U.S. tax professionals often recommend the LLC as the vehicle of choice to own real estate properties in the U.S. Although the LLC provides numerous fiscal advantages for U.S. citizens and residents, it creates issues of double-taxation for Canadian residents. We generally do not recommend that our Canadian-resident clients own property directly in the U.S. through an LLC.
What Is an LLC?
An LLC is an “unincorporated business organization providing its members with pass- through tax treatment, limited liability, and the ability to participate in firm management”.[i] The LLC is thus best described as a special hybrid entity that combines some of the best features of partnerships and corporations.
Each state has its own individual LLC statute. An LLC formed under state statute may be taxed as a partnership for federal income tax purposes. However, its members are generally not personally liable for the LLC’s debts or liabilities, which is the same luxury enjoyed by shareholders of corporations.[ii] The LLC’s members can therefore participate in management without risking personal liability.[iii] (One potential caveat: LLCs may be tempered by the piercing of the corporate veil.)
LLCs are generally registered in the states where they conduct their business, but there is no legislation restricting incorporation to the state where the principal place of business is conducted.[iv] Taxpayers can choose which states have the most beneficial LLC legislation. Delaware, Florida, and Nevada are currently the most popular choices.
How Are LLCs Treated by the Canada Revenue Agency (“CRA”)?
The CRA views LLCs as corporations, so Canadian-resident LLC members cannot benefit from the same flow-through treatment as their U.S. counterparts. The use of an LLC by Canadians for investments in the U.S. will oftentimes result in double taxation due to this mismatch in entity classification between the CRA and the Internal Revenue Service.
LLCs as Cross-Border Tax Planning Tools
However, the LLC can sometimes serve as a useful tool in cross-border tax planning where a Canadian taxpayer using a partnership to invest in real estate can incorporate an LLC to act as a general partner of the partnership, with the Canadian taxpayer acting as the limited partner. It should be noted, though, that the LLC cannot benefit from the same Canada-U.S. Income Tax Treaty benefits as a regular corporation.
For the reasons outlined here, we generally do not recommend that Canadian residents own U.S. properties directly through an LLC, notwithstanding that they may be excellent vehicles for U.S. citizens and residents.
[i] Bainbridge, Stephen M., Agency, Partnerships, and LLC’s, 2nd ed. ( St-Paul, Minnesota: Foundation Press, 2014) at 7.
[ii] Canadian Master Tax Guide, 73rd ed. ( Toronto : Wolters Kluwer Limited, 2017) at 191.