Canadians Buying & Selling Real Estate in the U.S.

Many people ask whether it is wise to buy Real Estate in the U.S. and there really is no straight answer to this question.  We’ve seen people buy and sell real estate in the U.S. recently and lose their shirt, while we’ve seen other people make a small fortune recently in U.S. real estate.  Just like in Canada there are many factors that affect the success of real estate transactions such as location, purchasing with a margin of safety, ensuring a thorough home inspection, having someone to take care of the property and the list goes on.  The real key in any real estate transaction is that you have to realize that you really make the return when you buy, not sell.  Buying the right property in the right location at the right time is really key!  Another question asked is whether people should buy the U.S. property personally or through a Corporation.  This question is different for each individual as everyone has a different situation when it comes to tax, liability and estate.  Keep in mind that the U.S. estate tax, which has been proposed to change recently can be a factor in making your real estate investment decision.  When buying, renting or selling properties in the U.S., you should know the basics on tax.  If you have income from property in the U.S. during a calendar year you must file a U.S. tax return.  If you do not have income from your U.S. property then you do not have to file a U.S. tax return.  You do not have to file an income tax return in the U.S. when you purchase U.S. property, however you must file one if you sell a U.S. property.  As mentioned in my prior blog when you sell a U.S. property they will take a withholding tax (typically 10-20%) on the gross proceeds of the sale.  To get this withholding tax back you must file a U.S. tax return and claim the U.S. tax paid as a credit on your Canadian tax return.  There are many considerations when dealing in the U.S. so please don’t hesitate to contact us for any questions.  We have a lot of knowledge and work closely with specialists in these areas. 

Canadians Investing in the US

Many people decide to invest in the U.S. but don’t know the rules.  There are 2 ways that people invest in the U.S., directly and indirectly.  Investing directly means that you invest personally, or through an entity, in the U.S.  Investing indirectly is when you invest through a broker and they put you into U.S. investments, partially or wholly.  Investing directly in the U.S. allows you to crystallize the type of passive income you will receive.  As discussed in other blogs, different types of income are taxed differently.  Of course investing in the U.S. brings more complication so you should know at least the basics before investing in the U.S.  Capital Gains is typically the best type of passive income you can receive from U.S. investments as, just like in Canada, only 50% of the gain is taxable.  Unlike Canadian dividends, dividends from a U.S. corporation or trust are considered non qualifying dividends.  This means there is no tax credit associated with the dividend, so you pay the full tax on the dividend income, just as you do on interest income.  Sometimes dividends earned from the U.S. show up on a Tslip as other income.  When reporting U.S. investment income on your Canadian return you must exchange the U.S. income to Canadian dollar income.  The acceptable exchange rates include the average for the calendar year the income was earned, or the exchange rate on the day the income was received.  The best place to get the acceptable exchange rates is from the Bank of Canada website.  There is typically no need to file a U.S. tax return or pay U.S. taxes on your U.S. investments when you are not a U.S. citizen (living in Canada), however there are exceptions.  One such exception is the sale of Real Estate, where there will be an amount held back for U.S. income tax.  In this case you need to file a U.S. tax return to ensure you don’t get double taxed in both Canada the U.S.  In my next blog we will discuss some of the basic ins and outs of purchasing and selling real estate in the U.S.

Doing Business in the U.S. Part 2

If you are doing a substantial amount of business in the U.S., and Permanent Establishment, or Nexus applies to you, then you must carefully consider the best entity to use to do the U.S. business.  There are typically 4 Structures used in the U.S. to do business:

          1. C-Corporations

          2. S-Corporations

          3. Limited Liability Corporations (LLC's)
          4.Trusts

Here are some basic points on each:

C-Corps:

•          Taxed similar to Canadian Corps except dividends are treated different. (no gross up or dividend tax credit)

•          Anyone can own a C-Corp.

S-Corps:

•          You typically have to be a U.S. Citizen or Resident (U.S. Person) to own an S-Corp.

•          With S-Corps there can be no Corporate tax.

LLC's

• These are not advisable for Canadians as there may be a possibility of double taxation

Trusts:

•          Typically are only used by U.S. persons.

•          Trusts can be effective when partnering with a U.S. person

There are more options than what I’ve listed here and there is much to know about each.  You should also consider where to incorporate.  The decision on where to incorporate generally depends on where the corporation does/will do business. If the company is primarily doing business in one state, it is generally recommended that the incorporation should be done in that state. If the company is doing business in several states, you can incorporate in Delaware and file to qualify to do business in the other states the company conducts business in. The company only pays tax in Delaware if it actually is doing business there (there is a nominal annual fee paid to Delaware). The company files tax returns in each state it is doing business generally using the allocation method in which profit is allocated to an individual state based on property, payroll and sales factors.  For companies with no presence in any state, the Delaware Corporation is typically recommended, however it is not the only option. 

This now wraps up our series on Cross Border.  If you have any questions or comments on the blogs, please let me know.  We work closely with Cross Border experts so if we can’t answer your question, they will. In my next blogs we will get back to Canada which is more my expertise.  

Kustom Design to Host Free Information Session This Month on 2011 Financial Boot Camp

News Release | January 11, 2011 | For Immediate Release

Kustom Design to Host Free Information Session This Month on 2011 Financial Boot Camp
Group recognizes how to save individuals on taxes and manage finances better

January 11, 2011 (Calgary, Alberta) - In our efforts to heighten awareness on the importance of taking control of finances, Kustom Design Educational is hosting a free information session to introduce members to our 2011 Level One Financial Boot Camp, which is designed to help individuals generate cash flow and excellent returns no matter what state the economy is in.

“We are very excited to host our free information session, and show people that it is possible for them to design the life they want to achieve,” said Kustom Design CEO Michael Lepitre. “People are accountable for the results they see financially, and Kustom Design’s information session focuses exclusively on the value of financial education and will show people how we can help them overcome any financial roadblock.”

Event: Kustom Design Free Info Session
Date: January 12th, 2011
Time: 7:00pm – 8:00pm
Location: Kustom Design Office on 221 18th St. SE in Calgary, Alberta

To sign up for Kustom Design’s free information session, and for more information on the 2011 Financial Boot Camp Level One visit http://www.kustomdesign.ca/.

About Kustom Design Educational
Kustom Design Educational, a member of the Kustom Design Group of Companies, is an organization designed to provide educational courses and resources on finance and taxes.

PDF News Release Download

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Media Contact:
New Wave Media | Ashley Feist | (403) 457-0919 ext. 228 | info@new-wavemedia.com

Doing Business in the U.S. Part 1

There is a lot to consider if you are a Canadian and wanting to do business in the United States.  We will only cover the basics in this blog to give you an understanding of some of the things to consider before doing business in the U.S. As always a professional consulting appointment should always happen when you are considering any business or personal transactions in the U.S.  We’ve already discussed a lot of the personal dealings in the U.S., such as vacation, retirement, investing and real estate in the U.S.   Doing business in the U.S. can be the most complicated of them all.

The first thing to understand is that the U.S. has rules and so do each of the States within the U.S. First we must look at the tax treaty between the U.S. and Canada in this area and see how it applies.  The main rule here is based on what is called “Permanent Establishment”  In simplistic terms it comes down to whether you are doing the actual business in the U.S. or are you really doing it in Canada with U.S. persons or businesses.  If you do not have a permanent establishment, such as a storefront, shop or office in the U.S. and all your decisions are made and contracts are signed in Canada then you most likely have nothing to report in the U.S. The Permanent Establishment rule of course comes with exceptions, such as locations for storage, display or delivery.  You must be careful in having an employee go down to the U.S. to do business as this employee could also be considered for the “Permanent Establishment Rule”, particularly if they have the authority to sign the contract or deal.

Each State in the U.S. also has their own rules and sometimes do not follow the treaty.  Many States have a threshold for determining whether State tax applies and this is known as “Nexus”.  Generally, nexus is some minimum contacts that the Canadian Company has with the State.  The presence of a Canadian employee, assets, inventory and even attendance at trade shows are some of the factors a State can use to determine whether nexus applies.  Each State has its own standards, so again careful planning must be done to consider all the tax consequences of doing business in the U.S. and in a particular State.