Guest Post: Tax Planning for Canadians Purchasing Property in Florida

This post is a summary of an article written by Attorney Michael Wilson and Attorney Heather Cooper and posted on the Williams Parker blog. Click the link (CanadaUSArticle) to read the entire article.

We are not tax attorneys.  Any questions about US tax law should be directed to a qualified US tax attorney.

Attorney Michael Wilson of Williams Parker

Tax Planning for Canadians Purchasing Property in Florida

Canadians make up a large portion of Florida home-buyers and immigrants and we are happy to welcome them.  It is imperative to note, however, that making the transition to the US or entering the Florida property market requires careful planning and preparation.  One does not simply walk in.  Choosing an immigration strategy is one factor that must be considered when moving to the US.  Tax planning is another.

Overview:

US citizens and residents are taxed on WORLDWIDE income.  Income is divided into two categories: ordinary and capital.  Foreigners can become US residents for tax purposes through several ways, even if they do not hold any US immigration status.

“A Canadian can become a U.S. tax resident if they obtain U.S. citizenship, become a lawful permanent resident (i.e., green card holder), or satisfy the “substantial presence” test, which looks at the number of days spent in the United States. The substantial presence test can be a trap for the unwary that spend too much time in the United States. If a Canadian becomes a U.S. tax resident, they will have the same tax obligations as any U.S. person (including the requirement to file an annual tax return with the IRS reporting all worldwide income).”

The US also taxes non-residents on income gained in a US trade or business and on passive income sourced to the United States.

Rental income from property in the US is generally sourced to the US and taxed by the US.  The US-Canadian tax treaty does not provide any relief for double-taxation of rental income, which is something to be very aware of.

Income from the sale of US real estate is also sourced to the US and subject to US taxation.  Like income from rental property, there is no relief in the US-Canadian tax treaty for income from the sale of US real estate and such income may be taxed in Canada as well.  The “Foreign Investment in Real Property Tax Act” (“FIRPTA”) regulates taxes on income from the sale of US real estate by foreigners.

Estate tax, which is 40% in the US, is another important consideration for Canadians who wish to buy real estate or immigrate to the US.  Any US real estate is subject to estate tax.  However, non-residents may be able to structure their assets so that they fall entirely outside the scope of US estate tax.

While there is no state income tax in Florida, there is sales tax and this can be levied against proceeds from rental property.  In addition there are various local taxes that may also need to be considered.

Holding Structures for Investments in US Real Estate

Direct Ownership:

• Simplest structure
• Rental income: 30% flat withholding tax unless net basis election
• Disposition income: may be eligible for 20% capital gains tax; otherwise, taxed up to 39.6%
• FIRPTA withholding applies on disposition
• Foreign owner must file U.S. tax return reporting any income
• Estate tax applies
• No limited liability

U.S. Partnership Planning Highlights:

• More administrative requirements than direct ownership
• Rental income: 30% flat withholding tax
• Disposition income: may be eligible for 20% capital gains tax; otherwise, taxed up to 39.6%
• FIRPTA withholding applies on sale of property or on sale of partnership interests
• Foreign owner and U.S. partnership have annual tax filing obligations
• Estate tax likely does not apply

LLC Planning Highlights:

• More administrative requirements than direct ownership
• Limited liability for owners
• Rental income: 30% flat withholding tax
• Disposition income: may be eligible for 20% capital gains tax; otherwise, taxed up to 39.6%
• FIRPTA withholding applies on sale of property or on sale of LLC interests
• Estate tax may apply
• Canadian tax planning concerns

U.S. Corporation Planning Highlights:

• More administrative requirements than direct ownership
• All income subject to corporate income tax (up to 35%) plus Florida corporate income tax (5.5%)
• Income is “double-taxed” (corporate income tax plus tax upon distribution to shareholders)
• FIRPTA withholding applies on sale of property (but only when proceeds are distributed to foreign shareholders) or on sale of corporation, but not on direct sale of property
• Corporate tax return required every year
• Estate tax applies

Canadian Corporation Planning Highlights:

• More administrative requirements than direct ownership
• Rental income: 30% flat withholding tax
• Disposition income: subject to corporate income tax (up to 35%) plus Florida corporate income tax (5.5%)
• Income is “double-taxed” (branch profits tax) at 5%
• FIRPTA withholding applies on sale of property at 35% of gain but not on sale of stock
• Estate tax does not apply

Canadian Partnership Planning Highlights:

• More administrative requirements than direct ownership
• Rental income: 30% flat withholding tax
• Disposition income: may be eligible for 20% capital gains tax; otherwise, taxed up to 39.6%
• FIRPTA applies on sale of property or on sale of partnership interests
• Foreign owner and U.S. partnership have annual tax filing obligations
• Estate tax likely does not apply

Trust Planning Highlights:

• Increased expenses and administrative complexity
• More options for minimizing tax liabilities

Multi-Tiered Structure Planning Highlights:

• Increased administration over multiple entities
• Increased expenses associated with multiple entities
• More options for minimizing tax liabilities

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Written by Chris Jaensch

Attorney P. Christopher Jaensch received a Bachelor of Arts degree in History in 1992 and a Juris Doctor degree in 1995 from the University of Florida. While at UF, he was a member of Sigma Chi Fraternity, Phi Beta Kappa Society and Florida Blue Key, the oldest and most prestigious leadership honorary in the state of Florida.

Mr. Jaensch is a member of the Florida Bar, the American Immigration Lawyers Association (AILA) and the Sarasota Bar Association. He has served as President of the Sarasota-Manatee International Trade Club and served as Regional Vice Chair, Tampa Bay, for the Central Florida Chapter of AILA. He was a member of City of Sarasota Charter Review Committee and has been active in several local organizations, including the influential Laurel Park Neighborhood Association in downtown Sarasota.

Mr. Jaensch has over 18 years of experience in the field of immigration and nationality law and focuses his practice on four primary categories (a) investors and entrepreneurs, (b) business executives, managers and professionals, (c) amateur and professional athletes and coaches and (d) performing artists and immigrants with extraordinary ability.