UPDATED: Tax considerations for Canadians purchasing U.S. real estate

If you are a Canadian who intends to purchase, or who has already purchased, real estate located in the U.S., you need to be aware of the U.S. and Canadian tax issues related to owning U.S. real property. Generally, the first question that arises is: in what manner should the property be held?

Ownership structure

How you choose to structure your ownership will depend on the purpose of the property. Will it be for personal use only, an investment which will generate rental income, or perhaps a mix of both? How long do you intend to own the property? Is your intent to create a legacy asset that is passed to future generations?

Ownership in your personal name is typically the first choice for many Canadians. This is the most straightforward option and the tax treatment upon sale may also be advantageous compared to other forms of ownership. Other options include ownership through a corporation, partnership or trust. Many advisors south of the border, as well as certain information available on the internet, recommend holding U.S. real estate through a Limited Liability Company (LLC). As a Canadian resident, this is generally not the best choice as it can potentially result in double taxation, with income tax rates of up to 70 percent.

Regardless of the reason for purchasing U.S. real estate, it is important to seek professional tax and legal advice in advance of your purchase, as restructuring after purchase can be costly.

U.S. estate tax implications

One significant disadvantage of holding U.S. real estate directly is the possible exposure to U.S. estate tax. The U.S. maintains the right to levy estate tax on Canadians who, at their time of death, own certain assets located in the U.S., called “U.S. situs assets.” U.S. situs assets include U.S. real estate, shares in U.S. companies, and tangible property located in the U.S.

Properly structuring the purchase of U.S. real estate will be a key consideration with respect to U.S. estate tax. Domestic law in the U.S. provides a basic exemption for non-residents of US$60,000. However, the Canada-U.S. Income Tax Treaty allows Canadians an exemption equal to that of U.S. citizens (US$11.7 million). Therefore, as a general rule, Canadians may be subject to U.S. estate tax if they own U.S. situs assets and their worldwide assets exceed US$11.7 million.

Individual taxpayer identification number

If you are a non-resident of the U.S. (and therefore do not have and can not get a U.S. social security number) receiving income from a U.S. property, or are selling U.S. real estate, you are required to obtain an Individual Taxpayer Identification Number (ITIN). An ITIN is a tax processing number issued by the Internal Revenue Service (IRS) used exclusively for helping individuals comply with U.S. tax laws. While applying for the ITIN is not onerous; the application process and required documents that accompany the application is often confusing. Our MNP team can assist non-residents with obtaining their U.S. ITIN number