The growing problem with Canadians owning U.S. property

Posted by on January 20, 2011 in Taxes

The recent extension of the Bush area tax cuts seems to have solved or at least provided some much need clarity to Canadians owning U.S. property (the original problem with Canadians and U.S. estate tax summarized by Canadian Capitalist). The quick and dirty being starting in 2011, the basic exemption on the estate tax will be $5 million with the top marginal tax rate at 35% (both the exemption and tax rate being much lower than if the tax cut had not been extended).

(Canadians can rely only upon a portion of the U.S. estate tax exemption as illustrated here; the tax rates listed are dated but the analysis continues to be correct).

However, what Uncle Sam giveth with one hand it taketh with the other.  Under the Small Business Jobs Act 2010, owners of real estate purchasing more than $600 worth of goods and services will be required to provide a Form 1099-MISC (which is like a T4A in Canada).  The issue is not providing the form per se. The issue is that a Canadian will need to apply for a Taxpayer Identification Number to file the form which means it will be classified as a “non-resident alien”  (in simple terms, a non-resident alien is not a U.S. citizen but has submitted to its taxing jurisdiction).

The most likely result is: (i) administrative burden of keeping paperwork; (ii) more professional fees in retaining accountants to file tax returns; and (iii) possible audit risk from the IRS (as a non-resident alien taxpayer, there is no one in Congress who wants to intervene on your behalf given the taxpayer is not a voter).

The second issue is an ongoing one. The exemption from the U.S. estate tax is calculated on the market value of the property of the deceased whereas in Canada only the gain on the deemed disposition at death is taxed; to phrase this another way, the Canadians tax you for being a shrewd investor; the American tax you for merely holding it. This is a crucial difference that most Canadians who do not have experience with American tax law do not initially grasp.

All of this is to say that Canadians holding U.S. assets (including stock listed on U.S. exchanges) are increasingly being caught in a jurisdiction badly in need of tax revenue and widening their scope to collect it. Professional advice is required for any Canadian in this situation.

11 Comments on The growing problem with Canadians owning U.S. property

By » Weekly Roundup of blogs Canadian Business Blogs | Advice on Investment in Canada, Stock Market, Small Businesses Opportunities on January 20, 2011 at 9:35 am

[...] Thicken My Wallet points out new risks in owning US property  [...]

By Steve Clairman on January 20, 2011 at 10:51 am

You say ” Under the Small Business Jobs Act 2010, owners of real estate purchasing more than $600 worth of goods and services will be required to provide a Form 1099-MISC”. This sounds like it’s applicable to everyone owning real estate in the US. The 2011 instructions for Form 1099-MISC include the following “Trade or business reporting only. Report on Form 1099-MISC only when payments are made in the course of your trade or business. Personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit”.

Is this applicable to all Canadian owning RE in the US, or just those engage in some business?

By Canadian Capitalist on January 20, 2011 at 12:04 pm

Thanks for the mention Thicken. The US Estate Taxes are one big negative of US-listed ETFs for Canadians, especially those with significant portfolios.

By admin on January 21, 2011 at 11:02 am

Steve- it applies to anyone who owns real estate whether personally or as a business.

By This and That: Interest rates, portfolio performance review and more… | MoneySense on January 21, 2011 at 11:26 am

[...] Thicken My Wallet warns Canadians of the potential pitfalls in purchasing a property in the U.S.. [...]

By Personal finance aggregator » on January 22, 2011 at 11:51 am

[...] The growing problem with Canadians owning U.S. property [...]

By Chris Wyatt on February 3, 2011 at 4:37 pm

Canadian Citizens who own U.S. properties with value greater than $60,000 and have worldwide assets of more than $5 million (including life insurance) are subject to the U.S. Estate Tax at the current rate of 35%. There is a solution……a Non-Recourse Mortgage (NRM). The NRM mortgage provides a dollar for dollar reduction in possible U.S. Estate Tax.

For more information contact Chris Wyatt, RBC Bank (USA) Canadian Lending Specialist @ 407-244-6002.

By Marion Laramie on February 26, 2011 at 1:52 pm

I purchased real estate in the us, and would like to know how to go about financing more purchases as a canadian with the most tax advantages, and not using my own money.
thanks

By Alex Hung on March 10, 2011 at 3:16 am

The only solution to legally feel safe and escape being taxed heavily by Canada and US is to know the rules clearly and to consult a finance adviser to help you take the right decision

By Marion Laramie on March 22, 2011 at 8:56 pm

Thank you Alex I do appreciate your advise.
Now I am trying to get a Home line of Credit on the real estate I already have in the states.
I am canadian and live in Canada. Not that easy.
I have no real estate in Canada, you see my problem.
Again, I don’t want to spend all my cash, I am trying to proceed buying real estate with 50%down and finance 50%.

By Weekly roundup of blogs on August 20, 2011 at 5:43 pm

[...] Thicken My Wallet points out new risks in owning US property  [...]

Write a Comment on The growing problem with Canadians owning U.S. property

Subscribe

Follow comments by subscribing to the The growing problem with Canadians owning U.S. property Comments RSS feed.

More

Read more posts by