La Quinta, CA
(760) 895-3516

Saturday, April 11, 2015

Should I Buy U.S. Real Estate Individually or with my Canadian Corporation?

Buy U.S. Rental with CDN Corp or Individually?

QUESTION: I am Canadian citizen. I would like to buy a U.S. rental property with my Canadian Corporation. Is this a good idea or should I purchase a property under my name?

ANSWER: If you are effectively doing business in the USA as a Canadian corporation (collecting rent from the US), you will need to file an 1120-F (Corporate return for foreign corps) to the IRS. Expect your tax to be upwards of 40%. Why? Because you will be taxed at the normal corporate tax rate; the same as a US Corporation would be taxed (See table below 2015).

 Once your figure your after tax net profit, you are subject to branch profit tax, which is 30% of the after tax income. Let's say your profit is $10,000...

Figure: $10,000 profit taxed at 15% is $1,500 tax. Now branch tax will be 30% of the remaining $8,500. So that comes out to $2,550 as your branch profit tax.

TOTAL TAX AS FOREIGN CORP = $1,500 + $2,550 = $4,050

Taxable Income ($) Tax Rate 2015
0 to 50,000 15%
50,000 to 75,000 $7,500 + 25% Of the amount over 50,000
75,000 to 100,000 $13,750 + 34% Of the amount over 75,000
100,000 to 335,000 $22,250 + 39% Of the amount over 100,000
335,000 to 10,000,000 $113,900 + 34% Of the amount over 335,000
10,000,000 to 15,000,000 $3,400,000 + 35% Of the amount over 10,000,000
15,000,000 to 18,333,333 $5,150,000 + 38% Of the amount over 15,000,000
18,333,333 and up 35%

Fortunately, the current tax treaty between US and Canada states that the maximum branch profits tax will be 5%, so that lightens a corporations tax load quite a bit.

Buying a U.S. property as an Individual

This is not the case if the property is held as an individual. You will file a 1040NR and there is no tax on your after tax money. If you have joint ownership of the property between husband and wife, you are able to split the rental income (half apportioned to each of you) by filing two seperate 1040NR returns and splitting the schedule E amounts.

Also, consider when you will sell the property, owning it as an individual will allow you to pay 0% tax on the first $36,900 of the capital gain. If you are married and sell the property, you can double that amount because you will be splitting the income from the sale between you and your spouse. Add on top of that the personal deductions of $3,950 each so you can pay no tax on the proceeds from the sale of a property up to $81,700 if it is held more than 1 year and if it is owned by 2 spouses.

Canadian Corp VS Individual U.S. Tax Comparison

This is a whole-nother story with corporations. Capital gains in the U.S. are recorded as ordinary income, meaning that you pay tax on the whole thing. If you sold the same house above with a Canadian corporation (where as a married Canadian couple or joint ownership you paid nothing on a capital gain of $81,700) you would pay $16,028 income tax PLUS the branch tax of $3,283.60.

(($81,700-$75,000) x 0.34) + $13,750* = $16,028

$16,028 x .05 (Branch tax for Canadian Corps) = $3,283

$16,028 + $3,283 = $19,312 Corporate Tax as a Foreign Corporation when you would pay absolutely nothing in tax as individuals jointly on a $81,700 capital gain.

*See Corporate Tax Rate chart above

These are current tax figures as of the posting of this article and may be outdated. If you have any further questions, please contact us. We are located in La Quinta, California in the Greater Palm Springs area.

Borders Bookkeeping

(760) 895-3516