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Ustaxiq Real Estate 1

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

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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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