From the planning desk
Our American neighbors have had one heck of a time getting COVID under control, and while many use that opening line to point fingers and launch attacks at those south of our border, I am not here to do that. What I have heard however is an increasing amount of chatter from Canadians with US property who are planning, or are in the process of, selling their US based property. Whether this is short sighted, driven by values, or just plain opportunity based, everyone is faced with the same problem when selling a US property. If you have never heard of FIRPTA.......keep reading.
Canadians who purchase property in the US must consider how to own the property from the very beginning. Whether you choose joint with right of survivorship , LLC , a specially drafted US trust or other structures, there are going to be pros and cons to consider. Let's examine the most common practice, and that is personal ownership.
Back to FIRPTA or the Foreign Investment in Real Property Tax Act. Over the course of the ownership, if you are not collecting any income, then you really don't need to worry about filing any tax. When you sell though, that is when you will be introduced to FIRPTA, which can be very complex, and represents up to 15% of the total sale price in terms of a holdback provision. Having gone through this process personally (years ago), it is not easy, and you need professional help. FIRPTA is a withholding measure that forces compliance with US capital gains tax and filing requirements. An amount is withheld from the seller (for up to 2 years in some cases!) until the proper filings are completed and taxes that are owed are paid in full. In order to receive any refund from FIRPTA, you must go through the tax filing process. 15% on a $1,000,000 sale is $150K, and I don't know anyone who would want to leave that on the table.
A second issue with personal ownership, is the fact that it can potentially lead to double taxation for the estate of the owners. Families must be accutely aware of the consequences of the joint with right of survivorship structure. If you are not sure what I am talking about here, click the link previously highlighted in this article.
I have added links throughout this post from various articles on the subject. I have also included a PDF attachment here from RBC FAST which digs deeper into the topic. If you are wondering about your US property and whether the ownership structure is aligned with your goals, we have the resources to examine the situation with your professionals, and get you that peace of mind.