On The Beach Education Corporation

Okay, for you Canadians who insist on buying investment property in the United States of America, you really need to do your due diligence in TAXES before you buy. You need to consult with a professional advisor who is familiar with being a Canadian resident and owning U.S. real estate because you are in for a nasty surprise if you don’t.

Most Canadians attend a seminar where a real estate guru makes these promises that this is the only way to hold an entity. That may be true for that person, but it does not necessarily mean it’s true for you.

One of the complications that arise is that these gurus do not know Canadian law. This is the nasty surprise scenario: You decide to create an LLC (limited liability corporation) to be on title for U.S. property. In the United States, an American citizen who creates an LLC can hold real estate in this entity and the income is taxed as a flow-through entity at their personal marginal tax rate.

Not so if you are a resident of Canada. According to Canadian taxation law, an LLC is not treated like a flow-through entity. It is treated as a corporation. All corporations that own real estate are considered passive entities and are taxed at the highest marginal tax rate (46%) with the exception of active entities. To be an active entity that holds real estate, you must have five full-time employees and show T4 slips for them. If your business meets this litmus test, then you are considered an active real estate business and are taxed at the corporate tax rate of 18% as of January 1, 2010.

When you understand this, then you can make a truly informed decision as to how to hold your real estate.

p.s.  you also need to understand FIRPTA (if you don’t know what this is then you really shouldn’t be buying real estate in the USA) and the implications of the 30% and 10% withholding taxes