All Forum Posts by: Gord Stevenson

@Lucky Tiderman

Another interesting wrinkle is potential capital gains tax in the other country due to currency swings. I bought a condo in Mexico when the currency was 13 pesos to the USD. Recently it peaked at 21 and now it is back to 17 or so. If I had sold at 21:1 for exactly the same number of US Dollars that I paid, according to the Mexican tax authority that would be a 21/13 capital gain and I would owe about 30% of that as tax! Yikes! Think through what you expect the currency to do, and in what currency the properties are being bought and sold.

@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?

if I was partnering with my son, and I was providing the money/credit, I would be happy if my son took the initiative to (a) find the deals and (b) handle the day-to-day "business".  (A) speaks for itself, but (b) may require explanation.

For my own properties I spend time each month looking at any bills being processed by the property manager.  E.g. Today I saw a work order for a loose/rocking toilet.  But a month or two ago there was a similar work order.  And I vaguely remember a similar one maybe a year ago.  What is going on?  Is the contractor not actually fixing it?  Is the tenant lobbying for a new toilet? I need to get to the bottom of that.  Also, at the end of each month I go through the reports for each property and update my own accounting to make sure I understand revenue and expenses for each and that there were no mistakes.  

One of my properties is a vacation rental and for that one I am the rental manager and deal with bookings, cleaning schedule, setting door codes, communicating with guests etc.  

At the end of the year I do all the US and Canadian tax returns.

If my son was partnering with me, and I was providing the money/credit I would be happy if he took all of this off my hands and managed the business.  Partly just to free up my time, but far more importantly because teaching him how to run a business would be the main objective.  This is the perfect learning-on-the-job opportunity and it would give me great satisfaction to provide him the opportunity to gain that skill.

If your mother is similarly motivated, make her proud!  And help make her some money!  

Great question!

BTW! As it happens, my son took a finance degree and is smarter than his old man.  He and a friend have a four-plex that they manage.  I ask him questions now.  Maybe he will hire me for a nice cushy retirement job some day.  :-)

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.

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.

If you are referring to expense categories, why not use the ones the IRS requires when reporting rental income!  That way you won't have to reclassify expenses at tax time.  

@Simone Newsome sorry I forgot to add the mention in the post above so you would get notified.

Ok, 1% annual (not monthly) but excluding electric and cable/wifi/phone. That makes sense. My HOA includes those items, so it sounds like the same ballpark.

So, the key items then would be believing the rental night numbers...and then allowance for state rental taxes (if they exist in your area, and if not being accounted for in the above numbers...I pay 2%).  And IVA (income tax) assuming you are going to be compliant with tax laws.  I know some don't file IVA but it is the law, and not doing so may come back to bite.

Good luck!  I hope it works out well for you.  We do like our condo and I am happy we did it.

@Account Closed 1% HOA sounds high. These are approximate numbers from memory for a 2bdr/2bath condo in Puerto Penasco: My HOA fee is $358/mo and includes water. Plus I have to pay the HOA $10/night for nights that are rented. I pay electric ($80-100/mo) separately. Property tax is very low ($100/yr or so). State rental tax is 2% of revenue. IVA (income tax) is something like 30% of profit...but only full "factura" expenses can be deducted. When you sign up to pay income (IVA) tax, the tax is phased in over 10 years, so you only pay 10% of it the first year, 20% of it the second years, etc until you pay 100% of the 30% or so in the 10th year. Most people would need a Mexican accountant to help with filing state rental and federal income taxes...I pay $58/month for that...although maybe your HOA fee covers that? I view it as a bit of a retainer as well as she is local, speaks Spanish, and knows "everybody" and can straighten out small issues when they pop up, and can pay the local electric bill etc. If you are renting in Mexico I believe you need a Tax ID number, and to get that you need a Temporary Residency card. That costs a few hundred dollars to set up and maintain.

I have a vacation rental in Mexico. Yes it can work. From an income perspective the key is occupancy. I highly recommend doing due diligence on real historical occupancy for condos of your type (1 bedroom, 2 bedroom, etc) and talk to a few others who already have experience to make sure you get an accurate picture of costs. Do you need to have and maintain a fiedocomiso (spelling? A bank trust, anyway). If so, that could be $500 per year. HOA fees? How are repair bills?

Another interesting wrinkle is potential capital gains tax in Mexico due to currency swings.  I bought a condo when the currency was 13 pesos to the USD.  Recently it peaked at 21 and now it is back to17 or so.  If I had sold at 21:1 for exactly the same number of USDollars that I paid, according to the Mexican tax authority that would be a 21/13 capital gain and I would owe about 30% of that as tax!  Yikes!  Think through what you expect the currency to do, and in what currency the properties are being bought and sold.