Florida real estate still attracts Canadian investors. Despite the current situation, Florida is no doubt the best sunny locale for snowbirds or aspiring snowbirds, and an excellent place to make money in real estate.
My advice is to avoid the average realtor in Florida who will probably recommend an LLC since it’s the most common and “works for everyone” (except for Canadians). Instead, read this article to see why it matters to pick the right structure. I invite you to read the following short article, not as tax advice, but to get a general idea as to how you can avoid a very expensive mistake.
The Trap! What Works for Americans Fails Canadians
After years working with U.S. and foreign investors, yes, I sometimes recommended it. The LLC is simple and provides liability protection, but if you reside in Canada, be careful. It might not be what works best for you.
Most American realtors recommend setting up an LLC because they are familiar with it, and it is true that these entities are easy to setup and provide protection under U.S. Law. I often include them as part of my clients’ strategies. However, if you are a resident of Canada, it might be something you want to avoid. Let’s break this down into two sections: 1) why it doesn’t work and 2) what you should do instead.
Why it doesn’t work.
Canada and USA don’t see the LLC the same way. Let’s call it a tax classification mismatch between the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA): The IRS view: The IRS generally treats a standard LLC as a flow-through entity, taxing the owners directly.
- The CRA view: The CRA generally classifies a foreign LLC as a corporation.
- The Consequences: Double Taxation and Stranded Tax Credits
Because the two countries view the entity differently, tax payments and income recognition happen at different times or in different formats. Canada taxes its residents on worldwide income and provides Foreign Tax Credits (FTCs) under Section 126 of the Income Tax Act to relieve double taxation. However, FTCs are calculated strictly by country and category, and do not automatically refund every dollar paid in the U.S. When an LLC creates an entity-level vs. personal-level tax mismatch, your U.S. foreign tax payments may not align cleanly with Canadian reporting, leaving you with stranded tax credits and double taxation.
Then, What Should You Do?
Different structures offer distinct trade-offs under Canadian and U.S. rules, and this is a conversation you don’t want to miss. I usually contact the client’s Canadian CPA and consult with a seasoned cross-border tax specialist here in Florida.
Then, I offer property guidance at the stage where the nuances of the specific real estate come into play, but that is another story. Here is a quick guide for education (this is not a tax advice).
Personal Ownership: Offers direct ownership and simpler administration for basic vacation homes, but leaves personal liability, estate, and currency considerations unaddressed.
Partnership or LP: May provide consistent flow-through treatment in both jurisdictions for certain investment projects, but requires careful review of withholding and filing obligations.
Canadian Holding Company (HoldCo): Useful if investment capital is already inside a Canadian corporation, but introduces corporate/shareholder tax layers and U.S. corporate filing requirements.
What you should do is to explore a bit deeper with the right professional. For a Canadian, investing in Florida truly is a great idea. Just beware of getting overwhelmed and accepting overly simplistic advice.
Two more things before I let you go.
Form T1135: Know that there is one form that could be new for you: it’s the Canadian T1135. It taxes you on your worldwide income, and it comes with severe penalties for late or inaccurate filing. There is also a myth about putting your Florida property through an entity wrapper or tagging the property as “personal-use” to avoid filing this form, but this does not automatically exempt you from it.
FIRPTA: It stands for Foreign Investment in Real Property Tax Act. It happens when a foreign national sells a U.S. based property. It is not a tax. It’s a withholding. However, it’s a bit painful to get it back. The IRS will usually withhold 15% on the amount realized. Can it be avoided? Yes, with the proper tax planning. I just want you to know about it. We will dig a little deeper into FIRPTA in another post.
