rental property in US . . .tax treatment?

[GO_JETS]

Hi,

I was thinking of buying 3-5 properties in the US for rental purposes? I was thinking about spending around 100K for each one and holding on to them for 2-5 years. I wanted to know what's the most effective tax treatment for this type of investment. . . I would prefer to file taxes only in the US and keep it separate from my Canadian return, if possible.
I was looking into LLC's and S-corps. OR at last resort doing a parent Canadian entity and a US subsidiary.

If anyone has experience with their own personal rental properties, it would be greatly appreciated to get some feed back on this.

[agnelson]

You won't be able to shield your income form Cdn tax. So no need to investigate/concoct some elaborate scheme. Buy them, rent them, pay tax on any profits (in US first, then Canada).

[GO_JETS]

well not trying to form a scheme . . . but I was aware of different approaches one could take in terms forming a particular entity when undertaking this sort of business in the US.

[agnelson]

I didn't mean scheme in the perjorative, only that it probably was not worth the money and effort, and definitely would not accomplish what you are wanting to do.

[Steven]

I was thinking of buying 3-5 properties in the US for rental purposes? I was thinking about spending around 100K for each one and holding on to them for 2-5 years. I wanted to know what's the most effective tax treatment for this type of investment. . . I would prefer to file taxes only in the US and keep it separate from my Canadian return, if possible.
I was looking into LLC's and S-corps. OR at last resort doing a parent Canadian entity and a US subsidiary.

I never quite get why people want to put their properties in a corporation, I can't see any advantage to it. At the end of the day you are the shareholder and you have to take the money out of the corporation to pay it to yourself, thus you have income and as a resident of Canada, income tax is liable on it.

The main reason not to personally own rental property is for inheritance reasons, so your probate does not have to be performed in each jurisdiction. Usually a trust is used for this, but trusts are taxed at 75% of the income tax rate (or however they express it, I forget, half the income tax rate and half the capital gains tax rate which is half the income tax rate so 50% + 25% = 75%). Capital gains tax is at a lower rate so even using a trust doesn't usually make sense if my understanding of Canadian trusts and foreign probate law is up-to-date. It would make sense if the property was transferred to a trust directly before the owner died I suppose as the capital gain would be minimal on transfer and it saves the grieving family having to mess with foreign probate immediately.

This CRA publication is quite useful in explaining the rental of US property: http://www.cra-arc.gc.ca/E/pub/tg/p151/README.html - page 16 onwards.

But it's a bit out-of-date because as the tax treaty stands now I think the rental income has to be considered effectively connected with a US trade or business, you no longer have a choice - but why on Earth you wouldn't do it that way I have no idea as the publication explains.

So you bang it down on your 1040NR and also declare it on your T1 and claim a foreign tax credit on T2209 and T2036.

Helps to get an ITIN - file a W-7 with your first 1040NR, let the IRS lose the application, then file W-7 again and lie by checking the box for "a" which makes them issue it without any other paperwork. Presumably you'll have a US bank account which usually means a W-8BEN anyway, and then you can legitimately check box "a" to get the ITIN.

[agnelson]

No, nothing has changed in the treaty on this issue.

Quite simply, both IRS and CRA are perfectly happy to accept full non-resident tax from you if you wish. In canada, a non-resident can always just pay the 25% withholding every month and not bother having it reduced. Same with the IRS 30% tax.

Its the taxpayer who would be crazy to NOT file an IRS 1040NR as ECI or a CRA Section 216 return to reduce the tax.

[Steven]

I thought the change in the definition of "permanent establishment" meant that rental income was now always considered "effectively connected". But anyway, like you say it would be crazy not to do it that way, if the treaty removes the NRA/1042 method that's a good thing.

And let me just re-phrase my answer above slightly - there are advantages to putting rental property into a corporation, but not for personal tax avoidance reasons. (Unless you want to use an off-shore corporation but I won't get into tax evasion 101).

The reasons to use a corporation are the reasons you would normally use a corporation for a business.

Actually there is a disadvantage to putting the property into a corporation, you have to file T1135 every year. If you own property abroad you only have to start reporting when you derive income from it or sell it and have to report the capital gain - but if you put it into a corporation you have to report that every year on T1135 as a foreign holding. Vacation homes are exempt.

So if you enjoy making the CRA suspicious, putting them into a corporation would be a way to go about it.

[agnelson]

"And let me just re-phrase my answer above slightly - there are advantages to putting rental property into a corporation, but not for personal tax avoidance reasons."

Absolutely correct.