Tax Tips for Real Estate
Investors
By: Allan Madan, CPA, CA
Madan Chartered Accountant
Personal investment
Topic of discussion:
•Pros / Cons
•Types of ownership
•U.S. tax forms
Personal investment
Pros
Cons
• Simplest structure – no significant
set up cost
• no liability protection (insurance is a
must)
• Lower annual compliance cost (tax,
state, etc)
• Estate tax may apply for individuals
with over $5M in worldwide net
assets
• Easier to obtain mortgage
• Access to the U.S.’ long term capital
gain tax rate (if held > 1 year)
• Probate fees may apply depending
on each state
Personal investment
Estate tax in more detail
o Unlike Canada which imposes tax on the accrued gain of a
deceased taxpayer at the time of death, the U.S. imposes tax
on the net asset of the taxpayer at the time of death
o For Canadians that are not US residents, estate tax applies
on the value of their U.S. assets if the FMV of their worldwide
assets exceed $5.34Million (2014)
Personal investment
Estate tax in more detail
o Under the Canada – U.S. tax treaty,
U.S. allows two major credits to
reduce or eliminate estate tax for
Canadian residents:
o Unified credit
o Marital credit
Personal investment
Estate tax – Unified credit
The U.S. allows Canadian taxpayer to reduce their U.S. estate tax liability by the following amount:
Personal investment
US estate tax
$1,145,800
Less: Unified credit
$624,540
US estate tax
$521,260
Estate tax – Unified
credit – Example
Fact
o U.S. stock holding:
$1M
o U.S. Real estate:
$2M
o Total worldwide
asset: $10M
Personal investment
Estate tax – Marital credit
The U.S. allows Canadian taxpayer to double the unified credit if
the U.S. assets are passed on to their Canadian resident
spouse
Personal investment
US estate tax
$1,145,800
Less: Unified
credit
$624,540
Less: Marital
credit
$521,260*
US estate tax
$0
Estate tax – Unified &
Marital credit –
Example
Fact
o U.S. stock holding: $1M
o U.S. Real estate: $2M
o Total worldwide asset:
$10M
* U.S. estate tax liability
cannot be reduced to
below zero
Personal investment
Estate tax – How to plan
for it
o Life insurance
o Consider different
structure including
Canadian corporation
(be aware of double
tax)
o Obtain non-recourse
mortgage for U.S.
property (reduces
value of U.S. asset)
Personal investment
Tax reporting – each investor
must obtain/submit:
o Individual Taxpayer
Identification Number
(ITIN)
o Form W8-ECI to property
manager (reduces
withholding tax to 0%;
else 30% applies)
o Form 1040NR – U.S.
Nonresident Alien Income
Tax Return (Usually due
June 15)
Investment via U.S. Structure
Topic of discussion:
•U.S. Limited Partnership
•U.S. Limited Liability Limited
Partnership
•Potential structures for avoiding
estate tax
•U.S. tax forms
U.S. Limited Partnership
Pro
• Offers limited liability protection for
investors (the general partner bears
the risk)
• No double taxation issue
• Flexibility in terms of adding or
removing investors
Con
• Set up cost can be significant
• Must manage various annual tax
and other compliance requirements
• Estate tax will apply on the U.S.
Partnership interest (considered U.S.
– situs asset)
U.S. Limited Partnership
Sample structure:
Husband
(Limited Partner)
49.5%
Canada
U.S.
Wife
(Limited Partner)
49.5%
U.S. C-Corp
(General Partner)
1%
U.S. Limited
Partnership
U.S. Real
estate
U.S. Limited Liability Limited Partnership
o Only available in certain states (~27
states)
o Florida, Arizona, Hawaii, Texas, Illinois,
Iowa, etc
o Works same as limited partnership
except the general partner also has
limited liability protection (ie. every
partner has limited liability
protection)
o No need for another C-Corp to act as
general partner (reduces set up and
annual compliance cost)
Structure idea:
Husband
Canada
U.S.
Wife
1%
General
Partner
1%
General
Partner
U.S. Limited Liability Limited
Partnership
U.S. LLLP
49% Limited
Partner
49% Limited
Partner
U.S. Real
estate
Potential Structure for Avoiding Estate Tax
Upon death, the
Canadian’s U.S.
partnership
interest will
constitute part of
his/her U.S. asset
for the purpose of
U.S. estate tax
A potential
solution is to own
the U.S.
partnership
interest via a
Canadian
partnership
A Canadian
partnership
interest does not
constitute U.S.
asset
Husband
(Limited Partner)
Canadian
Corp (General
Wife
(Limited Partner)
Partner)
49.5%
49.5%
1%
U.S. Limited
Partnership
(Limited Partner)
Canada
U.S.
1%
99%
U.S. Limited
Partnership
U.S. Real
estate
Potential structure for avoiding estate tax
o Caution:
o The IRS have not
formally declared
whether they will
consider Canadian
partnership interest
which holds U.S.
real estate
partnership interest
as part of U.S.
assets for the
purpose of U.S.
estate tax
U.S. tax reporting
o Personal Obligations:
o Obtain ITIN
o Submit Form W8-ECI to the
partnership
o File Form 1040NR – Nonresident Alien
Income Tax Return
o Partnership Obligations:
o Remit withholding tax on a quarterly
basis (39.6% of income attributable
to non-U.S. partners)
o File Form 8804/8805/1065 by March
15 (Partnership returns)
U.S. tax reporting
Partnership Obligations
(cont’d):
• File annual compliance
form with fee to the State
(non-tax)
Corporation Obligations:
• File Form 1120 or 1120-F
by March 15 (Corporate
tax return
• File annual compliance
form with fee to the State
(non-tax)
U.S. tax reporting - reminder
o Most state also require
separate tax filing which may
or may not have the same
filing due date as the federal
returns mentioned in the
presentation
o Same with withholding tax
requirements
Double Tax Problem
o
o
o
o
S Corporations
LLC
Flow-through for US
Corporation for Canada
Three tier structure
for investment
properties
o The Three tier structure is
designed for and used by real
estate investors. It consists of
three corporations:
1) A management corporation
2) A Real Estate company
3) Holding corporation
o For more information, please
visit
http://madanca.com/blog/ben
efits-three-tier-structure-realestate-investors/
Tax Issue for
Non-Resident
Investors
o
o
o
Tax Account Number
o Mandatory to obtain a tax account number so the CRA can
track your tax filings
Withholding Tax
o Withholding tax applies at a rate of 25% on the rents that
you collect in Canada
NR6 Form
o This form reduces the withholding tax
Continued...o
o
NR4 Slip
o This slip reports the gross rents you collected and
the total withholding tax you remitted to the CRA.
o You have to collect this form no later than March
31st of the following year or you will face a penalty
Annual Tax Returns
o Annual tax returns must be filed
o Section 216 tax return is due by June 30th of the
following year
For more information, please visit
http://madanca.com/blog/non-resident-tax-onrental-properties-in-canada/
Disclaimer
o The information provided in this
presentation is intended to provide general
information. The information does not take
into account your personal situation and is
not intended to be used without consultation
from accounting and financial professionals.
Allan Madan and Madan Chartered
Accountant will not be held liable for any
problems that arise from the usage of the
information provided on this presentation.