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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1081
Experience:  US Taxation specialist.
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For non US resident and a Canadian citizen, what is the best

Customer Question

For non US resident and a Canadian citizen, what is the best form of legal entity(copr/llc/trust, etc) that can be employed to own rental properties in the US (specificlly Washington State) that will have the least operation tax impact, and can be optimally structured to provide for estate planning (passing on to children).
Submitted: 1 year ago.
Category: Tax
Expert:  USTaxAdvising replied 1 year ago.

Hello,

 

This is a good question. I can't tell you what is best as each entity has it's own benefits and pitfalls which must be evaluated in accordance with each user's goal.

 

Before we review the choice of entity we need to understand what the tax implications are for foreign persons to own U.S. real estate. Effectively connected income is the topic to read up on.

 

Effectively Connected Income - http://www.irs.gov/Individuals/International-Taxpayers/Effectively-Connected-Income-(ECI)

 

Corporate Structure - this structure will block all ECI/FDAP income from being taxable to the shareholders. The entity itself will pay tax on net profits and then the shareholders will experience federal withholding taxes on dividends repatriated to Canada. (approximately 5% as qualifying under treaty). Thus there will be a form of double taxation in the U.S. Then the shareholders will most likely be taxed by Canada on the income. This choice of entity is probably least desirable. But perhaps Canada provides a foreign tax credit for the 5% of federal withholding taxes taken by the U.S.

 

Partnership/LLC/Trust/Individual - All of the following entity classifications provide for basically the same type of taxation in the U.S. (i.e. the individual declares the income and pays the tax) Since owning real property gives rise to ECI the individual's can file a tax return and declare all the income and get the benefits of the deductions.(see link below) Partnership's and LLCs will provide legal protection but just complicate things from a tax perspective as these entities are also required to file tax returns. Partnerships and LLCs might be best when doing family wealth planning as they provide a vehicle to apportion the investment out to members of the family. Note that each individual would file a U.S. tax return and declare his/her share of the income from the partnership/LLC/rental and pay tax on the income if applicable. This would occur whether or not cash were actually distributed.

http://www.irs.gov/Individuals/International-Taxpayers/Nonresident-Aliens---Real-Property-Located-in-the-U.S.

 

I cannot opine on the Canadian tax effects of such structures but I presume that Canada will wish to tax the income as well.

 

I personally believe the best choice would be the LLC as it provides legal protection and can be divided and transfered easily. The LLC is also not subject to tax by default so long as partnership taxation is selected on formation. (note that an LLC can either be taxed as a partnership or a corporation) The LLC would prepare and file a tax return and provide a Schedule K1 to each member. Each member would then file a U.S. tax return and declare the income and expenses from the LLC. They may or may not have tax due when filing such returns.

 

I hope this helps and provides the clarity you were looking for. Please let me know if you have any further questions.

 

Best regards,

Customer: replied 1 year ago.

Thx. In general, what is the annual cost of maintaining a LLC itself.,viz. formal record keeping, statutory filing, etc. Is there anything called "cross border trust", and how much would it cost to maintain and administer.


 

Expert:  USTaxAdvising replied 1 year ago.

The annual cost of maintaining an LLC in the state of Washington would be around $70 per year. Plus the fees for filing a federal tax return which could vary from $500-$5,000 depending on complexity.

 

I have read about the cross border trust. The Cross Border Trust SM requires no ongoing maintenance or extra tax filings. The cost would really be the initial set up costs which could be quite high.

 

Please let me know if you have any further questions.

 

Best regards,

USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1081
Experience: US Taxation specialist.
USTaxAdvising and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

The other parts of the previous question were:


1. The statutory composition of a LLC and a Cross Border Trust - how should it be formed? is there a minimum number of members required? can they all be non-US residents, and citizen of any country? maybe you can point me to references.


2. Assuming members are 1 Canadian, 1 Chinese & 1 US citizen, what happens tax-wise when income is distributed from a LLC, or a Cross Border Trust to the different members?


3. By the same token, what happens when one of the above members is deceased and assets attributable has to go to the heirs. How is the distribution taxed?


Thank you!


 

Expert:  USTaxAdvising replied 1 year ago.

Hello Alan,

 

1. This is a new question not related to your original question and I am not certain about the composition of a cross border trust. There is no minimum number of members for an LLC, albeit there must be at least one and they can be non residents/citizens of the US.

 

2. From a tax perspective all income and expenses are passed through to the members/trustees and tax accordingly. The trust or LLC does not pay tax, it merely passes on the income/deductions. There is no U.S. tax liabilities arising when distributing cash as the income/expenses have already been declared.

 

3. I am not certain how the distribution of assets is taxed for the foreign persons (again this is a separate question from your original query).

 

 

Customer: replied 1 year ago.

Sorry, if I confuse you. It's just one thing leads to the other.


On the issue of a LLC again:


1. How long would it take to file and register a LLC in the State of Washington, normally.


2. When 1 member is deceased, is it that his attributable asset will be passed on according to Will, if there is one. And the beneficiary will have to deal with such benefits in accordance to the tax regime of his tax-residence?


3. Again back to a previous query, what is the advantage and defects for employing a corporate person(legal entity) as a member of a LLC?


Appreciate!


 


 

Expert:  USTaxAdvising replied 1 year ago.

No problem.

 

1. You can register an LLC in Washington very quickly I think the whole process could take a day.

 

2. I believe you are correct but I am not 100% certain. There may be U.S. tax implications as well from an estate perspective.

 

3. A corporation can be a member of the LLC. The corporate form gives rise to double taxation as the corporation itself is a tax paying entity. When it makes distributions to shareholders in the form of a dividend then those shareholders also have to pay tax on the dividends.

 

I hope this helps.

 

Best regards,

Customer: replied 1 year ago.

Thank you!

Expert:  USTaxAdvising replied 1 year ago.

No problem. Good luck!

Customer: replied 1 year ago.

Just to clarify to ease my anxiety:


In a US LL situation, if I am a Canadian citizen/resident and a a memebr of the LLC. I will have to face (a) the tax regime of the US as an alien, i.e. 30% withholding tax on the net income(after expenses for doing the business); (2) I file Canadian tax returns to record the US income and report US tax paid as a credit to my Canadian levy as there is a tax treaty between Canada & the US.


In the same situation, if I employ a corporate body registered at a tax haven such as the British Virgin Island, the BVI company will have to pay US withholding tax on incomes (?%) as a alien juristic body; and the BVI company pays whatever BVI levies as income. Consequently when the BVI company distributes fund to me as a Canadian, it is personal income that I have to pay attributable to my income tax.


Kindly correct me if I am wrong in any of the above intrepretation.


Thanks so much!

Expert:  USTaxAdvising replied 1 year ago.

Your understandings appear valid.

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