Subject: Purchasing Property in the United States
Expert: taxman at centa.com
Date: Wednesday May 03, 2006
Time: 10:21 PM -0700
QUESTION:
We are thinking about purchasing a condo in Southern California with 2 other
couples (total of 3 owners). The intention would be for each couple to have
4 months personal use each year ( in other words we would not have any
rental income). How would you proceed with the purchase (eg. would you set
up a corporation to hold the property?). Also what tax complications might
owning this US property cause?
Thanks for you help.
-------------------------
david ingram replies:
Sounds like a great idea and providing no one gets divorced and that part of
the property ends up in the middle of a divorce action, you will be okay.
think up a solution to what will happen upon death of one of the parties or
a divorce.
i.e. do the kids of the departed get the unit or do the others get to
automatically buy them out at FMV.
buying life insurance on all the purchasers' lives would solve the problem.
If any of your estates exceeds $3,000,000 or so today, there could be an
estate tax problem but it is just paperwork in the long run because the
estate tax (if any) becomes a credit against Canadian capital gains tax
which you would all have upon death if the property was a condo in Whistler
or a waterfront cabin on Saltspring island. Just different paperwork which
is what we do.
I would not even think of a corporation.
There will be no tax consequences if you are all in the US less than 120
days a year. If there longer you can run into US substantial presence rules
as follows:
----------------------
My April 1994 newsletter explains most of it I think.
April 1994 Pages 35-43
the CEN-TA PEDE
david ingram's US/Canadian Newsletter
CABINS ACROSS THE BORDER and "SNOWBIRDS"
I recently received a copy of a newsletter from a Canadian enclave in the
State of Washington. The newsletter dealt with the possible requirement to
file a US tax return by Canadians who have recreational property in the US.
In this particular case, there are some 2,000 Canadian members of this one
enclave and there are another 30 to 40,000 estimated Canadian owned
recreational properties in the US within a three hour drive of Vancouver.
The newsletter was very accurate in explaining the "rules" but bothered me
because it dealt mainly with fear of filing rather than with the logical
solutions.
Let me explain
There is nothing new about the requirement of a Canadian Snowbird to file a
US tax return if they are in the US too many days.
Many of you will remember when Howard Hughes came to live at the BAYSHORE
INN. For six months we were titillated with Howard Hughes stories and the
speculative question among tax consultants was: "Would he stay more than 183
days?"
The answer was "NO". He left Vancouver (and Canada) on the 181st or 182nd
day because if he had stayed just one more day, he would have become taxable
in Canada on his WORLD INCOME.
The United States had and has the same 183 day rule as does Great Britain,
Australia, New Zealand, etc. The difference is found in how the United
States has calculated the 183 days since 1984. That's right, these
supposedly new rules are now just about 10 years old. What has changed is
the stepped up enforcement of ten year old existing tax laws.
If you are in the US more than 183 days this year, you are taxable on your
world income. But it can also sneak up on you in the following way.
The United States calculates the 183 days for THIS year by counting some of
the days for the preceding two years if you have been in the US for more
than 30 days in the current year.
So, if you have been in the US for 126 days a year for this year and the
last two years, the calculation is:
1993 126 days
1992 (1/3 of 126 days) 42 days
1991 (1/6 of 126 days) 21 days
For a total of 189 days
and you are taxable on your world income unless you can prove you have a
closer connection to another country.
You might want to and even be able to prove you have a closer connection to
Canada by filing a form 8840 but "why bother" when filling out the tax
return itself is easier and leaves you free to "live your life".
On the other hand, filling out the 8840 just leaves a list of people for the
IRS to look at and will leave you paranoid. Filling out the tax form is
usually relatively painless (if you deal with my office, that is), and
leaves you free to join a golf club and be in (and out of) the US for 189,
210 or maybe even 300 (under these extended rules) days as long as you have
a full blown home waiting for you in Canada or any other country.
US "IMMIGRATION" laws say that a Canadian can be a visitor for up to six
months. That literally means that you can go across the border to your
cabin, chalet, trailer pad, ranchette, condo or sailboat in Elliott Bay,
stay there for 180 days, come back to your home in Canada for a day or a
week or two, and go back for another 180 days.
US "INCOME TAX" law says that if you do that, you have to file an American
Tax Return. So what! 150,000,000 other people file a US tax return every
year and they have to "PAY" tax to the US. If you have already paid full tax
to Canada and if all your income comes from Canada, the US rules allow a
foreign tax credit for the tax paid to Canada. There is usually zero tax for
the Canadian to pay to the US.
At "up to $40,000 US" for a couple, there is usually no tax payable to the
US. After $40,000 per couple, an Alternative Minimum Tax can creep in. But
do not worry. At $80,000 US, it will not be over $600.00. And, if you do not
mind me saying so, if you are in the US for half the year, and you made over
$80,000 US (about $105,000 Canadian), you can afford to pay $600.00 to the
US.
If you do not want to pay the Alternative Minimum Tax of $600, there is
another simple solution which you should have done anyway. Make sure you
have some investment income from the US. Say about $6,000 to $10,000. This
will generate a tax liability to the US First (don't worry, Canada will give
you credit for every cent paid to the US and reduce your Canadian tax
accordingly). Alternative Minimum Tax usually only kicks in when you aren't
paying the US any tax.
What are the advantages of the david ingram method of dealing with these
regulations?
A. You are free to come and go without worrying about the "tax man".
B. By having some of your wealth in the US, you are hedging your retirement
dollar.
C. You can join the library, golf club, ski club, buy all the furniture you
want, buy a golf cart, and just plain enjoy your surroundings.
D. You will be forced to deal with your medical insurance. At the moment,
all sorts of SNOWBIRDS believe they have coverage under the Canadian Medical
Services plans while they are spending most of their time in the US. LET ME
WARN YOU HERE. POSSESSION of a BC MEDICAL CARD does NOT mean you are
covered. BC MEDICAL routinely cancels medical insurance RETROACTIVELY when
their investigators find a person sleeping in the United States more than
183 days a year. BC Medical, OHIP, New Brunswick and every other provincial
medical plan all insist that you "SLEEP" in that PROVINCE more than 183
nights to qualify for their medical plans.
E. You will not have to come up with detailed answers for the 8840 which has
questions like:
19. Where were your personal belongings, furniture, etc. located?
20. List social, cultural, religious, and political organizations you
currently participate in and the location of each:
a __________________________ Location ___________________________________
b __________________________ Location ___________________________________
c __________________________ Location ___________________________________
d __________________________ Location ___________________________________
e __________________________ Location ___________________________________
>>>>>>>>>(10 other questions>
31 List any charitable organizations to which you made contributions and
their location.
a __________________________ Location ___________________________________
b __________________________ Location ___________________________________
c __________________________ Location ___________________________________
d __________________________ Location ___________________________________
F. By filing as a "resident for tax purposes" of the United States, you
should escape inheritance tax on amounts of over $60,000. (changing with new
treaty)
WHAT ARE THE DISADVANTAGES?
A. You have to file an extra tax return. But so do residents of Quebec and
you are getting cheaper gas, eggs, milk and turkeys.
B. No others that I can think of.
The following is a copy of a "SNOWBIRD" article I wrote back in 1992 and
which seems appropriate about here.
SNOWBIRDS
The US government is starting to enforce long standing rules against
Canadian SNOWBIRDS, and, to be sure, anyone else who spends a lot of time in
the US. It can more easily apply to someone who has a cabin in the San Juan
Islands or a summer (winter) cabin at Birch Bay, Point Roberts or Mount
Baker as it can someone with the place in Palm Springs or Arizona.
In particular, if you rent that cabin out during the year, you MUST file a
tax return as well. Failure to report even $600 rent can result in an
automatic tax of 30% of the gross with no expenses allowed AND penalties
plus a fine of (are you ready for this?), up to $10,000 for failing to file
the tax return "EVEN THOUGH YOU LOST MONEY IN THE RENTAL PROCESS".
But back to SNOWBIRDS (or summer visitors who go back and forth a lot to
shop, etc.).
a TEN MINUTE TRIP ACROSS THE BORDER COUNTS AS ONE DAY. GOING TO BIRCH BAY ON
FRIDAY NIGHT AND COMING BACK TO VANCOUVER ON MONDAY MORNING COUNTS AS FOUR
DAYS. AND, The US counts the number of days one is in the Country in the
following manner.
Take the days present this year - let's say 130 days
add 1/3 of the days in the previous year
and if that was 120 we get another 40 days
plus 1/6 of the days present two years previous
and if that was another 120 we get 20 days
for a total of: 190 days
and we are now taxable in the US on our "WORLD" income. i.e., the person
must report his or her Canadian Pensions, interest, dividends, rents,
farming and capital gains income to the US as well as Canada.
The person is taxable in other words, even if no income is coming from the
US simply because of physical presence. Canadians will remember back in 1977
when Howard Hughes was ensconced in the BAYSHORE INN. He left town on his
182nd day because Canada would have taxed Howard on his world income if he
had stayed 2 more days.
It is possible to avoid this by filing a "DECLARATION OF CLOSER CONNECTION
TO CANADA" with the IRS Service Centre, Philadelphia, PA, 19255. This
Declaration would state that your family, belongings, permanent residence,
social and business ties are all in Canada.
The problem is that with time, these ties "move south". The SNOWBIRD has
bought a nicer place in Arizona than they have in Nanaimo or Lethbridge. The
Snowbird has bought a cheaper US car in Arizona. The Snowbird has rented out
their house in Campbell River and is living in a motorhome in Arizona and
California in the Winter and travels through Canada in the Summer. The
Canadian has taken out a US Visa card and MasterCard. In other words, their
centre of influence has moved south and their closer ties are not
"definitively" in Canada anymore.
And, if it is half and half or even close to, the US will quite properly
want a tax return.
But fear not. File the Canadian tax return first and then file the US tax
return and claim foreign tax credits for the tax paid to Canada. Unless the
income is over $40,000 US, the tax paid to Canada is usually enough to wipe
out any US tax.
If the income is over $40,000 US, there may be a small amount of Alternative
Minimum Tax to pay. The problem is US Immigration Department's crackdown on
Canadian Snowbirds or "border livers" in Motorhomes and other semi-permanent
Canadians spending a lot of time in the U.S.
Let me use a few examples:
Situation 1
72 year old woman with a condominium in Phoenix, Arizona. Has been spending
every winter in Phoenix for the past ten years. Owns a $400,000 house in
Vancouver. She rents the house out every winter and has no phone number in
Vancouver "in the book" because her number is disconnected when the phone
book closes in January every year.
She is driving down to Phoenix after renting out her house and the INS
person at the U.S. Border questions her closely. He decides that she "might"
be trying to live in the U.S. and turns her back at the border. He asks for
such things as "phone bills", to prove that she lives in Canada and is only
"visiting" in the U.S.
Of course, she is in a tough spot. She finds it easy to rent out her
Vancouver House for a nominal rent every winter but it is impossible to rent
out her Phoenix condominium in the summer when she is not using it.
The question is: "where is she LIVING" and where is she VISITING?
INS has decided that she is now "living" in the U.S. and "visiting" Canada
and that is not legal without going through a lengthy immigration process.
Banned from the US under these circumstances.
Situation 2:
A 70 year old man who with his wife has had US resident alien cards for some
20 years and has been working in the U.S. for the same twenty years and
still is. Owns a house in Vancouver that his mother lives in and a
condominium in Los Angeles that he and his wife have lived in for that
twenty years.
He has a phone number in Vancouver in the house that his mother lives in and
he owns.
His wife is in Vancouver for an extended period looking after his mother. He
comes up for a weekend. On the way back through Vancouver Airport, he is
questioned by INS. He innocently tells the story to the INS officer who
decides that with a phone number in Vancouver and his wife in Vancouver for
19 months, and because he has a BC Medical Card, the person has likely given
up his residence in the U.S. and starts to take away his resident alien
card. Calmer heads prevail and he is allowed to keep it but told he better
straighten out his act. He has made the mistake of having all sorts of
Canadian Identification including a B.C. medical Card. There is a "theory"
that he is not allowed to have a B.C. Medical card if he is a resident of
California. U.S. INS officer reports him to B.C. Medical.
Situation 3
A couple sell their house and buy an expensive Canadian Registered (that is
the key to me - if they were not intending to be Canadians, the motorhome
would have been $80,000 U.S. cheaper in the U.S.) Beaver motorhome. They
spend some time in the U.S. and come home for Xmas and then start off to
tour some more. They have been told by a 100 people that they can be in the
U.S. as visitors for up to 183 days legally.
After Xmas, they leave to go south at Huntington Crossing and are told that
they cannot enter as they cannot prove that they "LIVE" in Canada. Their
mailing address is their daughter's house and they have no phone number,
etc. Their vacation - retirement - snow birding is ruined as they are not
allowed in the US as visitors.
Situation 4
This is out of the Vancouver Sun, I have not met the people.
Another couple sell their home and buy a truck and trailer. They spend some
time in the U.S. and come back up to Vancouver to visit. They leave the
trailer in Redmond, Washington, and when they go to go back to the U.S.
after their Vancouver visit, an INS person at Huntington / Sumas crossing
denies them entry on the grounds that they do not have a home in Canada. He
is allowed 3 days compassionate leave to get his trailer and return to
Canada (again, please note that the truck and trailer are registered in
Canada).
Situation 5
A Couple sell their condo in Vancouver and rent another apartment in the
same building. They keep the same phone number. They buy a house in Whatcom
County and check with an INS officer at the Huntington crossing as to
whether they can take some of their furniture down (this book says they
can). When they go to visit their house at Xmas, 1991 (two weeks after
talking to the INS officer) with a U-Haul trailer full of their excess
furniture, they are questioned at the same Huntington Border Crossing by the
same INS officer and denied entry. The INS officer asks for such things as
address, phone number, etc., and of course, the address in the phone book is
different. The house in the U.S. is far nicer than the rented apartment. The
house in the U.S. is within commuting distance to the husband's employment.
The INS officer decides they are going to "LIVE" in the U.S. and spend
occasional time in Vancouver "if" they even really have a place in
Vancouver. They are denied entry to the US with their excess furniture.
Situation 6
A couple with a house in Greater Vancouver and a cabin at Point Roberts are
denied access to their cabin before Xmas. They are told by the INS officer
that they have been in the U.S. too much in 1991 and to come back in 1992.
Situation 7
A young lady with a boy friend in Seattle whom she visits on a regular basis
with no problems is denied entry to the U.S. when she arrives at the border
driving a rental car. She shares an apartment in Vancouver with someone and
there is no phone in her name. She has stuff in her luggage that indicates
she spends a lot of time in Seattle and also has a picture in the car which
she is talking down as a present. It "LOOKS LIKE" maybe she lives in Seattle
and visits Vancouver.
Situation 8
Same situation, different cities. A young lady with a fiancée working in
Chicago for two years flies down to visit him almost every weekend from
Toronto. She works for an airline and it costs her virtually nothing do fly
down. She shares an apartment in Toronto and has no phone, and little
Toronto ID. Even her car is a company car so she doesn't have a car, phone,
or apartment in her name even though she has a full time job in Toronto and
that is obvious from her business identification and a call to her employer.
The INS officer is not satisfied. he feels she is living with her boyfriend
in Chicago and commuting to work in Toronto. She is banned from the U.S. but
invited to get proof of her Canadian Residence.
Situation 9
I do not know this couple either. It comes from CTV National News. Couple in
Maple Ridge are going to U.S. through the same Huntington crossing. They
have been down dozens of times. They are asked if they have ever been
arrested. He says no because he has a Canadian pardon. For some reason, the
INS people check. He was arrested and charged and convicted 18 years before
for the possession of a single marijuana cigarette. HER car is seized. At
last word, the car was not being returned and will not be.
Situation 10
Same Crossing. A Vancouver City Policeman who has a criminal charge against
him and is under suspension is going across the border with his wife and one
other person. His truck is seized for trying to get into the U.S. while
under a charge. It also turns out his wife has a criminal record.
You see; it does not matter whether you are asked or not, it is illegal to
enter the U.S. if you have a criminal record or have been arrested unless
you have a waiver from the U.S. Department of Justice. And, if you are
taking someone else across with your car or they borrow your car and drive
across the US border without mentioning the charge (even with a waiver
form), you lose your car.
Situation 11
Osooyos Crossing, Aug 19, 1992. A couple and their two children and 8
friends are crossing to the U.S. for Mexican Food at Oroville, Washington.
They are in a 33 foot motorhome and INS decides to question all people
asking where born, what citizenship, where they live, and have you ever been
arrested. Driver says yes but not convicted. INS officer takes information
and comes back a few minutes later and bans driver from U.S.
INS officer warns all other members of party that they are not to assist
driver across U.S. border or they can be arrested themselves. Tells driver
"I am sure glad you said YES, or I would have had this motorhome". It took
"david ingram" 4 months to get an official waiver to go back to U.S.
You see, an arrest in Canada and either a "Stay of proceedings", or an
"Absolute Discharge", or a "Conditional Discharge" is treated by the U.S. as
if you were convicted, even if the offence is minor. Getting charged with
stealing a loaf of bread can have you banned from the U.S. for life.
The solution is to get a "Canadian Non-Resident Alien Border Crossing Card"
and waiver. This costs $80.00 U.S. and requires fingerprinting by the RCMP
and FBI but is a relatively painless experience. If you wish more
information on this topic, we would be glad to assist. There are also
regular advertisements for "Pardons" and "U S Waivers" in the Vancouver Sun
and Province. Write for more information to: David Ingram, 201-935 Marine
Drive, North Vancouver, B.C., V7P 1S3 or fax to (604) 649-4759 or call (604)
657-8451.
Situation 12
A "highly placed" lady from Ottawa decides to sneak into a class at a
University in the U.S. for a semester. She does not bother with the
formality of a Student "F-1" visa but just "goes south". She has student
cards, library cards, etc. Then she comes up to Canada for a weekend with a
fellow lady student from the University (these are not kids, these are 30
year old women). When going back to the U.S. in the U.S. student's car, she
is questioned and the U.S. student I.D. is found. She is banned from the
U.S.
She has been identified and should know that an INS officer might check
later at the U.S. University to see if she has snuck in, BUT she just isn't
thinking.
She calls a Canadian Friend and tells her what happened. the Canadian says,
don't worry, I'll take you down, we'll just say we are going shopping". The
Canadian picks up the Canadian Student and they arrange to meet the American
student on the other side of the border. They make it across but the U.S.
Border people follow the American car which now is short a Canadian Student.
When they meet at a U.S. Shopping centre to transfer baggage, etc., they are
surrounded by U.S. Border patrol cars. All three are arrested and spend 8
hours in jail. $51,000 worth of cars are impounded. The two Canadians are
deposited back at the Canadian Side of the border and spend $70.00 on a taxi
to get home.
The Canadian car is a lease car with hefty payments. Finally, with the
payment of a $2,000 "penalty", the leasing company gets the car back but is
told that they may not give it back to the Canadian, nor may they make any
special financial arrangements with her on another car. i.e. she is to get
no benefit and she is expected to make up any shortfall to the leasing
company. I do not know what happened to the American's car. Stay tuned.
U.S. to CANADA
Please note that the Canadian Customs are getting tougher every day. In
1989, the borders south of Vancouver seized some 1,000 cars. In 1991, they
seized 10,000 cars from returning Canadians and U.S. visitors.
In fact, a drunk driving charge in the U.S. bans a U.S. citizen from Canada
for life. The U.S. is far more sophisticated when it comes to waivers and
entry of people with problems. Smuggling, particularly cigarettes, firearms,
and alcohol will get you severe penalties. It isn't worth it.
Copyright © 1996-2004 david Ingram
Updated February 23, 2004, All rights Reserved
Cross-border Income Tax Preparation Experts
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Disclaimer: This question has been answered without detailed information or
consultation and is to be regarded only as general comment. Nothing in
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