A number of Canadians are investing in the U.S. real estate market with the conventional U.S. LLC. For  the Canadian investor,  this  causes double taxation from a Canadian perspective and is generally  not treaty- friendly for an in-bound investment into the United States. The LLC is treated as a corporation for Canada, however if  the LLC is a controlled foreign affiliate, the Canadian investor must accrue or report passive income like rental income annually. As both countries tax the rental income annually, the leakage is less onerous as opposed to  the LLC realizing  active business income which is not FAPI.

As an alternative one may consider utilizing  a U.S. limited partnership where there are limited partners who are Canadian residents and the general partner is a U.S. C corporation whose shareholders are also Canadian residents. On using a U.S. LP and not a U.S. LLP, Canada treats the U.S. LP  investment as a flow through for both U.S. tax purposes and for Canadian tax purposes.

For those who want limited liability protection, the U.S. LP  investment vehicle is often proposed due to its tax efficiency in both countries  because income realized by  the LP, is reported by the investor for each year  in both countries but primarily computed for  Canadian income tax purposes under Canadian tax law. In this regard, usually depreciation is the major difference in the computation of income for Canada. A U.S. partnership return is required to be filed and foreign partners will cause tax withholding on effectively connected income with IRS forms 8804 & 8805 being filed on a timely basis.

The  U.S. C corporation is also the norm, whether  held directly by the Canadian resident or indirectly by a Canadian corporation. In this regard, there is a first level of U.S. federal & corporate tax,  there is withholding tax on distribution of U.S. profits in the form of U.S. dividends across the border payable to the owner of the C corporation.  If Canco owns C corporation, Canco pays tax on the dividend subject to our refundable tax system,  Canco gets no foreign tax credit for the withholding tax on the dividend it receives from USCO because the payor is a foreign affiliate under our rules,  and then if such profits are distributed to the  Canadian individual shareholder, he or she pays personal tax on the dividend which in considered a Canadian dividend. This vehicle may  raise repatriation tax issues and additional compliance fees.

The instructions to Form T1134 state that the form is not required where the Canadian tax basis of  the share investment is under $100K and  the foreign affiliate is inactive or dormant. The  current inactive/dormant  definition is where gross receipts of the foreign affiliate is under  $100K in the year and the fair market value of the underlying assets of the CFA or FA are not  over $1MCdn at any time in the year. The form is due within 10 months after the end of the taxation year.

Although not written in the instructions to the T1134 form nor written in the legislation, a 2012 Windows on Canadian tax document, released on July 8, 2013 issued by CRA indicates that where there is a foreign affiliate who is a general partner, total gross receipts of the partnership are taken into account and not the general partner’s share. Based on this interpretation, is is more than likely that CRA Form T1134 will be required annually. This potential filing requirement should be examined before any work is done on the file.

The T1135 is a required filing by  the  U.S. partnership if the partnership is regarded as a “Canadian specified entity” by virtue of its holding U.S. situs property with a cost amount greater than $100KCdn. and more than 90% of its members are not non-residents of Canada. If the T1135 is not required by the U.S. LP, it may be required by the Canadian partner, if their tax basis in the partnership is over $100KCdn.The T1135 is due 3 months after the end of the taxation year of the U.S. partnership which is generally March 31st as opposed to April 30 or June 15 for an individual T1135 filer.

Both T1134 and T1135 have no filing extensions available. The minimum penalties not filing for each annual form is $2,500 per year with higher penalties for gross negligence. A number of taxpayers are using the Canadian voluntary disclosure program to submit forms that are past-due of at least one year to waive penalties. The program allows one to go back 10 years. CRA Information Circular IC00-1R7 outlines the criteria for the program with CRA Form RC199 being the voluntary disclosure application form.

Contact your professional advisor prior to implementing any of the outlined strategies.