Forming either Canadian Co. or US LLP to purchase investment real estate -

Hello David,
My name is  xxxxx cccccc, daugher-in-law to xxxxxxx xxxxxxxxx. My husband xxxxx
told me to email you some questions as I'm at a standstill trying to form our U.S.
LLP.  I got your number from the handout you gave a presentation at Ozzie Jurock's
one day seminar.

1.  First tried to form a U.S. LLC.  Our Canadian accountants told us either:
     a.  Form a Canadian Company w/ a U.S. property Mgmnt Co. to open a trust account for us to
          stream the rental company  or
      b.  Form a U.S. LLP in which we will file individually as file as a partnership for a U.S. tax
           return.  File 1040 NR at tax time.  We need to file a W7 to get an Individual tax #.
           In order to operate as a U.S. LLP, we need to get an EIN number.  We cannot get an EIN
           number until we are received our individual TIN from the W7.

     When we applied for the U.S. LLC our Bellingham lawyer filled out the W7 for myself.  6 weeks
     later, I received a rejection from U.S. treasury for the W7 apparently this lawyer was not an
     authorized agent to sign for the W7.

     This lawyer now has told me to contact a U.S. accountant which will also be our "withholding"
     agent to hold proceeds when we file U.S. taxes.  The accountant should be apply to get our
     individual TIN by proceeding for the W7  for each of us individuals and then get the EIN
     for our business operation in Washington state under a LLP.
     The lawyer can file the papers of organization with the state and issue the partnership agreement.

     The lawyer so far has used his retainer of $2250.00 U.S. and now wants another $1400 to change from
    LLC to an LLP.  As we already have a vested interest in this, I don't know whether we should cut our
   losses as the lawyer cannot sign as agent for the W7.

2.  We are buying the property all cash from Canada.  We are doing this by using our line of credit.
3.  How can we show the U.S. revenue that the rental income proceeds after expenses needs to be
     applied to our line of credit in Canada?  We decided not to get a mortgage in the U.S. as we can get
     a better rate through our line of credit in Canada.

4.  Main reason we want to form a company so we can limit our personal liability.  We all have large
     investments on our personal in Canada and we don't want to be sued on our Canadian assets.

5.  If we form a Canadian Co. and have a lawyer write up shareholder agreement. Can we hold off
    applying for a W7 until we file our first U.S. tax return?

Many thanks for your attention to this.  I better inquire about what your rates are first.
You can reach me at (604) 261-9190 or cellular (604) 377-2056.

Best regards,
xxxxxx xxxxxx

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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If this seems unlikely, remembe that a server in a bar, restaurant or pub owned by a corporation can be held personally liable for the damages  

 

 

However, it is the recent case of Hunt v. Sutton Group that has caused many companies to rethink employee events that have an alcohol component. The standard of care, which the trial judge deemed to be appropriate, has created a chill due to the high onus. Hunt carries overtones of Jacobsen v. Nike except that the onus upon the employer seems to be significantly broadened beyond that of the earlier case. In this case, the employer did monitor the consumption of the employee, brought her intoxication to her attention and provided some options for her to return home other than by driving herself. These options were found to be insufficient by the judge who took the view that the employer's responsibility was far greater.

Linda Hunt was a receptionist for a real estate company that had a drop-in wine and cheese party for staff and customers in 1994. She began work around 1 p.m. and by 4 p.m., her boss observed that she appeared to be intoxicated. He suggested that he would call her husband if she continued drinking. His evidence was that she did not appear intoxicated after that point. She began cleaning up at 6 p.m. and didn't leave those premises until 6:30 p.m. Her boss offered cabs to everyone and another employee who didn't drink offered rides for everyone.

Instead, she drove from work to a pub where she stayed until 8 p.m. The judge made a finding of fact that she consumed two beers in that time. The weather was especially poor that night and one of her colleagues offered her a place to stay to avoid the drive home, a 45 minute drive in good weather. The accident occurred at 9:45, one hour and forty-five minutes after she left the pub and 12.2 kms from the pub. There was evidence of a coffee at the crash scene but most of that time is unaccounted for and was not explained in the reasons for judgment.

The trial judge made a joint finding of 25% liability against the employer and the pub, however, since the pub had since become bankrupt and had no insurance, the burden of the judgment fell to the employer.

As in the Jacobsen case, the judge found that the employer had a duty to protect its employee from harm, as in, providing safe working conditions. That duty extended to insure that she did not become intoxicated while in the course of her work and subsequently, drive home.

The judge believed that by having an open and unsupervised bar, the employer was unable to monitor the consumption of alcohol of it employees. He stated that the employer "owed it employee an overriding managerial responsibility to safeguard her from an unreasonable risk of personal injury while on duty."

The employer argued that it did take reasonable steps to safeguard her by offering to call her husband, making a general offer of a cab, and another employee offering a ride, however, the judge rejected these efforts as insufficient. It was his view that the employer could have taken her keys from her, taken custody of her car, taken her to a hotel or called her husband. As a last resort, he stated that the employer should have called the police.

The argument of a break in the causation was made as well and rejected as well. The employer argued that while he last observed her drinking at 4 p.m., at the very least she left the business premises at 6:30, attended the pub for 11/2 hours leaving a further 13/4 hours unaccounted. The judge referred to an earlier decision for comments on the issue of causation:
"A break in the line of causation is subject to the qualification that if the intervening act is such that it might reasonably have been foreseen as anticipated, as a natural and probable result of the original negligence, then the original negligence will be regarded as an approximate cause of the injury, notwithstanding the intervening event".10

The fact that the intervening events were considerably different in character was not considered.

A lesser known aspect of this case is the fact that the plaintiff was able to recover an apportionment of income which had been denied to her under the Ontario automobile no-fault legislation. Pursuant to the Statutory Accident Benefit Schedule, no one is entitled to Income Replacement Benefits if he or she was impaired at the time of the accident, regardless of fault.11

Generally, the defendant in a tort action is entitled to deduction of the benefits paid to the plaintiff with some exceptions. The employer in this case, argued that it should be entitled to deduction of the benefits that would have been paid had she not been impaired. The trial judge rejected this argument stating that Ontario legislation has not specifically imposed a penalty upon an insured where he or she is convicted of a criminal offence (such as in British Columbia). Consequently, the defendant was not entitled to a reduction of what the plaintiff would have received had she been sober. In essence then, the plaintiff was able to get a portion of income replacement through the backdoor when she was disentitled to it in the front door due to her impairment.   Read more or the whole thing and others at http://www.longwoods.com/product.php?productid=16972&page=6

So, back to the tax issues.

If you just have a Canadian corporation buy the property, the company will need to file a US 1120F foreign corporation Income tax return.  It will pay tax to the US if there is a profit and the Canadian Corporation will then claim a foreign tax credit for any tax paid to the US.

As individuals, you will not have to file a US tax return.

You will borrow the money in Canada and loan it to the Corporation which will use the money to buy the 4-plex.

The company will pay you interest, likely at the same rate that you pay your banks in Canada.  You will report the interest received fromt he company as income on schedule 4 of your canadian return and then claim the interest on the money borrowed as a dedcution further down on schedule 4 where it says interest on money borrowed for investment purposes.

The following will help you as well.  You will notice that I continuously suggest that people not be incorporatred.  Mitchell, my son who is also becoming a US Canadian Tax consultant mad ethe observation that in the three or so years he has been assisting me now, your are only the third person where i agreed that a corporation makes sense.

Hello. I know you have answered this before to other lost people but I shall ask again for myself. If we rent out our house in the US (which we are still desperately trying to sell), where do we owe taxes first, the IRS or CRA? On which forms do we report this income? Are we obligated to provide a tax receipt to the renters? Are security deposits/damage deposits income to be reported? Thanks for this and any other advice you can give.

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david ingram replies

This question was rejected but I was resting while filing and decided to answer it.

What a nice house - love the floors and the view and I see it has been empty coming up three years now. 

see better at http://maps.google.com/maps?client=firefox-a&rls=org.mozilla:en-GB:official&hl=en&tab=wl

You should Read Garth Turner's book "THE GREATER FOOL" and his website at www.greaterfool.ca where he shows a nice little Detroit house for sale for $625.00

If the following picture does not show up on your email, you can find it on the front page at www.greaterfool.ca
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For sale in Detroit: 3 bedrooms, 1 full bath, 1129 square feet, lot 40 by 140, ready for immediate occupancy. Price recently reduced, to $625. (Yes, six hundred and twenty-five US dollars)
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Another one of my clients is in the process of walking away form a Detroit house in which he had $100,000 of equity in 2002, long before the sub-prime crisis.  He rented it for 4 years but it has been empty for the past two. News reports in Calgary and Vancouver in the last week all point to the total slowdown in real estate sales although we have not had that big price drop yet.  On the other hand, I fully expect my house to go down $300,000 in the next two years.


check out:  http://www.greaterfool.ca/

This book contains a very good analysis of the sub-prime mess and explains that the same thing is actually happening in Canada.

Garth and I will be speaking on real estate and cross border investing in Victoria on September 20, 2008 and Nanaimo on sept 21.  Go to www.howestreet.com to register - click on MONEY EXPO.  It is presented by Tom Allen and it is free.

If  you read the book, be sure to read the last two pages AFTERWORD FIRST.  You will see that Garth still has a house (I am NOT selling mine) but it is the perfect house.  He sold the one like yours.

His recommendation and likely mine is to bail out of the house at any price and solidify your assets.  Your house is in the country in an area with little financial hope on the horizon.  the cars made there are NOT the cars that people are buying. the price of gas is not friendly to your location at $6.00 a gallon gas which is where we are going in the US and have already hit in Canada.

And if you read the Detroit Free Press, today, June 30, 2008 at http://www.freep.com/apps/pbcs.dll/article?AID=/20080630/BUSINESS01/806300358

You will not see anything that will encourage anyone to want to buy in the Detroit area at any price.

On the other hand, I have had over 1,000 Canadians at seminars on buying cheap US real estate in the last year.  Canadians are snapping up bargains everywhere and maybe yours is one of the bargains that should be kept and rented sooner rather than later.

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back to your question


I am assuming that you have returned to Canada and the house is sitting empty.

If you rent it, you will be taxed first in the US.  You will file forms 1040NR plus schedules E and 4562 each. for Michigan you will file form M-1040 and Michigan schedule NR with it and send a copy of the federal return. 

You will then convert the US to Canadian dollars and the rent will go on your T1-General returns on Schedule T776.  If you have any tax paid in Michigan and the US Federal Return, you will claim that tax as a foreign tax credit on CANADIAN forms T2209 and T2036.

If you have abandoned the house and are no longer working in the US with a visa, you may not do any work on the house.  Even though you may be 70 miles away in Windsor, Ontario, you may not go back and clean the house and paint a wall and cut the grass if it is now for sale.  That is taking a job away from an American.

You may show the house, but you can NOT accept rent or do any work on the house whatsoever.  You MUST use an agent as the following shows.

Is it worth it, you might say.  You have already watched the price go down int he last three years and yo9u have already lost some $0,000 in rent that you would have received if rented already.  Assuming that there is a mortgage on the property, the mortgage has not been deductible to you anywhere.  Renting it out will make the mortgage interest deductible in both countries and return anywhere from $1,000 to $2,000 a month in operating cash.  It should have been rented three years ago.

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these older questions might help.

My question is: Applicable to both US and Canada

QUESTION: My husband and I are planning to purchase a residential property in Las Vegas in Spring 2008. We're both Canadian citizens currently residing in BC. Should we decide to rent this LV house, do we need to file an annual gross rental income in the US AND Canada? And if down the road we decide to sell this income property, how will this affect the capital gains in both countries? Would you also recommend us to incorporate in the US when we buy this investment/income property? If you do, would it be alright to incorporate as a subsidiary of our Canadian holding company? Thank you.

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david ingram replies:

In my opinion you should not incorporate unless you want more tax at the end and a 'LOT' more accounting and legal costs in the interim.

This older Q & A may help

david ingram replies:

You need a property manager if you do not want the strong possibility of going to jail for a few days before being deported and then not allowed back in the USA. For a story about US Immigrations hell for a Holiday Inn Manager, try
http://apostille.us/news/local_holiday_inn_express_manager_in_jail_on_immigration_charges;_husband_fights_for_her_return.shtml
or how about a married woman's ordeal in Georgia for a traffic violation  at
http://www.canada.com/ottawacitizen/news/story.html?id=f4f1d2fb-07ae-4560-8f6c-703acf8146fb&k=0

Crossing the border when you have an ad running to show the premises and saying you are going down to spend the weekend in your holiday home (i.e lying to the HOMELAND Security official) could result in seizure of your vehicle and a ban for up to 10 years under their ER (Expedited Removal) process.  In other words, it is more serious to lie to the guard at the border than it is to do the work.

You 'could' actually show the property for rent,  but you can NOT write out a contract for rent or collect a single rent cheque (check) or cash for rent in the United States. There is nothing new about this.  The first time I ran into it was in 1972 or 1973.

If you are physically there, you can NOT cut the grass, shovel the sidewalk, paint or decorate or repair or fix or remodel or improve or take out the garbage for any part of the rental property.

You can paint and clean your own unit if it is NEVER rented or intended to be rented. You can not paint and clean up getting the property ready for rent so DO NOT make the mistake of thinking you can live in one, clean it up and remodel it and then rent it out and do the same for another one and then another one and another one. If you do this and one of your tenants (who maybe doesn't like you because you evicted them or told them to turn their stereo down when you happen to be in town or for any other reason) read my website, (or the uscis website) he or she would find out that you can NOT do this stuff and could phone the Homeland Security office or write an anonymous letter and you could be arrested in November 2008 for something you did in December 2007. 

This may seem unreal, but in US terms, working without a visa is just as serious in law as the spontaneous robbing of a convenience store and the penalties can be worse.  Think of those nightly news shows with 28 illegal Mexican or Guatemalans citizens being stuffed into Paddy wagons on the Arizona border. This is not a racist comment but with the Mexican illegal immigrants, bing rounded up and shipped back across the border is a way of life with no social stigma.  For a nice clean living Canadian, being thrown into an immigration detention cell for taking money for rent is a devastating experience. In one case, a mother and her son were thrown into jail for 5 days in Phoenix when she went to Phoenix from White Rock BC.  Her husband owned 18 units and HAD a property manager.  Unfortunately, he also died in the arms of that female property manager and his widow then fired the property manager and she and her 20 year old son went to Phoenix to collect the rent and hire another property manager.

The property manager (who knew the law as everyone in Arizona does) phoned Homeland Security who showed up and arrested mother and son and threw them into the notorious Phoenix Immigration hell with some 300 other illegals. To rub salt into the widow's wounds, the property manager ended up with the property because she was a second mortgage holder on the property and the property fell into default because of the widow's cash flow troubles, largely because she could not go to Phoenix to hire another property manager.

For instance, for 'you', this kind of arrest could result in imprisonment for a usual five days in a US immigration jail until you posted $5,000 bail each and then being banished from the US for five to ten years. 

It does not stop there.  This type of conviction would stop you getting on an airplane which stopped in the USA on the way to Mexico.  AND,  under new US laws that have been proposed but not yet actually put in place, the arrest and banning would stop your Nov 6 trip to Cancun because people in this position will not even be allowed on commercial airliners that are flying over any part of the US. To get to Cancun, you would have to fly from Calgary or Vancouver to London England and then back to Mexico City and 'then' to Cancun and reverse it to get home.

This may be overkill but 'You' are / were lucky that the inspector gave you the correct advice BEFORE you put your foot in it.

By the way, for income tax You ALSO HAVE TO FILE A 1040NR US TAX RETURN WITH A SCHEDULE E AND A SCHEDULE 4562  EACH.  Then the same income gets put on Schedule T776 of your Canadian return.  If you have paid tax to the US, you will claim it as a credit on Canadian forms T2209 and T2036.


These older questions will help you AS WELL.

QUESTION: Hello David,

I'm living in Vancouver, finally paid off the student debt but don't see myself getting into 

the expensive Vancouver market. I do however like to ski and was thinking of buying an 

inexpensive trailer (25k Cdn) in Maple Falls Washington. 

However I'm not sure what other expenses I should expect given that it's in the US. 

I'm not trying to make this an investment with a high return, but I would like to do some 

handy work to it to increase the value. If I add about 10k worth of value, how would that 

affect my taxes in the long term?

Thanks for the advice.

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david ingram replies:

One of my favourite weekends ever was in 1973 at the Chandelier (think it has a different name now) when marooned at SnowLine  because of the gas shortage when one could only buy gas on odd days if your licence plate ended with an odd number and even days when it was an even number.

Strangely, it was that weekend 34 years ago that lets me answer you question now.

The cabin I was staying in was not a rental but was built by the fellow who owned it.  When he was building it, buddies would come down and help him and one weekend, the INS raided the spot and deported a bunch of his friends for working in the US .

He was fine building it because he owned it but no one else can hammer a nail, paint a board, install a sink, or carry a shingle if they are not either an owner or a legal US citizen or US resident with a green card.

If your buddy is working and living Anthe US with a TN, H1, O1, P1, L1 or any other visa but a green card, they cam NOT help you either.

And, if you are intending to rent the trailer out 'EVER', 'you' can NOT hammer a nail, sweep the front steps or clean the toilet.


Assuming you are buying this trailer on its own lot, when you go to sell, you will owe the US income tax on the profit.

If it is your only piece of real estate at that time, you will not owe Canada any tax because you can claim it as your personal residence if you have not bought another place.
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However, I would far prefer that you stretched your resources to buy something in Canada to live in and combine your present rent and the payments you would have to make for the trailer to buy your home in Canada. If you can't afford a one bedroom, buy a studio.  Go down to Ikea on the Lougheed highway and look at how much they can put into a small space.  

Interestingly, I read the other day that Ikea has now sold enough furniture in North America that 10% of all children are conceived in an Ikea Bed.  Now that is information worth knowing.

Good luck

.

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david ingram replies:

Assuming that you are going to rent the property out, you will need an ITIN (Individual Taxpayer Identification Number).   Fill in a W-7 and submit it with your first tax return or try and get it at the bank where you get your mortgage. 

I do not suggest a corporation in either country unless you want to spend a couple of thousand dollars a year extra on accounting.  As a foreigner with a US corporation, you will need to fill in form 5472 with your 1120 corporation tax return.  Then, because the mind and control of the corporation is in the hands of a Canadian resident, you will need to file again in Canada.

 This older Q & A may help

My wife and I are Canadian citizens and own a rental property (house) in Arizona. 

Do I need to file income tax in the USA? Can we deduct the mortgage interest 

and any expenses associated with the rental on our Canadian income tax return?
Thanks and regards,
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david ingram replies

If you do not file a US 1040NR with Schedule E and Arizona 140PY or 140NR return, you face the likely Federal penalties of a $1,000 to $10,000 fine each per year for failure to report rental income as a non-resident plus 30% of the gross rent with no expenses allowed.  

That is for each of you if you both own the property.  And, I  have never seen a $10,000 penalty.

Then, you will EACH be assessed 30% of the gross rent with no expenses allowed.

(Canada's penalty of  just 25% of the gross rent with no expenses in reverse seems mild in comparison.)

FILE the US returns for every year you have missed.

THEN - There is NO responsibility for you to claim any rental expenses on your Canadian return.  You can claim them if you wish on form T776.  HOWEVER, you MUST report the gross rent on line 126 of your T1 if you do not claim expenses and the net rent if you do,.If there is a legitimate rental loss which has not been created by your using the unit personally, you can use the loss to reduce your other taxable income.

A Warning.  There is ample evidence that the IRS and CRA are pro-actively sharing information about these.  And, if you are in a complex and using the unit personally NEVER talk about the fact you have not filed a US tax return and don't ask a local.  I personally know of two people who make their living turning in Canadians who are not filing their US returns.  There is a 10% to 30% reward for turning you in by filing US form 211. See it at www.irs.gov - click on forms, etc.

If you need help with this, you now know where we are.
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--QUESTION:

We have a rental property in the US.  Can I claim the property taxes paid on my condominium as a rental expense deduction on my Canadian taxes?  Form T776 mentions only Canadian property taxes however, the general guide states that all expenses can be deducted.


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david ingram replies:

Anything 
that can be claimed on schedule E of the US return can be claimed on form 
T776

You need to do your Schedule E 1040NR first and then convert the US 
figures to the T776 on  your Canadian return.  If the condo is in 
Arizona, you would do a 140NR or if in California, a 540NR.

There is no 
state tax in Florida, Texas or Nevada, the other three popular places for a 
Canadian to have a rental US condo.

The difference between the two 
counties is the method of claiming depreciation.  In the US, you MUST 
calculate the depreciation and include it even if it creates a loss.  The 
good news is that the operating loss caries forward as a future deduction 
against rent OR Capital Gains as opposed to non-resident losses in Canada which 
unfairly disappear into the ether.

In Canada, you do NOT have to claim it 
and if you do, can only claim enough to create a zero rental. Depreciation or 
CCA (capital cost allowance) as we call it can NOT be used to create or increase 
a loss.

Make sure that you do the US returns, particularly if you are 
losing money.  The penalty can be a minimum of $1,000 to $10,000 PLUS 30% 
of the gross rent for failure to file a US rental return by a 
non-resident.

We, of course, are ideally suited to look after these for 
you by fax, snail mail, email or courier.

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david ingram replies:

If your intention is to start spending significant time there, buying now is extremely sensible because you are buying it at today's price which will logically go up in the future.  You 'are' of course, also dealing with exchange.

Since your earnings are in Canadian dollars, borrowing the money in Canada and paying cash in palm Springs means that you will be paying in a known currency.

To explain that statement, persons who bought in 1991 with a US mortgage payment of $1,000 needed $1,145.87 Canadian dollars to make the payment.  By 2001, they needed $1,548.62 to stay even.

However, in reverse, if you bought in 2002, you needed 1,570.36 and only need about $1,060 to stay even today.

Currency exchange does go both ways.

You might want to borrow half in Canada and take out a mortgage for half in Palm Springs.

If you are renting the property, you will both need to file a US Federal 1040NR with Schedule E and California 540NR return and then change the currency  to Canadian and file form T776 with your Canadian T1 returns.  Failure to file the form 1040NR can have penalties of $1,000 to $10,000 per year per return per person even if you lose money.  A very real problem is that all sorts of Canadians approach a US accountant and ask about filing and are told they do not need to file a return because they are losing money.  Not so.  When it comes time to file, hunt down a specialist in dual country tax returns like Gary Gauvin in Dallas,, Steve Peters in Halifax, Kevyn Nightingale in Toronto, Brad Howland in Victoria or myself in Good Olde North Vancouver.

Whatever you do, do NOT buy it in a corporate name. You will not save anything and end up with another $2 or $3,000 of accounting fees.

You will also need to file personal US tax returns if you are there more than an average  of 120 days a year. See the April 1994 newsletter in the top left hand box at www.centa.com