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The ins and outs of buying U.S. real estate



Canadians’ most common misconceptions about buying U.S. real estate:  1. Rental or capital gains income reported in Canada does not have to be reported in the United States, and vice versa.
 In fact, says Mr. Walters, taxability is determined by residency or citizenship and where the business activity took place. If the rental activity happened in the U.S., the income is taxable in the U.S. Likewise, as a resident of Canada, you are subject to tax on your worldwide income, regardless of where it is earned. You can use the foreign tax credit to reduce your Canadian tax by the amount of the U.S. tax paid.
 2. Owning U.S. real estate in my Canadian corporation is a good idea.
 There are actually a number of reasons not to own U.S. real estate in your Canadian corporation, Mr. Walters says. Any profits will be subject to double tax in the U.S., and you will also lose special tax treatment of long-term capital gains at 15 per cent. All income in a corporation will be taxed at ordinary income tax rates, which can be as high as 38 per cent. Foreign rental income cannot be deferred income in your Canadian corporation.
 3. If I rent only to Canadians and they pay only in Canadian dollars, I will not owe U.S. taxes.
 Actually, where a tenant is from or what currency they use is irrelevant. You must pay tax in the country in which the income is earned and in the country in which you live. Do not forget to use the foreign tax credit to prevent double taxation.
 4. Having a house in the U.S. at my death will cause all of my assets to be subject to U.S. estate tax.
 The non-resident estate tax system is set up to tax only U.S. assets at the time of death, Mr. Walters says. You do not have to let U.S. tax authorities know about other assets. However, it is usually beneficial to report your worldwide assets because of the exclusion from U.S. estate tax allowed under the U.S.-Canada Treaty. Under the treaty, Canadians can use the same exclusion Americans are allowed – currently $5-million (U.S.) per person.
 5. The U.S. will impose a tax of 50 per cent on assets subject to U.S. estate tax.
 The 50-per-cent tax is part exaggeration and part lack of information about the U.S.-Canada treaty, Mr. Walters says. Prior to 2010, the highest marginal tax rate was 45 per cent. The rate is now a flat 35 per cent for amounts over the $5-million exemption.


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