Tax Issues for Canadians Investing in U.S. Real Property

Author(s): Rufus Rhoad­es and Alex­ey Man­a­suev Date: August 2011

Back­ground.

“Noth­ing is cer­tain in life, but death and tax­es.”¹ That max­im has main­tained its rel­e­vance through the cen­turies; it is as true for Cana­di­ans as it is for the rest of civ­i­lized human­i­ty. Although this Emerg­ing Issues Analy­sis does not dis­cuss prac­ti­cal death mat­ters, it does dis­cuss some key prac­ti­cal estate tax con­sid­er­a­tions rel­e­vant to Cana­di­an indi­vid­u­als invest­ing in U.S. real estate.

The eco­nom­ic down­turn expe­ri­enced in the Unit­ed States has led to a sig­nif­i­cant decrease in home val­ues through­out the coun­try. That eco­nom­ic envi­ron­ment, as dis­tress­ing as it has been for U.S. res­i­dents, has pro­vid­ed unique oppor­tu­ni­ties for many small and large for­eign investors to pur­chase U.S. real prop­er­ties at low­er prices com­pared to those the investors were pre­vi­ous­ly offered. Cana­di­an investors are in a par­tic­u­lar­ly sound posi­tion to invest in U.S. real estate because they are prox­i­mate to the Unit­ed States, and the his­tor­i­cal­ly close ties between the two coun­tries allow easy move­ment between the two neigh­bors. Typ­i­cal­ly, Cana­di­an indi­vid­ual investors invest in U.S. real prop­er­ties for any one of a num­ber of rea­sons: to gen­er­ate rental income; to pur­chase sec­ond homes in areas close to resorts; or to acquire a long-term invest­ment they expect will appre­ci­ate in val­ue and result in mea­sur­able gain (hope­ful­ly, no loss) on fur­ther re-sale of the prop­er­ty.

What investors some­times fail to real­ize at the time they make the U.S. real prop­er­ty invest­ment is that prop­er­ly struc­tur­ing the invest­ment before­hand can assist in effec­tive­ly man­ag­ing poten­tial U.S. and Cana­di­an tax expo­sure and may make a dif­fer­ence between reg­u­lar tax and dou­ble tax­a­tion (not quite a dif­fer­ence between life and death, but it cer­tain­ly may prove very cost­ly). Beyond the cer­tain­ty of com­mon­ly known U.S. tax impli­ca­tions, the authors would like to draw the atten­tion to U.S. estate tax, which can sig­nif­i­cant­ly impact the val­ue of the invest­ment in the event of the investor’s death.

Non-Tax Issues.

A major headache for a decedent’s sur­vivors is their dif­fi­cul­ty in com­ply­ing with local law. For exam­ple …

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