Thousands of Canadians own and invest in U.S. real property, but the issues one couple recently faced when selling their vacation home serve as a cautionary tale on the importance of structuring your investment properly and speaking to a qualified U.S. tax advisor, says Oakville-based U.S. tax attorney Alexey Manasuev.
In the case, says Manasuev, principal of U.S. Tax IQ, husband and wife clients, both Canadians and neither holding U.S. citizenship, approached his firm with a question of whether they were required to file a U.S. tax return as they were selling their vacation home in Arizona.
“They owned the U.S. real property, a vacation home, through a corporation. Initially, because they bought it 10 years ago, they used it for personal purposes, but then in the last four years, they started renting it out. To manage U.S. estate tax exposure, the Canadian tax advisor 10 years ago advised them that they should make an investment through a numbered Ontario corporation. And that’s how they held the vacation house.”
As a result, says Manasuev, the firm identified and addressed a number of issues in this particular case.
“First of all, under U.S. tax rules, when you receive U.S. source income — in this case, rental income — you’re required to report it and file a U.S. tax return. No U.S. tax returns had been filed,” he says. Sometimes, even when you are not generating any income, you may still be required to file a U.S. tax return, as you may be deemed to be engaged in a U.S. trade or business…