Canadian investing in US. Should I open a LLP?

Question

Lesley Resnick · Answer

The LLC will provide you asset protection.  In your case not being a us citizen, it would be hard for someone to sue you.  The bigger issue is going to be financing.  Some banks only want to lend to LLC's others want personal.  I recommend checking with the larger US banks, Citi, wells etc.  I think you will have the most success with TD, they do a  lot of Canadian / US investment loans.

Roy N. · Answer

@Gord Stevenson

This is why I always encourage folks to spend a few hundred dollars and consult with an accountant and attorney who are versed in cross-boarder business and taxation as everyone's situation is a little different.

In my other (active business), we've had an U.S.A. incorporated "child" entity for many years.  The control over repatriation of capital (dividends from 100% owned child entities are repatriated to the Canadian parent with little to no taxation).   It's not a matter of claiming back tax, but a matter of having eyes-wide open when you set-up your ownership structure.

Again, what works for us and what works for you, may not be the best solution for the OP.

Hai Loc · Answer

You should consult CPA

Fan Nahi · Answer

Hi @Arthur Neves,

I am in a similar situation. Wondering what route did you take? Curious as wondering what would be tax effective to buy and rent property.

I am Canadian looking to buy in USA

Gord Stevenson · Answer

@Roy N.  I suppose you could elect to treat the LLC/P as a corporation for tax purposes in the US, and then be ok with the CRA treating it as a corporation in Canada.  That may solve the double taxation issue, although there may be one o more flies in that ointment.

From a US tax perspective, at least when I reasearched it in 2009/10, there were higher tax rates for corporate income than for personal income, both for rental income and for capital gains.  That may or may not be the case now, and it may change again if Trump is successful in reducing corporate tax rates in the US.  But at the time that is why most advice was to elect partnership (personal flowthrough) treatment.

From a Canadian tax perspective I would want to check the details on how exactly to claim back US corporate tax against Canadian corporate tax.  I.e. Would the Foreign Tax Credit (a simple form attached to an individual tax return) do it?  Or would you have to maintain a corporation in Canada and file a corporate tax return?  I could be wrong buy my gut tells me the CRA would make it difficult somehow.

My guess is that very few LLC/Ps in the US are set up to treat income as corporate income.  It would be interesting to know that, and if so what are any other implications of doing that besides tax rates.  Do you know?

Roy N. · Answer

Containment of liability is not the only reason to use an incorporated entity.   Depending on your goals, holding U.S.A. property inside a corporation may even be preferable as it allows you to control when/if retained earnings are repatriated to Canada - if you're objective is to grow your holdings, you can leave the retained earnings in the corporation to be reinvested.

An LLC is not automatically a "flow-through" entities, depending where you are operating, you may elect for an LLC to be taxed as a corporation or as a flow-through entity.  If your intention is to treat it as a corporation from the outset, then the 'great surprise' of misalignment between U.S.A. taxation and the CRA does not occur.

Gord Stevenson · Answer

I should add a few points to answer the rest of your question.

The whole point of using a LLC or LLP to hold a property is containment of liability risk.  If you get sued, only assets held in that entity are at risk...at least in theory.  Some would say it is not foolproof, but that is the theory.  There is no difference in tax payable (in the US) as a result of holding the property in an LLC or LLP.  Those entities are "flow through".  The only purpose of the entity is liability containment.  The downsides are complexity (both the entity and the individuals require tax returns); and financing difficulty if you need a mortgage.

Now that the CRA has made it so that you will likely suffer double taxation if you use an LLC or LLP, in my opinion, it would be better to own the property in your own name(s) and buy more liability insurance.

Gord Stevenson · Answer

I am not an expert, and have no credentials...so this is opinion only.

The short answer is NO!  Historically the CRA (Canada's tax authority) sees LLCs as corporations for tax purposes so there is a mismatch between "personal" tax being paid in the US and "corporate" tax being paid in Canada...so the tax treaty does not allow you to reclaim US tax paid through a foreign tax credit.  Therefore, Canadians historically used LLPs.

But in Spring 2016 the CRA said they were clarifying (I say changing) their position and that LLPs would now also be treated as corporations.  They said they would grant lenience for those who converted their LLPs to LPS before the end if 2017.

Then, in Spring 2017 after hearing a lot of feedback they said they would grandfather LLPs that already existed, within a few constraints, but that any new LLPs would be treated as corporations.

So, going forward, using new LLPs could result in double taxation.

There are a number of nuances but that is the essence as I understand it.

Canadian investing in US. Should I open a LLP?

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