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Sent: Monday, May 26, 2003 8:57 PM
To: [email protected]
Subject: Capital gains for U.S. Residents
If you've already received an email from me, please accept my
apology. The computer, which can be a great thing, is giving me
fits right now and I don't know if the message I just sent to you
actually was sent.
Anyway, my wife and I live in the Chicago area where we own a
townhome. We have recently purchased a condominium in
Abbottsford, BC for investment purposes. We are also in the
process of purchasing two lots where two homes will be be built
in BC (Langley). Here in the States we also have a small
corporation, which is just me and my wife. These properties are
being purchased not through our little corporation, but by us
individually. We are wondering if we should set up a Canadian
corporation to own these properties and thereby avoid capital
gains taxation in both Canada and the U.S. We want to shelter
the potential profit that we hope to realize. We are also
wondering what forms will need to be filed by us for Canada and
for the U.S. We would appreciate whatever advice and help you
could provide.
Thank you in advance!
R XXXXXXXXXX XXXXX
630-3 XX-XXXXX (home phone)
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david ingram replies:
First you need an agent in Canada who represents you as a
non-resident owner of Canadian rental property.
You and your wife will both need to file a form NR6 and your
Canadian Agent must sign the form as well. this form should be
filed BEFORE your first rental month. Find it at
http://www.ccra-adrc.gc.ca/E/pbg/tf/nr6/nr6-00e.pdf or click on
the attachment.
Having a Canadian Company would be a big mistake. Add $2,000 a
year or more EXTRA accounting fees for your "Foreign Personal
Holding Company" accounting. You would have to file all sorts of
extra forms. Try the 5471 for instance.
You and your wife will both then file a non-resident rental tax
return under section 216(4) of the Canadian Income Tax Act.
If you make a profit your tax rate will be at about 24% to Canada
up to the first $30,000 Canadian.
After that, you would report the rental profit to the US on
schedule E of your 1040 and claim credit for any tax paid to
Canada on a form 1116.
In your situation, we usually prepare both returns. However,
because of your US Corporation which I presume is a Subchapter
"S", you might prefer to have a US accountant do your US returns.
In that case, we prepare the Canadian Return and then do a dummy
US return with the figures in place for the US accountant. You
supply us approximate figure for the US return so that the
foreign tax credit amounts will be pretty close.
That way the US accountant does not have to reinvent the wheel by
spending hours trying to figure out how to deal with the foreign
tax credits and the foreign property.All they do is plug in the
figures in the places we have suggested
(The US IRS guide suggests 1 hour and 53 minutes to prepare a
single US foreign tax credit and I guarantee that it takes longer
to figure out if you use a computer to do it for the first time.
Unless your accountant prepares a hundred of them a year, he or
she is at a great disadvantage. Our office, on the other hand
prepares some 1800 foreign tax credits a year and have written
unique software which takes the credits back and forth between
the countries with built in currency exchange rates, etc.)
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Trying to shelter the Canadian profits will leave you liable to
all sorts of expensive US accounting. For instance, setting up a
Canadian Trust to handle it would leave you liable to file forms
3520 and 3520A each year. (6 page/6 hour forms)
Make the profit in Canada - pay the Canadian Tax and claim your
foreign tax credits on your US returns.
Hope that this helps.
david ingram - [email protected]
108-100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 913-9133 - (604) 913-9123 www.centa.com
Cell is (604) 657-8451 (10 AM to 10 PM seven days a week)
US / CANADA REAL ESTATE TAXATION SPECIALISTS
US / CANADA / MEXICO
Working Visa and Income Tax Specialists
Be ALERT, the world needs more "lerts"
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