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Canadians Investing in U.S. Real Estate

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by Arizona real estate and partnership attorney Richard Keyt

A lot of Canadians hire me to form an Arizona limited liability partnership (LLP) or limited liability limited partnership (LLLP) to own real estate in the United States.  I created this web page called “Canadians Investing in U.S. Real Estate” to answer common questions Canadians have about investing in U.S. land – residential, commercial, industrial, apartments, raw land or any other type of land.

Limited Liability Partnership (LLP) Formation Agreement

Limited Liability Limited Partnership (LLLP) Formation Agreement

Limited Partnership (LP) Formation Agreement

  • Requirements for a Non-US Person to Open a US Bank Account – This article is written by an Assistant Vice President of Comerica Bank who may be able to open a bank account for a Canadian or a citizen of another country without requiring that the non-US citizen come to the United States.
  • Canadian & U.S. Certified Public Accountants, Chartered Accountants & Financial PlannersKeatsConnelly is the largest and most experienced cross-border wealth management firm in North America that serves Canadians and Americans with life and business interests on both sides of the border. Its expert cross-border and multi-discipline team helps to simplify and enrich the lives of Canadians and Americans living or working in both countries. KeatsConnelly provides unique, personal, and effective cross-border wealth management services that are designed to ease the financial complexities of living an international lifestyle, including financial planning, tax planning and compliance, and investment management services.
  • The Border Guide ForumKeatsConnelly, CPAs, online message forum where you can ask questions about cross-border issues, receive answers and read questions and answers asked by other Canadians about investing in the United States.
  • Canadians who purchase an asset located in the United States that generates U.S. source income must file a U.S. tax return on IRS Form 1040NR.  Before a Canadian can file an IRS 1040NR, he or she must get an International Taxpayer Identification Number (ITIN).  I recommend Canadians get the ITIN as soon as possible because it can take a minimum of three months for the IRS to approve a request and issue the ITIN.  For more about ITIN’s see our ITIN information web page.

Estates of Canadians Who Invest in U.S. Assets May Be Liable for U.S. Estate Taxes

  • U.S. Estate Tax and Cross Border Benefits for Canadians – A good short summary of how U.S. estate tax can impact Canadians who invest in the U.S.  It has several examples based on the 2012 U.S. estate tax exemption amount of $5,000,000, which applies only to people who die in 2011 and 2012.  This exemption amount will decrease to $1,000,000 for people who die after December 31, 2012, unless Congress passes a law that changes the exemption amount and the President signs it.
  • U.S Estate Tax Issues for Canadians – A more in depth explanation of how U.S. estate tax affects Canadians who invest in the U.S., but it was written before the U.S. changed the estate tax exemption amount in December of 2010, to $5,000,000 for people who die in 2011 and 2012.
  • U.S. Estate Tax – Another short explanation, but it ends with this all to accurate statement:  “Tax Tip:  This is complicated, so get professional advice if you plan to own more than $60,000 of US assets when you die.”
  • An article entitled “Estate Taxation of Nonresident Noncitizens: A Primer” provides an overview of the U.S. estate tax rules that apply to nonresidents who are not U.S.citizens. The long arm of the U.S. federal estate tax extends to individuals who have assets located in the United States even if the individual is neither a resident nor a citizen of the United States. The statutory framework of subchapter B of chapter 11 of the Internal Revenue Code ode is not well understood, even by specialists. Those Code sections are not taught in most law school courses in federal estate and gift taxation. In light of the staggering staggering amount of foreign investment — $1,245.7 billion of financial assets (excluding derivatives) in 2010 — the estate tax rules governing nonresident noncitizens deserve attention.

One way for Canadians to avoid U.S. estate tax is for the Canadian to invest in the U.S. assets in a way that does not involve the Canadian individual owning any U.S. assets.  For example, if a Canadian individual owned 100% of a Canadian corporation that owned a U.S. limited liability partnership that owned valuable U.S. real estate, U.S. estate tax would not apply to U.S. assets because the Canadian did not own the U.S. assets.  His or her Canadian corporation owned the U.S. assets.

This resolution to the potential Canadian / U.S. estate tax problem ultimately involves analysis and a solution from the Canadian law perspective.  Canadians should consult with an experienced cross-border tax, entity formation and estate planning advisor to determine how to structure the outside the U.S. ownership entity.  Should the Canadian form a Canadian trust, corporation or partnership?  Should the Canadian create an offshore trust in the Cayman Islands, Lichtenstein or some other non-U.S. and non-Canadian jurisdiction and add it to the mix?  What are the Canadian and U.S. income tax consequences of the non-U.S. structure?  It may be that steps taken to reduce or eliminate the U.S. estate tax may increase the annual U.S. and/or Canadian income tax and vice-versa.

If you know of an experienced Canadian attorney who knows how to solve these problems, please tell me his or her name. All of my Canadian clients need the answer to this Canadian / U.S. estate tax problem.

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