The tax world has changed a lot in recent years. It’s important to be aware of the vehicles that can cause potential taxation pitfalls.
US Limited Liability Companies (LLC) and Revocable Living Trusts (RLT)
LLCs are generally taxed as partnerships in the US but are taxed as corporations in Canada. This causes potential double taxation, a “taxable benefit” for Canadian income tax purposes, and higher overall income taxes. RLTs are not necessarily ignored for Canadian tax purposes, which can also result in potential double taxation.
The Canada Revenue Agency (CRA) has not ruled on the Canadian entity classification of US Limited Liability Limited Partnerships (LLLP) and Limited Liability Partnerships (LLP), thus causing uncertainty on the Canadian tax implications of using such vehicles.
Gifting US real property
Gifts of US real estate are not eligible for pro-rata unified credit utilization and are subject to gift tax at 40% of the value of the gift. In addition, the Canadian attribution rules mean you may also be subject to Canadian tax.
Joint Tenancy with Right of Survivorship
When two (or more) people own a property as Joint Tenancy with Right of Survivorship, and one of the joint tenants dies, the entire property is passed to the survivor(s) and can result in the double application of the US estate tax.
Holding US real estate through a Canadian corporation can cause Canadian shareholder benefit issues, which can result in significant Canadian tax costs.
Life insurance and non-recourse debt
Life insurance can be a very simple and effective way to provide liquidity to cover your US estate tax liability arising on death. Financing the property with non-recourse debt is also an option that can reduce your US estate tax exposure.