Need Advice

spock · Post by **spock** » Sat Oct 22, 2011 8:43 pm

I am a Canadian resident and US citizen and will be working in the US beginning next fall. I have two properties here in Canada, one is my principal residence and the other is a rental income property. Both will be rented when I move. The question is, will the deductions against this income (such as interest, maintenance expenses, etc.) be valid on my US tax return, as they would be in Canada? Or would I have to recognize income from these properties without any offsetting deductions?

Secondly, if these properties generate losses, can I apply these losses against my US employment income, as I can on my Canadian return?

Would it make a difference if I held these assets in an LLC or a corporation?

I also have Canadian tuition and education tax credits. Can I apply these to US income on my US return? Or do I need to carry them forward and apply them only to Canadian income?

Any help would be greatly appreciated.

JGCA · Post by **JGCA** » Sun Oct 23, 2011 10:51 am

Rental Income received by a CND resident is taxed under part 1 in Canada on their T1. If you become a non resident you still pay tax on the rental income inder sec 216 and must file a tax return with only the rental income showing and you should be witholding 30% of the gross rental income and sending it to Rev Canada monthly bu te 15th day following the first actual rental receipt. Any losses can not be claimed against anyother income in Canada unless you are filing as a Cnd resident.

In the US you should have already been reporting the rental income from you r CND property since you are a USC this is required filing on world income by all USC tax paid to Canada would have been claimed as a credit in US. The tuition fees you paid in Canada would have also been claimed at the time you were reporting the world income on your 1040.

You could trigger losses on the rental property but the limitation of passive income will restict the amount of the loss you can claim on the 1040, but in theory it is eligible.

You should not try to trf real estate to a LLC or Corp first it would normally trigger a sale at FMV and recapture of dep you were claiming in US even if you did not claim any you were suppose to since you were suppose to be filing rental income to the US all along.

triunbad · Post by **triunbad** » Sun Oct 23, 2011 11:08 am

Is it 30% withholding? I was always under the impression it was 25%.

JGCA · Post by **JGCA** » Sun Oct 23, 2011 12:01 pm

Yes, correction it is 25% of the Gross Rental not 30%., typo.

Don't forget however if you have an Agent in Canada and elect you can reduce this to 25% of the Net Rental income instead of the Gross. You would estimate the annual income less the expenses BUT you can not claim any Dep ( CCA) , so this is a good way to ven reduce teh 25% of teh Gross down by a lot more.

JGCA · Post by **JGCA** » Sun Oct 23, 2011 12:25 pm

The 30% I quoted instead of 25% was the WT on the US side there it is 30%, but in this case since property is in Canada it is 25%.

spock · Post by **spock** » Sun Oct 23, 2011 2:10 pm

Thanks - to clarify, I am closing on the property on Dec. 8 - so i don't have any rental income yet - was wondering if it makes sense to purchase it as a corp or LLC. any advice?

JGCA · Post by **JGCA** » Sun Oct 23, 2011 2:24 pm

I do not believe its beneficial to purchase rental prop in a corp the loss will not be attributable to you as if you owned it and unless you have more than 5 full time employees the tax rate is at 30% not the small bus tax rate of 18%, Also same applies to an LLC in CND its taxed as a corp.

spock · Post by **spock** » Sun Oct 23, 2011 5:55 pm

Great thanks for the advice

spock · Post by **spock** » Tue Nov 01, 2011 1:13 pm

Follow up question:

I am reconsidering purchasing the property in a corp - my tax rate in the US and Cda will be in the highest bracket and triggering a sale at FMV may not be an issue on the first property, because Ive never claimed depreciation and as my principal res it is tax exempt. More background info:

I am still a Cdn resident. I purchased property A as my principal residence in 2007 - since then, I have rented it sporadically, but have not claimed any CCA bc it is not a rental property. I understand I have to backfile with IRS 3 yrs for this income, and can get a credit for Cdn taxes already paid.

I am buying property B as a rental property. It closes next month. If I buy it as a corp, there is no second transfer into the corporation. There would be the transfer on the first one, but I don't think this would matter as I should be exempt from capital gains on transfers given its status as my principal res.

My goal is to continue to be taxed as a canadian resident corporation - I won't be receiving income from the corporation unless the corporation issues dividends. otherwise, all income will stay within the corporation and all losses/deductions will be applied internally. with this structure, can i avoid the 25% net rental income withholding tax levied on non-resident owners of Cdn income property? Technically, the corporation is a Cdn resident, so non-resident treatment shouldn't apply. From a US perspective, unless I receive income from the corp, I can't be taxed on simply owning shares in a Cdn corp.

Is this correct? Thanks!

nelsona · Post by **nelsona** » Tue Nov 01, 2011 1:17 pm

The problem will be despite all your property in canada, you will become US tax resident by treaty, and canada will move to 'push' you out. Moving stuff into your Cdn corp won't do anything to this, and you will likely lose your Cdn-controlled corp status.

spock · Post by **spock** » Tue Nov 01, 2011 1:21 pm

Thanks for the quick response - what do you mean Canada would move to push me out? I only expect to be in the US 4 yrs max.

spock · Post by **spock** » Tue Nov 01, 2011 1:22 pm

I should add, Im only a 50% owner of these properties, a full Cdn resident (not dual) is the other owner. would there be the same issue with a partnership structure?

nelsona · Post by **nelsona** » Tue Nov 01, 2011 1:31 pm

You would be declared a "deemed non-resident" because of your ties in US vs. your ties in canada (which would be negligeable at that point -- even if you kept a place to live).

This would trigger deemed disposition of many of your assets, and loss of Cdn-controlled status for any corps that you own.
CRA has begun to act very aggressively in removing any tax benefits reserved for Cdn residents, when they move to a treaty country (and CRA thus loses taxing rights). They don't let you straddle the fence.

nelsona · Post by **nelsona** » Tue Nov 01, 2011 1:31 pm

... and 4 years is forever in this matter.

spock · Post by **spock** » Tue Nov 01, 2011 1:39 pm

Thanks! So what should I do then? Buy and hold as non-resident small business owner? Would transferring ownership to my partner to hold for me beneficially make any difference?