US resident investing in commercial real estate in

US resident investing in commercial real estate in VancouverHello,
I enjoyed your articles on the web and am looking for a Canadian Tax
expert to help me with this.
I have been offered an opportunity to invest in some commercial real
estate with some colleagues who are Canadian. I have heard that in
order to avoid 'double taxation' of the income and eventual sale of
the property, I need to set up a Canadian holding company that can
actually do the investing and I can pay myself as a manager out of
that company.
Here is the advice I have received. Can you let me know if this is
Legit, tax implications and if you can help me with setting up the
Company..
Thanks,
J xxxxx
To satisfy the legal requirements for the Limited Liability
Partnership a Canadian Company would be formed. This company with
yourself as the 100% shareholder and manager would file a tax return
to the Canadian Revenue Agency every year.
It will be ideal for this company to expense out as much, if not all
of the income and returns you receive from the Canadian investment
interests every year. This can be done by paying management fees to
you and should be supported by a management agreement between yourself
and the Canadian company. This will ensure income and capital gains on
the investments are taxed at your US rates. (If you leave the income
in the company, Canada will tax you at 47%)
So for example:
$10 000 income paid to Jeff Co. Canada from the Partnership
Jeff Co. pays Jeff King $10 000 in management fees for managing his
interest in the partnership and offsets the $10 000 income with a
management fee expense of $10 000.
Jeff Co. reports $0 income on its Corporate Tax return and pays no tax
in Canada.
Jeff King reports $10 000 income on his IRS return and pays tax in the
States accordingly.
One thing that does need attention though is in keeping management
fees reasonable. If you end up with significant amounts of income that
you are filtering 100% through the Canadian company, Revenue Canada is
going to want a share, so there should be  more comprehensive planning
required in the event your investment base in Canada begins to
increase substantially.
 ==========================
david ingram replies:
If you want a nightmare of accounting and tax nightmares, set up a
Foreign personal holding company to own your share of the Limited
Liability Partnership.
If the investment is any good, buy it in your own name.  Any tax paid
to Canada is a simple foreign tax credit in the USA.
Otherwise your Canadian Company is an American Company for US tax
purposes and must be reported by means or Form 5471 and schedules to
the USA.
My fee would be in the $3 to 5,000 (Cdn) range to do the Canadian
accounting and tax and convert them to the US forms.
In my opinion, there is little likelihood of its saving any income tax
but it will sure increase your accounting bills.
Here  is the answer to someone else about owning a Canadian Company.
========
QUESTION:
Hi David,
My wife and I recently moved to Canada. In Virginia, she owned a
limited
liability corporation. In BC she was advised to form a corporation
with
herself and me as its only employees. She did.
Now we need to know how to run a Canadian corporation with a
particular
emphasis on taxes.  This is a small Company with expected gross income
of
about $120,000. Any advice or direction would be greatly appreciated.
Thank you for your help in this matter.
Sincerely,
=========================================
david ingram replies:
It would be "very" unusual for me to advise US citizens in Canada to
form a
corporation with  the shareholders being the only employees.
In fact, I cannot imagine a situation where I would do so.
1.  You have to file forms 5471 each year to the US government with
your
1040 tax return.  This doubles or triples your accounting fees.
2. You will be signing personal guarantees with anybody you deal with
to
start off with and as the employee doing whatever work or actions done
by
the corporation, you are personally liable for any actions of the
corporation.
3. Unless your home is already  paid for, it is difficult to make your
Canadian Mortgage deductible if you have a corporation, easy if you
are a
proprietorship or partnership.
4. A combination of salaries and dividends is just as much tax as a
partnership would pay or even 1/2 a percent more.  You can NOT or
should NOT
leave retained earnings in the Canadian Corporation because of the
form 5471
mentioned above which makes you report internal retained earnings of
the
Canadian Corporation on your US 1040 and pay tax even though you do
not have
the money.
5. Failure for each of you to file the 5471 form will / can result in
a fine
of $10,000 for the first 90 days and $10,000 every 30 days to a
maximum of
$50,000 per shareholder per year.
You need to sit down with someone like myself who understands Canadian
and
US taxes at the same time.  I assume you are US citizens and US
citizens
must continue to file US tax returns no matter where they live and no
matter
where their income is from.  If you are not in the Vancouver area, I
do
phone consultations for a minimum fee of $350.00 for up to an hour.
My likely advice will be to dump the corporation.
The Instructions for form 5471 can be read here
http://www.irs.gov/pub/irs-pdf/i5471.pdf
The actual form is at:
http://www.irs.gov/pub/irs-pdf/f5471.pdf
Some of the extra schedules are at:
Schedule J
http://www.irs.gov/pub/irs-pdf/f5471sj.pdf
Schedule M
http://www.irs.gov/pub/irs-pdf/f5471sm.pdf
Schedule N
http://www.irs.gov/pub/irs-pdf/f5471sn.pdf
Schedule O
http://www.irs.gov/pub/irs-pdf/f5471so.pdf
Answers to this and other similar  questions can be obtained free on
Air
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for more information.
=========================================
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
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Res (604) 980-3578 Cell (604) 657-8451
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