US Real Estate for Canadians: Tax Setup & Investing Tips

Introduction

Welcome to the Wisdom Lifestyle Money Show. I'm your host, Scott Dillingham. The show is designed to help Canadians invest better in Canada and the United States. We are the North America-based mortgage financing lender and provide education to both countries.

Discover how you can become a better investor and access the financing you need. Welcome everybody to the Wisdom Lifestyle and Money Show.

My name is Jillian Irving. I'm a mortgage agent with Lens City Mortgages. I specialize in helping real estate investors scale their portfolio. I'm also a coach as well, so I can help you improve your portfolio in a myriad of ways.

I love to come on this podcast and talk to other professionals in the field, people who can help us save taxes, which is who we're gonna speak to today. Today, we have the great pleasure of having Michael Matthew with us. He has been a professional accountant for more than 30 years. He has a Bachelor of Arts from Chartered Accountancy Studies from the University of Waterloo.

The Core Idea

As a small business owner in the fields of computer and business consulting for more than 20 years, Michael has a real appreciation of the challenges and frustrations that are faced by his clients. He understands that clients want an accountant who will do more than just fill out forms. They want a trusted advisor who will add value to their bottom line.

Welcome today, Michael. Thanks so much for having me here, Jillian.

Oh, it's my pleasure. So we obviously would like, we're gonna have you on many times, Michael. I feel like there are so many things that you and I could discuss, but I think primarily today, the focus of our conversation is gonna be for our investors who have this new and deep interest in investing in the States. At Lenz City, we have a whole new program where we can help foreign nationals purchase properties there.

And honestly, we have so many investors calling us to help prepare them for getting, you know, mortgages down in the States. But there's a whole lot that has to happen before you can actually get a mortgage, isn't there?

Deep Dive

Yes, that's absolutely right. S. And what they're always asking is, how do I get financing? So the new program that you just mentioned will be of great interest to my clients for sure.

So I think, you know, when people come to me and say, I need a mortgage, I say, you gotta set up your corporate structure first. And they say, what is that?

And what do I do? So can you help us understand, Michael, what, let's just start with a beginning investor, someone who is just getting started. So not a sophisticated investor, but just someone who might wanna go and buy one property or maybe two properties in the States. What kind of entity they need to set up with you to go and do that successfully?

The first question I would ask is, what is their goal? Like you mentioned, perhaps one or two properties. Is this something that they're gonna use primarily for their own personal use and perhaps rent out a bit to offset the costs? Because that tends to mean they don't need to set up a lot of these more detailed structures because they're actually not running a business.

Practical Steps

If however, though, it's meant to be a money-making venture, they want to build up some long-term cash flow from rental income, they're probably gonna wanna set up a corporate structure. And typically what I recommend for someone that, especially if they plan on leaving some or all the income in the States that's generated, to use what I call a triple C structure.

Mm-hmm. There's no point in Googling it because it's my term. You're not gonna find any information on it.

Oh, I love it. A secret.

An accountant strategy secret. That's it.

Key Takeaways

So tell us more about this. Typically, it involves setting up a Canadian corporation.

So a lot of my clients are Ontario. So as an example, you would set up a Ontario numbered corporation. You don't need a name for it because you're not gonna market under this company.

It's not top facing. So it's just an Ontario one, two, three, four, five company.

Exactly, exactly. Mm-hmm. And then you get what's called a C corporation.

Resources

S. has several types of corporations.

S. resident. So if you're doing business from Canada, that one's off the table anyway. The next one, LLC, you can use, but you have to be careful.

You can't hold it directly as a Canadian. And that's because the LLC is considered to be a flow-through entity or sometimes called a disregarded entity.

S. tax return.

Introduction

S. resident.

, where's that coming from? S.

S. citizen or resident did, and then you claim that on your Canadian personal tax return, and you're both in the same level, both personal tax returns. The problem is CRA won't allow that. They'll say, you're trying to claim corporate tax credits because they're coming from an LLC.

You're trying to claim them on your personal tax return Canada. It's matched.

The Core Idea

We won't allow that. And that's how you end up paying double tax or potentially more, but you'll pay extra tax. And if you're going to have an LLC as a Canadian resident, you have to have an intervening corporation. And that's where the C corporation comes into play.

In this case, you'd have your Ontario numbered corporation, which would own the Wyoming, because that's where most of them go. C corporation, which owns the LLC. The LLC is the entity that actually takes title to the property. A lot of Ontario residents like to invest in the East Coast, so places like Georgia, Florida.

So you'd set up, say, a Florida LLC to buy your Orlando area property, and you would treat that as a disregarded entity, just like most of the other LLCs. It would flow the income and expenses, in this case, to your Wyoming C corporation.

S. for one corporation, the Wyoming one.

Deep Dive

S. residents.

S. resident, it goes to your personal tax return. As a Canadian resident, in this scenario, it goes to your Wyoming C corporation.

That pays the taxes. Right. And so this LLC, you said, for the purposes of our illustration, you said this was a Florida LLC and that you can buy your property in Orlando. But what if you set up this structure and you're like, okay, I've got my Wyoming C corp ready to go.

I've got my Florida LLC, and now all of a sudden, I want to buy in, you know, Ohio. That's a great question. With the C corporation, you can all, you only have to ever set up one. You can then run multiple LLCs underneath that.

Practical Steps

You could run, there's no limit, actually. So you could run two, five, 10, 50 for that matter. The whole point is, the Wyoming corporation isn't doing business directly.

Mm-hmm. It doesn't have the legal exposure. And the reason why you'd have different LLCs is you want to separate your investments such that a problem with, say, your Orlando property doesn't affect your Ohio property. You can absolutely use your Florida LLC to invest in another state like Ohio.

You just have to, one extra step, that's all. Mm-hmm. And you would have to register your Florida LLC in Ohio to do business there as what they call a foreign corporation.

Mm-hmm. I get a kick out of that because you're not all in the states, but that's not how they look at it. If you're not, your corporation isn't local to that specific state, it's considered a foreign corporation. But all that means, it's a one-time registration fee to do business, and then everything else is the same.

Key Takeaways

And are those expensive fees? I mean, is that something like you really wish you had thought about that first before you registered your LLC? Or is it minor and it's really not that big a deal?

It's the latter. These fees, minor, and they vary from state to state, but you're looking in the range of $100 to $200 to maybe $300.

Mm-hmm. That's the fees.

Mm-hmm. the state's registration fees just to start the corporation, they range from nothing up to about that.

Resources

So it's hundreds of dollars. It's not thousands.

Mm-hmm. And one of the reasons I like Wyoming is their fees tend to be among the lowest in the country. Wyoming has no state income tax.

All those reasons. And everything's automated, so you can get companies registered in as little as two to three days if things go well.

Mm-hmm. So if you would, so if you registered the C-Corp in a state other than Wyoming, tell me what that might look like. I mean, it's so more, more expensive, lengthier. The fees are going to be more in almost every case.

Introduction

Mm-hmm. They're not going to have as good privacy protection. And also the way it assesses legal judgments, it's more beneficial in Wyoming such that if you don't distribute from that company, your creditors can't get in to get the money. It's only if you pay money out from that company that they're able to, to yourself, that they're able to swoop in and take it.

Mm-hmm. It's called a charging order. So the other states, they're not as friendly and when it comes to all those factors.

Mm-hmm. And from the tax perspective as well to the state tax level, it sounds like it's the lowest. You know, the state tax level, as I said, there's no corporate income tax, there's actually no personal income tax either in Wyoming. Why does everyone not live in Wyoming?

Interestingly enough, it's the least popular state in the country. What that means is you can buy a property there, you absolutely pay no income tax at the state level. The problem is you're not likely to get much appreciation because you simply don't have the demand.

The Core Idea

Mm-hmm. Because the least popular state, that means not a lot of people want to live there in the first place.

Right. So you have to weigh your pros and cons from a business perspective. It's no use having a property that you can't sell to anyone. And I always tell people the first thing to look for where to invest is simply, is this a landlord-friendly state or is this a tenant-friendly state?

Mm-hmm. Because in states like California, New York, New Jersey, you can have a tenant be in default for a year or more before you can kick them out.

That sounds familiar with Ontario. Like Ontario and Texas, it's about three weeks.

Deep Dive

They're not messing around there. No. You know, don't mess in park.

So that's the number one criteria. I always tell people, yes, you can debate about which state has a slightly better tax rate. You have a federal tax rate for corporations, which is currently 21%. That's going to apply in every state.

So what you're talking about is a range of zero. 5% or 12%. But those are the states that I don't suggest you invest in anyway. States like New Jersey, New York, California, with the one exception, if you're flipping properties, then you can do that anywhere because you're not actually taking title in most cases.

You're not actually holding on to it for a long term. So those sorts of things don't really matter. But for any longer term play, you're going to start with that evaluation. Does this state favor tenants or landlords?

Practical Steps

S. lending is because of exactly that, that the Ontario Landlord Tenant Board has just made it really difficult to do business here, right? And people are finding it hard to be able to evict tenants in any sort of expeditious way. And so they're looking to move their money into areas where there is a more landlord friendly environment to connect business, really.

Yeah, I'm a landlord myself in Ontario and I've experienced some frustrations around trying to get a tenant to move out because there was a pest problem, frankly, roaches. And I was so stubborn, I didn't want to pay them to leave. But that's actually encouraged in the Ontario market, is the tenants to leave.

property. And that just struck me as why would I want to reward someone for damaging my property?

Right. I was talking to a property manager, a friend of mine, and she said, you have to remember, the landlord and tenant board is not there to kick tenants out of their homes. So if they can find any excuse possible to not do it, they will not do it. Right down, including you make some simple clerical error on your paperwork, they don't allow you to just cross it out, initial it, and keep going.

Key Takeaways

You have to start all over and get a brand new hearing. And it's just craziness.

Yeah, it's very frustrating. Not to get too political, but the politicians keep going on and on about housing crisis, and we've got to do something to improve it. And they keep trying to tinker with demand when they should really be concentrating on increasing supply. And one of the ways to increase supply is to have a fair landlord and tenant board that doesn't cater to the tenants so much that they can continue not paying rent for a year or more before they're kicked out.

And even when you get the order, it's not like they leave the next day. Weeks down the road, and then the police do not get involved, the sheriff is the only one who can legally kick your delinquent tenants out. And the sheriff posts a notice, and again, it's not the next day. So even after you've, quote, won a trial, it can be a couple of months before you even get into your property.

So it's definitely stacked against you. S. because you can get into properties for much less money.

Resources

Yeah, 100%. That's what I'm seeing across the board. You know, people, Ontarians who look at homes for sale really anywhere in the States, and they come back to me excitedly and said, the number starts with a two. They can't really believe it, that there's actually a house that might cash flow that you can buy that's not a shack that is in the $200,000.

You know, it feels exciting to be able to help people really to scale businesses in the States and for us to be able to help them more readily now from Canada with tons of financing options. So let's jump back into these LLCs again because you made a comment that was interesting to me. You said if you had two LLCs, you might want to protect what's happening in one state from properties, like from what was happening with properties in another state. Do you try to stack your LLCs up to a certain value?

Michael, is that what you try to do? You say once we get to $500,000 with properties in Florida or wherever it is, then we're going to make another LLC just to keep the value of them kind of distributed just so that there doesn't, does that make sense just so that you don't have too much exposure in one company? Yeah, that's a great question and yes, generally speaking, people have a rule of thumb and it's somewhere for most people between $500,000 and a million dollars worth of properties.

Once they cross that threshold, they will then look to have another LLC opened up to purchase the next property. It comes down to peace of mind which only the client can value versus cost to maintain and set up. I can certainly tell the client what it's going to cost to set up another LLC, what the anticipated cost is to maintain it year to year, but what I can put a price on is their peace of mind such that some people may say, you know what, I don't think I'm going to get sued, I've got good insurance in place, I don't mind having four, five, six propers in the same entity.

Introduction

Other people may say, you know what, I ran into a problem where there's one problem tenant at one property and then all my real estate holdings were all of a sudden at risk because this guy decided that would be a good place to break an arm and sue me because I didn't maintain a safe home for him. And I'd rather have everything carved off into a separate entity. Yes, I know it's going to cost me more, but then I don't have to worry that a problem with one property is going to take down everything else I own.

And after you have to have more assets accumulated, it's going to be more of an issue. Let's say that $200,000 property and you buy another $200,000 property, most people will be comfortable just leaving those two in the same structure. But it's, at the end of the day, the client's option because they're the one who has to sleep at night, not me.

Right. And do you feel like the litigious nature of the states? I mean, people do sue there more than they do here. I mean, it really does sound like a consideration.

I mean, I'd never thought about that as a property owner here in Ontario with several rental properties. I do have different holding companies for my properties just because they've been around for so long, but I've never really thought about people suing me for breaking their arm, but maybe I should, even for my Ontario properties. The way I look at it is you have to assess the risk. And to me, having 10 individual homes is less risky than having one 10 unit apartment building.

The Core Idea

Seems like everyone has at least one idiot friend. And if you're concentrating those 10 idiot friends in one building, the chance of having a problem goes up exponentially versus 10 single-family homes. You have to evaluate the risk. And while you need insurance, especially if you have a catastrophic loss, such as a fire or flood damage, insurance companies are pretty good at figuring out ways to not pay you.

As an example, most people would be surprised to learn that if their rental unit lies vacant for more than 30 consecutive days, they have no insurance coverage whatsoever. the standard in the industry is, and I'm talking in Ontario, that the policies lapse or avoid after 30 days of not being occupied. And personally, it's taken me two to three months, maybe even four months to rent my place out on several occasions.

corporations. And had there been a problem during that time frame, I would have been on the hook potentially myself, although at least for some of that time, my policy explicitly had, I think it was 120 days of coverage. So you can get these extra coverages, but you have to be aware of the need in the first place.

Right. Now, back to sort of setting up these corporations, again, so many of the people who I'm talking to about who are really just starting their, you know, their research into the States and purchasing their, you know, they're being told that what they should do first is to shop and find the property and then open up their entity. And I'm not sure that is the correct order. What would you recommend for people who know they want to get started soon?

Deep Dive

Is it best to wait or is it best to just get started with the setup of this entity now? If you're committed to proceeding, then it makes more sense probably to start setting up your entities. And the reason is in order to open up a bank account, you're going to need what's called an employer's identification number.

S. calls their tax ID number for corporations. If you have a business in Canada, you know that CRA issues you a business number, this nine-digit number, the equivalent in the states is this EIN. And the IRS is the only entity that can issue these EINs and they sometimes are quite busy.

So we're okay now, but starting sort of March to May, because they're dealing with so much personal taxes, what should take perhaps two to three weeks can take two to three to four months to get that EIN issued. S.

entity. You cannot open up a bank account without it.

Practical Steps

Right. So you could have the best property in the world and you can't get it because you're waiting for the IRS to give you this EIN and that might be weeks or even possibly months for that to happen.

Possibly months. And yeah, obviously there are ways around it, but in an ideal world, you don't want to have to ship properties around from one entity to another at the last minute if you can avoid it. So yes, if you're committed by all means, get things set up to set up a numbered Ontario corporation. I mean, I say a week just between us though, it can be happening that much faster, especially if there's just if there's no name and it is truly a numbered company and setting up the C corp and the LC takes usually about two weeks.

The fly in the ointment, so to speak, is that EIN number because they're very, you think, CRA is procedural. IRS is so much more procedural that there's no possibility of hurrying them along. As an example, I received some correspondence from the IRS and I had to forward a response, which I did. And rather than read my response, which I thought they would do, they just sent a letter saying, yeah, we know you sent us something, but we need 45 days to read it.

I'm thinking, just read it. Why are you sending me this letter? You're like, you could have read it in the time it took you to respond to the letter saying you're not going to read it for 45 days.

Key Takeaways

Exactly. So there's just no hurrying on them along.

People get the EIN documentation. If they somehow misplace it, the IRS refuses to reissue a copy.

Again, I don't know why. So you'd have to apply again? You have to apply for this, not the EIN number, you have to apply for a confirmation. It's a different process and it's a whole thing.

And the only reason I know is because I've had clients that did that. They lost the paperwork.

Resources

So public service announcement. If you get an EIN, take a picture of it.

Yes. Take a picture of it so that you can reproduce it from the bank because the banks want to see the original letter from the IRS. They won't just say what's the number. They want to see the actual document.

Oh, fascinating. And what are there sort of classic mistakes that you see? Do you have people who come to you or they're like, oops, I set that up, that was not correct. And do you try to tidy up the messes for people or do people come to you with preconceived ideas and you are mostly in the education game saying that's not the way I would set it up?

I'm just wondering if there's like mistakes that people make that you're like, wow, I wish I had known or I would have done better had they come to me first. I think of it as a mistake if they're buying a property that they're going to be renting out over the long term, even if it's a short-term rental, but they're doing it year after year and they did it in their personal name.

Introduction

What's the mistake with that? The problem we had is I want that to be in the LLC and to move it, that would trigger in Canada capital gain if the property is appreciated. And in this case, it was in Florida in a growth area. So even though they just bought it, I think, the year before, the price had gone up more than six figures, which means half of that gain is taxable in Canada, because when you move it from one entity to another, that's considered a taxable transaction.

And there's no rollovers that apply to foreign corporations. We just, ugh.

Let's not do that again. Let's get a good insurance policy and hope you don't have a problem with this property, but future properties should be set up in a corporation from day one. , and you basically need to be on top of things. , and they also file all the tax returns, and also the information returns.

e. yourself, and you didn't file this information return, please send us $10,000.

The Core Idea

And that got my attention. That's a word.

S. tax returns, so I contacted the same CPAs that I just mentioned and said, I know we filed an extension to file the corporate tax return, and I know we filed it well with an extension.

Time frame, yes, that's correct. Now, just curious, no real reason, did you happen to file this information return related to related party payments? He said, oh, absolutely, that's a very important form to file.

I said, oh, good, why? Because the IRS, I didn't file it, and they won $10,000. Oh, no, we filed it, and why did they send this?

Deep Dive

Oh, they don't have it. What happens? A lot of companies just pay it. So here's a left-hand, right-hand thing where one department, the IRS, received the document.

The other one just sent out this notice because there was a related party payment. Hoping you might just pay.

You're hoping I would pay. It's a pretty good strategy. But I could see how that would be incredibly stressful for a new investor who was starting out there who didn't know all of these things, right? That would kind of make you want to be sick if you got the you owe me $10,000.

So I am assuming then, like you were saying, that if someone were to set up their corporation with you, that all of those reporting and information requirements would be something that you would take care of on everyone's behalf. That's right. In coordination with my American CPA colleague, all that is dealt with, right? It's just up to the client to get their details in terms of the transactions took place during the year, a timely basis, and provided that's done, then everything falls into place after that.

Practical Steps

And then do you also do just regular bookkeeping as well? Is that a service you would offer for someone who is setting up their properties that you would do the monthly... expenses and all that kind of stuff as well? Or is that something that they would have to take care of?

I can handle that. I don't directly do it myself because I'm frankly too expensive. But I do work with a bookkeeper that can handle various types of assignments and that's something that he could do. And it's a good idea, at least starting out, for the clients to do it maybe for a year or two, just to get some familiarity with the file.

But it's not something they have to do on an ongoing basis. And especially if they're investing in a big way, they have multiple properties.

It's too much. Too much work for them. And it's going to bog them down. And for sure they would need to work with a bookkeeper, you know, more or less from the start because what they do well is find and fund properties.

Key Takeaways

They're not bookkeepers because if they were, they'd already be doing it as a business. S.? Get some education and take action. You need both because there's some people that get no education, just take action and end up spending a lot of money digging themselves out of the hole they've created.

And other people who are reluctant to take any action until they know everything. You're never going to know everything. The deal is a good deal because it's generating the return that you're looking for. Just understand you will have some extra costs, no question about it, there is some extra complication, but it's factored in to whether it's a good deal or not.

So as long as you understand those factors, then you'll be fine. That sounds like fantastic advice. And if our listeners want to reach out to you to get your help in setting up this mythical three-stage corp that only you do, where can I find you, Michael?

ca. ca.

Resources

That sounds great. S.

ca. S.

purchase. Thank you very much, everyone, and I hope to see you back here soon.

Thanks, everyone. Bye now. Thank you so much for tuning into the show today. If you found value, please follow the show and rate it five stars.

Introduction

It would mean the world to me. And lastly, all the resources that we spoke about are at the bottom of the show notes. Looking forward to seeing you in the next episode.