LLC rental loss and capital loss for Canadian resident?

neoplop · Post by **neoplop** » Tue Jan 24, 2012 6:42 pm

I am a dual Canadian/US citizen and I reside in Canada. I file tax returns with both CRA and the IRS.

In 2003 I bought a rental property near New Orleans inside a single-member Louisiana LLC (created for the purpose of privacy, not taxes). The LLC is a disregarded entity in the eyes of the IRS. All income (loss) is passed-through to my 1040.

I sold the property at a drastic loss in 2010. It would be very nice to be able to claim a terminal loss on the house and capital loss on the land by amending my Canadian returns as well.

The issue of the LLC, especially in light of the Fifth Protocol amendment to the Canada-US Tax Treaty, is a little murky to me. Did the treatment of US-source income inside the LLC change in the eyes of CRA and can it now be claimed as pass-through income/loss on my T1, _retroactively_? Or is the LLC still regarded as a foreign corporation to Canada and therefore a US-source loss would not help me personally?

There is always the option to ignore the LLC entirely since the US returns show this as personal income(loss), and simply amend the personal Canadian returns with this. It would get confusing in case of an audit, though... ;)

As usual, no CRA "area" has any idea about this and my only option seems to be to get an Income Tax Ruling from the Directorate. This is like waving a huge red flag and yelling "OVER HERE!!!" and I would like to avoid this.

Any ideas appreciated! Thanks. Can you tell me which subparagraph of section 4 of the Treaty applies? I have tried substituting actual country names for the words "Contracting State", "other State", "first-mentioned State" and "that State" and my head is spinning!!!

nelsona · Post by **nelsona** » Tue Jan 24, 2012 7:07 pm

How have you been reporting the rent in canada? If you've been reporting it on your personal return, tyhen I see no oissue reporting the cap loss as well.

Be awre however that a huge loss in USD ofver this period may actually be a gain in CAD (or at least a much smaller loss), once you factor the exchange at the time you bought and at the time you sold.

nelsona · Post by **nelsona** » Tue Jan 24, 2012 7:08 pm

How have you been reporting the rent in canada? If you've been reporting it on your personal return, tyhen I see no oissue reporting the cap loss as well.

Be awre however that a huge loss in USD ofver this period may actually be a gain in CAD (or at least a much smaller loss), once you factor the exchange at the time you bought and at the time you sold.

neoplop · Post by **neoplop** » Tue Jan 24, 2012 7:22 pm

Thanks, nelsona, for the quick reply.. I have _not_ been reporting the rent in Canada as expenses have exceeded income in all years (yes I was under the impression I didn't have to report because it was a loss). I am about to remedy this by amending the returns and claiming the losses. That is, if this is the right way to proceed due to the LLC--my original question.

Actually, the sharp decline in the US dollar between 2003 and 2010 almost DOUBLES the loss when converted to Canadian dollars, not the other way around.

Hypothetical:
2003 Buy for $100,000 US = $140,000 CDN
2010 Sell for $50,000 US = $51,000 CDN

Loss in US$ = $50,000
Loss in CDN$ = $89,000

So, LLC? Ignore the LLC?

nelsona · Post by **nelsona** » Tue Jan 24, 2012 10:28 pm

"the sharp decline in the US dollar between 2003 and 2010 almost DOUBLES the loss "

yes, I mixed that around.

JGCA · Post by **JGCA** » Tue Jan 24, 2012 10:38 pm

I see a problem in the at the CRA will rule that the LLC is a corp for tax purposes in Canada, in short they treat the income as a dividend the cap loss will have to be calculated as proceeds of disposition in your investment in the corp this may or may not result in a cap loss its not a given you will need to show proof of initial capital and adjustments to the ACB to determine this amount.