Considerations for Canadians looking to relocate to Florida…

As a Canadian Citizen that has moved to Florida myself, I am experienced in the processes necessary to complete the journey including legal, emotional, logistical, etc.

I was also a successful investor in Real Estate in Canada before coming here to Florida and I bring with me my experience in investing both in Canada and the U.S. … and I can help you do the same.

CDN Tax Page on the IRS Website:

https://www.irs.gov/individuals/general-itin-information

Tax Planning For Canadians Purchasing Property in Florida

Rental Income

Non-US tax residents are only required to report and pay tax on their income that is sourced to the United States.

A Canadian can become a US tax resident if they obtain US citizenship, become a lawful permanent resident (i.e.: green card holder) or satisfy the “substantial presence” test, which looks at the number of days spent in the United States. First, if income is from a “US trade or business”, the net income from such trade or business is taxed at the US regular graduated tax rates. (Up to 39.6%)

The Trade or business tax applies to the net income of the foreign investor from the US trade or business, after the application of any available deductions. Second, if income is passive (that is, not from a US trade or business), and sourced to the United States, such income is subject to 30% flat withholding tax. The 30% is generally withheld by the payer. No deductions are available to certain holding requirements are met. Corporations are taxed federally at graduated rates up to 35% plus state tax if applicable, and do not enjoy a reduced capital gains tax rate.

Some foreign owners of US property may choose to rent out their property for part or all of the year. Rental income from US property is generally sourced to the US, and the income must be reported to the IRS by the recipient. Assuming the rental property is held on a passive basis (that is, the foreign owner is actively involved managing the property), rental income paid to a foreign owner is subject to 30% flat withholding tax, unless the foreign owner makes an election to be engaged to a US trade or business with respect to its rental real estate. If the owner is involved in managing the property, the rental income may be deemed to arise from a US trade or business and graduated tax rates apply, subject to expense deductions. The Treaty does not provide any relief against double taxation of rental income. This means that the rental income may be taxable in Canada, even if tax was already paid on the income in the US (although Canadian law may provide a tax credit for foreign taxes paid in the US)

If the property is owned by a legal entity, such as a corporation, partnership, or limited liability company, and is used personally by the owner of the entity, then the entity may be required to charge a fair market rent to the owner. If such rent is not charged, the IRS may impute a fair market rent which will be taxable.

(Please consult your accountant to verify, these are only approximate figures and not to be used)

Taxation of Gain from Selling the Property

Income from the disposition of US real property by a foreign person is sourced to the US and must be reported to the IRS by the recipient. Unlike rental income, disposition income is treated as though from a US trade or business and may qualify for the lower capital gains (up to 20%) if held for more than one year. Additional tax may apply on recapture income if depreciated property is sold at a gain. There is no exemption for income from real property dispositions under the Treaty. This means that the income on disposition may be taxable in Canada, even if tax was paid on the income in the US (although Canadian law may provide a tax credit for foreign taxes paid in the US).

Income from the disposition of real property by a foreign owner is subject to the “Foreign Investment in Real Property Tax Act” (‘FIRPTA”), which requires tax withholding by the buyer at the time of the sale. The FIRPTA rules may also apply when interests in a property-holding entity are sold by its foreign owners—even if the real property is not directly sold. Under the FIRPTA rules, the buyer is generally required to withhold 10% of the sale price at the time of the sale. The foreign seller is then required to file an annual tax return with the IRS and calculate the actual tax due on the gain.

Estate Tax

At a rate of 40%, the US estate tax regime should be a significant consideration for Canadian Investors.

The regime differs considerably from the Canadian system and often catches Canadian investors by surprise. Foreign persons are subject to the US estate tax only to the extent of property physically situated in the US.

Direct Ownership

Foreign direct owners are also directly taxable on income from any gain on sale, at graduated ordinary income tax rates (up to 39.6%) or possibly at the lower capital gains rate (up to 20%). FIRPTA also applies on the disposition of the real property, which requires the buyer to withhold and remit to the IRS 10% of the sale price (which may be refundable, depending on the tax due on the gain if any).

The Canadian owner may be required to file an individual income tax return with the IRS reporting income from the property. For a variety of privacy reasons, many people prefer to report this income on the tax return of a separate entity rather than on an individual tax return, which makes direct ownership less desirable.

(Please consult your accountant to verify, these are only approximate figures and not to be used)

Direct Ownership Planning Highlights:

Simplest structure

Rental income 30% flat withholding tax unless net basis election

Disposition income: may be eligible for 20% capital gains tax; otherwise, taxed up to 39.6%

FIRPTA withholding applies disposition

Foreign owner must file US tax return reporting any income

Estate tax applies

No limited liability