Canada and seriously exploring rental properties in the U.S. Before we go too far down this path, we are concerned with getting some general insights on legalities and taxes if we were to invest in properties in the U.S. It seems like there are many Canadian investors in the U.S., so we are thinking that the process will not be too onerous. But we'd love some insights and tips for setting up a corporation, financing, and accounting info. Would be grateful for any help!

Thanks,

Tanna

[Roy N.]

@Tanna Brodbar 

@Gary McGowan has given me a billing the shadow of which I could not hope to cast.

Announcing you are a Canadian looking to invest in the U.S.A. will bring you no shortage of personal communications and offers to help direct your capital into turnkey investments.  This is an avenue to consider, particularly if you are troubled by the idea of having to manage property from afar {we are hands-on operators, so this has been the biggest challenge for us personally}.  Like anything there will be a tradeoff of cost for convenience - like when you pull into the full service lane at the petrol station.  And, like anything in this industry, you need to vet the other side of the transaction thoroughly before signing any agreement or sending any funds.

Once you have identified the area(s) in the U.S.A. where you would like to invest, another strategy to consider is finding a boots on the ground partner local to that area.  The right local partner will bring you knowledge and contacts you would be hard pressed to establish on your own from afar.  Sure you will be giving up some of the deal and its proceeds - perhaps half - but you will have local expertise who have skin in the deal and are motivated for its success.   BP is a very good vehicle to find, get to know, and vet such potential partners.

@Chad U. has laid out the broad strokes and many things you must consider when investing in real estate in the U.S.A;  several are every bit applicable to buying property in Canada.  Being a U.S.A. citizen transplanted to the north, you will have the advantage of already being familiar with - perhaps even understanding - the banking and lending practices south of the 48th.

The best advice I can share is to reiterate the fundamental message given by Chad and others above and recommend you sit down with an accountant and attorney who understand cross-border taxation, liability and real estate to ensure you get the ownership organisation which fits your present needs, but which can be evolved to meet your long term investment goals while protecting your assets and minimizing your taxation.

There are a multitude of ways you can own property in the U.S.A.: directly in your name; within a U.S.A. incorporated entity; via an JV/partnership; directly in the name of a Canadian corporation; or through a 'child' entity in the U.S.A. owned by a Canadian corporation. [Note: this is not an exhaustive list]. There will be pros and cons to each approach and some will make no sense in the context of your current situation and your future plans.

As a general guideline, the more organisation you have, the more overhead costs you will incur: corporate registration, business licences, corporate income tax filings, legal and accounting fees, etc.  The upside is more control over when you repatriate earnings and realize income and/or capital gains in your own hands and greater protection of personal assets through mitigated personal liability.  

If your plan is to own a small number of properties in the U.S.A. only, and your present personal income is in a lower to moderate income bracket, then holding property directly in your name may make the most sense. However, if your intention is to grow your U.S.A. portfolio or you are in a top personal income tax bracket, you may wish to incorporate an entity in the U.S.A. to hold your real estate. Your real-estate profits would be taxed at the applicable U.S. corporate tax rate; which is typically higher than a U.S.A. personal tax rate on U.S.A. residents, but frequently less than your personal marginal tax rate in Canada or the full Corporate income tax rate applied to passive income. Perhaps the biggest advantage is your retained earnings could remain in the U.S.A. entity (company/LLC) and would not have to be repatriated to Canada (as they would if you held the property in your personal name). This allows you to keep earnings stateside to reinvest in additional properties without dealing with shoving funds back and forth across the border.

Note: many/most folks here on BP, including accountant types will tell you holding U.S.A. real estate in a U.S.A. corporation will result in higher taxes.  This is typically true for a U.S.A. resident, but is often not the case for a foreign investor. 

If you hold property in the U.S.A. directly from Canada, you will have to repatriate the earnings which translates into paying the withholding tax (30% in most instances) to the IRS and then paying the delta, between the amount withheld and what you would be taxed in Canada on the full earnings, to the CRA. This holds true if you invest via a flow-though entity in the U.S.A. such as a partnership or flow-through LLC.

If you hold the property in a U.S. corporation, you can repatriate earnings when you choose {provided they are available ;-)} and can typically do so as a foreign dividend and pay a lower rate of overall taxation.   If your U.S.A. entity/corporation is a (100% owned) child of a Canadian corporation, taxes on repatriated earnings to the Canadian parent would be <=10%.

Another element, I neglected to work in above is whether you, as a US citizen, plan to return to the U.S.A. at some point.  This, combined with whether you intend to own, or continue to hold, Canadian real estate after such a move, will also impact how you organise your investments.

There is also the whole element of {family} trusts which may come into play - if you have children and want to plan for future transition of assets or income splitting.

After this long ramble, I've barely scratched the surface of the number of variables to be considered and possible complexity of picking the correct "now" and "later" organisation. This brings me full circle to my opening remarks.  Sit down with your partner and sketch out a plan of what you want to accomplish in the "now", the "mid term" and "in your dream scenario", then earmark several hundred dollars for professional fees and find yourself an attorney and accountant with cross-border business and real-estate experience (interview these folks like you would any other professional on your team until you find people with whom you are comfortable) and come-up with a starting point and a plan for growth which will allow you to add organisation as needed w/o incurring a large taxation event.

I hope the above is useful. If you were looking for an itemized step-by-step how-to guide, you will be disappointed, but better off.

[As an aside, Gary & Chad, these sorts of questions arise frequently enough that I'm toying with the idea of creating a sticky thread or a series of blog posts covering the various aspects.  To be thorough, I would invite both of your input and also be looking to recruit a {Canadian} accountant and/or attorney with the relevant taxation and cross-border experience ... there must be some hiding here on BP?]