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Canadians Buying US Real Estate

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A high level summary of the potential income/gift/estate tax considerations for Canadians (non-US person) who invest in U.S. real estate.

A high level summary of the potential income/gift/estate tax considerations for Canadians (non-US person) who invest in U.S. real estate.


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  • Canadian buying U.S. property is complicated. Any decision on the matter requires significant analysis. No solution is perfect, but there can be tailoring to suit your needs.
  • U.S. Green-Card HoldersWe should note that U.S. green-card holders can potentially be classified as non-residents in the United States through the use of treaty-tie breaking rules. This could cause problems with the U.S. green-card holders immigration or working status in the U.S., however.
  • The various ownership structures can be very complex and very fact specific. It is best to consult with a qualified attorney before a property is purchased or sold to determine any consequences.
  • Non-residents must file a U.S. return if value of U.S. situs property is greater than $60,000 (USD).“Small Canadian Estate”If a (non–U.S. citizen) Canadian resident decedent has a worldwide estate of less than 1.2 million U.S. dollars, U.S. estate tax will apply only to U.S. real property and certain U.S. business property (not to any other U.S.-situs property). Marital Deduction:Qualified Domestic Trusts (QDOTs) can also be set up to take advantage of a full marital deduction. The requirements for a trust to qualify for the marital deduction include that: (1) all income must be payable to the surviving spouse at least annually for life; (2) the surviving spouse has the power to appoint principal to the surviving spouse or to his or her estate; and (3) no other person has the power to appoint any part of the property to anyone other than the surviving spouse. QDOTs generally only defer the estate taxes. Subsequent distributions will generate estate taxes. The trust will most likely need one U.S. person (which includes a domestic corporation) as a trustee. An irrevocable election must be made by the trust. The estate tax return must be timely filed as well for the election to be valid. Generally, if the fair market value of the items (not including primary residence, a second residence, or the related furnishings) included in the QDOT exceeds $ 2,000,000 (USD), security requirements, such as a bond or letter of credit might be required to ensure that the taxes will eventually be paid. Note that if a QDOT is created, the “Canadian Marital Credit” can not be claimed, which is discussed next.The “Canadian Marital Credit”, is applicable where assets are transferred to a Canadian spouse at death. This credit, once elected, irrevocably waives the right to the marital deduction and is generally limited to the lesser of the unified credit allowed to the estate before the reduction for any gift tax unified credit, or the amount of estate tax that the U.S. would otherwise impose on the transfer of qualifying property to the surviving spouse. This credit is in addition to the unified credit! It is normally better to claim the treaty marital credit rather than setting up a QDOT. Non-Recourse MortgageGenerally, non-recourse mortgages held on U.S. situs property results in the net equity of the property being exposed to the U.S. estate tax. It is important to note that some U.S. states do not allow non-recourse debt, so you will have to discuss with an attorney or lender in the state you own such property to determine if this is a viable solution. One must also consider if they wish to pass on U.S. situs property to beneficiaries. Further considerations would be required.New Portability RulesWith the enactment of “portability” at Code Section 2010(c), US persons can shelter $10 million from US estate tax with only minimal planning. However, in general, portability does not apply to non-resident aliens. It is an open question whether the US exemption under Article XXIX-B(2) is portable if transfers to a Canadian spouse already pass free of US estate tax by reason of the credit under Article XXIX-B(3).
  • In Canada:Gifts of capital property, such as real estate [other than principal residence], or investments, the deemed sale will be at FMV and the giver will be subject to capital gains taxes. It is also important to remember that gifts of income producing property to children under the age of 18 will normally create attribution problems!In US:Gifts include any type of property, including cash. Generally, a gift tax return is due annually when the total amount of gifts given to a particular recipient exceeds the annual exemption limit. A married couple may combine their annual exemptions (currently $ 12,000 per recipient), but they each must file a gift tax return for that year even if their attributable amount is below the threshold.
  • Transcript

    • 1. Canadians Buying U.S. Real Estate
    • 2. Agenda• Buying U.S. Property – Residence, Owning U.S. Real Estate, Renting U.S. Real Estate, Estate Taxes, Gift Taxes, Investing Alternatives.• Investing in U.S. Income Earning Property – Income Tax and Withholding Tax Basics; – Scenarios – Investment Alternatives; and – Scenarios – Estate Alternatives.
    • 3. Buying U.S. PropertyDealing with Two Governments
    • 4. Tax Status and Residence• Generally, Green-Card Holders and U.S. Citizens, regardless of taxableresidence, are subject to U.S. tax on worldwide income.• Foreign nationals are subject to U.S. and State tax • On their worldwide income if they are resident in the U.S. • On their U.S. source income if they are not resident in the U.S.• Foreign tax credits are available in Canada for U.S. taxes paid on U.S.source income • No Canadian foreign credit for gift tax.• Residency and tax status are IMPORTANT!
    • 5. Residence• A substantial presence in the United States deems you to be a U.S. resident. The substantial presence test has two parts:1) > 183 days in the U.S. in the current year test  U.S. resident • Subject to tie-breaker rules under the Treaty.• 183 day cumulative 3 year test if > 31 days in the U.S. in the year • 100% of the U.S. days in the current year, plus • 1/3 of the U.S. days in the prior year, plus • 1/6 of the U.S. days in the second preceding year.• If the total number of days is > 183,  U.S. resident for the current year, unless a “closer connection” form is filed with the IRS.
    • 6. Substantial Presence: Calculation
    • 7. Owning / Selling Rental Property• Rental real estate • 30% withholding tax on gross rental income, or elect to file on net basis: • Individuals must file return within 16 months of due date or potentially lose all deductions.• Sale of property • Individuals: long-term capital gains rates – 15% • Corporations: 35% • Possible foreign exchange gain/loss • 10% withholding on sale (FIRPTA withholding) • NOT A FINAL TAX – MUST STILL FILE A RETURN.• State income tax issues vary!
    • 8. Investing With Others• Estate value allocations can be complicated • Generally proportioned by equity invested • Proof of contribution is critical.• Joint tenancy (with spouse) • Proceeds received by non-contributing spouse may be subject to gift tax • 50% of property generally ends up in the estate of the first to die • Property rolls over to spouse and eligible for marital deduction • Spouse takes FMV basis in the inherited portion.• Tenants in common (ownership with friends) • Joint tenancy between non-spouses can result in 100% of the estate of first to die • Flexibility problems associated with joint tenancy are avoided • But, all tenants are tied into probate process if one tenant dies • Planning can mitigate probate problems.
    • 9. Investing Through a Trust• Can be cost effective in certain situations• Complex, as trust rules vary between Canada and U.S. • No U.S. income tax advantage to accumulating income in a trust• If trust survives death of settlor • 21 year life of trust• If life beneficiary dies before settlor • Settlor would have to rent property to use it, or facts may suggest it is actually part of settlor’s estate.
    • 10. A Comparison of Tax Rates: Earned Income Capital Gains on Property Entity Active Passive Active Passive Individual 43% 43% 22% - 43% 22% - 43% Canadian 44% 44% 22% - 44% 22% - 44% Partnership USco 66% 66% 66% 66% Canco 56% 64% 45% 45% Canco / 56% 56% 56% 56% UScoNote: 2011 BC and Federal rates used. All percentages rounded to the nearest 1%. State income tax was assumed to be 5%. All rates are based on the top marginal rate. The effective rate is +/- 2 percentage points and is a complete flow through rate
    • 11. Residence – US Estate Tax Rules• Residence means domicile • Physical presence; • Intent to remain indefinitely; and • Greencard status.• Domicile determines whether all world-wide assets or only U.S.-situs assetsare subject to estate tax.
    • 12. U.S. Situs Property• U.S. estate tax applies to property situated within the United States,including: • U.S. Real Property; • Tangible Property in the U.S.; • Shares of U.S. Corporations (including in RRSPs); • U.S. Debts, Pensions and Annuities; and • Interest in partnerships carrying on a U.S. Business (maybe).• U.S. estate tax does not apply to property situated outside the United States,including: • Shares of a Foreign Company; • U.S. and foreign bank deposits; • Portfolio debt and bonds; and • Life insurance.
    • 13. U.S. Estate Tax - Nonresidents• $5.12M unified tax credit prorated on value of U.S. to Worldwide Assets • Based on Treaty.• 100% Marital deduction available to non-residents if assets transferred into aqualified domestic trust (QDOT): • Must have at least 1 U.S. trustee • Estate tax applies to any distributions from the trust • Defers estate tax until distribution or death of surviving spouse • No access to $5.12M unified credit or marital credit.• Marital credit available where non-U.S. spouse is the recipient: • Equal to the unified tax credit • Requires election, and waiving of marital deduction • Marital deduction must have otherwise been available • Open to U.S. citizens and Canadians.
    • 14. Estate Tax: The Other ½ of the Coin• Sell property before death; or Entity Estate Tax• Beneficial to invest into the U.S. through LLC Possible a Canadian corporation, from an Estate Tax perspective Canco N/A • Annual compliance • Taxable shareholder benefits USco Yes • Higher current income tax rate.• Canadian Limited Partnership • Can elect to be treated as a US Corp, but Canco / N/A would increase income tax if election USco made pre-death. May be possible post- Canadian Possible death (seek advice). Partnership• Life Insurance • Will reduce allocation of $5.12M credit as Individual Yes included in worldwide non-U.S. assets; and • Possible non-deductibility of premiums.
    • 15. U.S. Estate Tax – Post 2012Possible Options For Congress• Do nothing • Exemption will be $ 1M and rate of 55% as of January 1, 2013.• Extend TRUIRJCA bill •$ 5.12M exemption (indexed) and 35% rate• Pass a compromise bill • Possible $ 3.5M and 45% rate• Repeal the estate tax • Republican possibility• Wild Card • Anything goes!
    • 16. Gift Tax•Canada rules: • Deemed sale of all assets gifted (giver is liable). • Rollover to spouse. • Tax applies to 50% of any capital gains that arise.•U.S. rules: • Gift tax applies at 18% - 35% (giver is liable). • Tax applies to the value of item gifted.•Exemptions from U.S. gift tax: • A lifetime exemption of $5.12M is available, but reduces the $5.12M estate exemption. • $13,000 (USD) exemption per recipient per year for 2011. • Gifts to U.S. citizen spouse are excluded (not U.S. resident spouse). • Gifts to non-U.S. citizen spouse eligible for $139,000 (USD) exclusion for 2012.
    • 17. Gifting U.S. Property – Non-Residents•Canada: • The cost base of gifted property becomes the FMV at time of the gift; and • No treaty reduction or Canadian credit for U.S. gift tax.•U.S.: • The cost base of gifted property transfers to the recipient; and • Gift tax and generation skipping transfer tax (GSTT) may apply.•Double / Triple Tax: • U.S. gift tax / GSTT on initial gift; • Canadian tax (no U.S. credit) on taxable capital gain; and • U.S. income tax applies when recipient sells the property.• Gift tax does not apply to gifts of U.S. securities, gifts to charities and politicalparties, or amounts paid directly to an institution for tuition or medicalexpenses.
    • 18. Contact InformationDavid Turchen, CA, CPA(PA)MNP LLP300, 32988 South Fraser WayAbbotsford, BC V2S 2A8Email: david.turchen@mnp.caPhone: 604-870-7431