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.
Gillian Irving: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 going speak to you today. Today, we have the great pleasure of having Michael Mathew with us. He has been a professional accountant for more than thirty years. He has a of Arts from Chartered Accountants. He studies from the University of Waterloo.
Gillian Irving:As a small business owner in the fields of computer and business consulting for more than twenty 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.
Michael Matthew:Thanks so much for having me here, Gillian.
Gillian Irving:Oh, it's my pleasure. So we obviously would like we're going to 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 going to be for our investors who have this new and deep interest in investing in The States. At Lens City, we have a whole new program where we can help foreign nationals purchase properties there.
Gillian Irving: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?
Michael Matthew:Yes. That's absolutely right. And it's actually a good fit for what I do because I help Canadians set up properly to do real estate investment in The US. And one of the questions 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.
Gillian Irving:So I think, you know, when people come to me and say, I need a mortgage, I say, well, you got to 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.
Gillian Irving:So not a sophisticated investor, but just someone who might want to 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?
Michael Matthew: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? Mhmm. 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.
Michael Matthew: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 going to wanna set up a corporate structure. And, typically, what I recommend for someone that especially if they plan on leaving some or all of the income in The States it's generated, to use what I call a triple c structure.
Gillian Irving:Mhmm.
Michael Matthew:There's no point in googling it because it's my term. You're not gonna find any information on it.
Gillian Irving:Oh, love it. A secret. An accountant strategy secret.
Michael Matthew:That's
Gillian Irving:it. So tell us more about this.
Michael Matthew:Typically, it involves setting up a Canadian corporation. So a lot of my clients are in Ontario. 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 public facing.
Gillian Irving:So why is that Ontario one two three four five company?
Michael Matthew:Exactly, exactly. And then you get what's called a C corporation. The US has several types of corporations. Here, the three main ones are C corporation, S corporation, we can dispense with quite quickly because that only applies if you're a US resident. So if you're doing business from Canada, that one's off the table anyway.
Michael Matthew: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. That works very well if you're an American resident because you get the protection of a corporation from the legal liability concerns, but you flow through the actual income and expenses from your LLC to your personal US tax return. Works great if you're, as I said, a US resident. The issue is if you try to do that as a Canadian, CRA will said, oh, you're claiming these foreign tax credits for the credit the tax you paid, in this case, in The US.
Michael Matthew:Where's that coming from? You say it's coming from this LLC, and they stop you right there. Because you thought you would take these tax credits from your US personal tax return that you flowed through to just like the US citizen or resident did, and then you claim that on your Canadian personal tax return, and you're both on the same level, both personal tax returns.
Gillian Irving:The
Michael Matthew: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 in Canada. If it's matched, we won't allow that. And that's how you end up paying double tax or potentially more, but you'll pay extra tax.
Michael Matthew:Mhmm. And if you're gonna have an LLC as a Canadian resident, you have to have an intervening corporation. Mhmm. 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, cause that's where most of them go, C Corporation, which owns the LLC.
Michael Matthew: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. Those type of places. 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.
Gillian Irving:Mhmm.
Michael Matthew:But you'd only file in The US for one corporation, the Wyoming one. So the first one drops out just like it does for The US residents. The difference is if you're a US 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.
Gillian Irving: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 Ohio.
Michael Matthew:That's a great question. With the c corporation, you can all you only have to ever set up one. Mhmm. You can then run multiple LLCs underneath that. Mhmm.
Michael Matthew:You could run. There's no limit, actually. So you could run two, five, ten, fifty for that matter. The whole point is the Wyoming Corporation isn't doing business directly.
Gillian Irving:Mhmm.
Michael Matthew:It doesn't have the legal exposure. And the reason why you'd have different LLCs is you wanna 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.
Michael Matthew:And you would have to register your Florida LLC in Ohio to do business there as what they call a foreign corporation. Mhmm. I get a kick out of that because are you 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.
Michael Matthew:But all that means it's a one time registration fee to do business and then everything else is the same.
Gillian Irving: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?
Michael Matthew:It's the latter. These fees are minor. They vary from state to state, but you're looking in the range of a 100 to 200 to maybe $300. That's fees. Mhmm.
Michael Matthew:The state's registration fees, just to start the corporation, they range from nothing up to about that. So it's hundreds of dollars. It's not thousands.
Gillian Irving:Mhmm.
Michael Matthew: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 it everything's automated, so you can get companies registered in as little as two to three days if things go well.
Gillian Irving:And So if you would so if you registered the c corp in a state other than Wyoming, tell tell me what that might look like. I mean, it's so more more expensive, lengthier.
Michael Matthew:The fees are gonna be more in almost every case. Mhmm. They're not gonna 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.
Michael Matthew:It's called a charging order. So the other states, they're not as friendly when it comes to all those factors.
Gillian Irving:Mhmm. And from the tax perspective as well too, for the state tax level. It sounds like it's the lowest.
Michael Matthew:You know, the state tax level, as I said, there's no corporate income taxes.
Gillian Irving:Mhmm.
Michael Matthew:Actually, no personal income tax either in Wyoming.
Gillian Irving:Why does everyone not live in Wyoming?
Michael Matthew: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. If it's the least popular state, that means not a lot of people wanna live there in the first place.
Gillian Irving: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.
Michael Matthew: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?
Gillian Irving:Mhmm.
Michael Matthew: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.
Gillian Irving:That sounds familiar with Ontario.
Michael Matthew:It's like Ontario. In Texas, it's about three weeks.
Gillian Irving:They're not messing around there.
Michael Matthew:No, no investment practice. 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, is currently 21%. It's going to apply in every state.
Michael Matthew:So what you're talking about is a range of zero, I think the top state is around 11.5 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 gonna start with that evaluation.
Michael Matthew:Does this state favor tenants or landlords?
Gillian Irving:You know, it's funny you should bring that up because I would say the primary reason people have been approaching us at Lin City to help with their mortgages. And the reason why we feel like there's this huge demand and surge for US lending is because of exactly that, that the Ontario landlord tenant board has just made it really difficult to do business here. 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.
Michael Matthew: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 to pay tenants to leave. Yep. And that just struck me as why would I wanna reward someone for, you know, damaging my property?
Gillian Irving:Right.
Michael Matthew:I assigned 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 Yeah. They will not do it. Right now, 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. You have to start all over and get a brand new hearing.
Michael Matthew:And it's just craziness. It's
Gillian Irving:Yeah. It's very frustrating.
Michael Matthew:Not to get too political, but the politicians keep going on and on about housing crisis, 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.
Gillian Irving:Mhmm.
Michael Matthew: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 the even when you get the order, it's not like they leave the next day. No. Right? Weeks down the road, and then the police do not get involved.
Michael Matthew:The sheriff is the only one who can legally kick your delinquent tenants out. Mhmm. And the sheriff posts a notice, and, again, it's not the next day. So even after you've, quote, won at trial, it can be a couple of months before you even get into your property.
Gillian Irving:So definitely
Michael Matthew:stacked against you. And that and also the high prices of entering into the real estate market in the Greater Toronto area and the Vancouver area in particular is what is encouraging my clients to look to The US because you can get into properties for much less money.
Gillian Irving: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. And 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 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.
Gillian Irving: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? Say once we get to $500,000 with properties in Florida or wherever it is, then we're going make another LLC just to keep the value of them distributed just so that there doesn't Does that make sense just so that you don't have too much exposure in one company?
Michael Matthew: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 $1,000,000 worth of properties. Once they cross that threshold, they will then look to have another LLC opened up to purchase the next property.
Gillian Irving:Mhmm.
Michael Matthew: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 gonna 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 gonna get sued. I've got good insurance in place.
Michael Matthew:I don't mind having four or five, six properties in the same entity. Mhmm. 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'd be a good place to break an arm and sue me because I didn't maintain a a safe home for him. And I'd rather have everything carved off into a separate entity.
Michael Matthew:Yes. I know it's gonna cost me more, but then I don't have to worry that a problem with one property is gonna take down everything else I own.
Gillian Irving:Mhmm.
Michael Matthew:And I get to have more assets accumulated, it's gonna be more of an issue. 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 and not me.
Gillian Irving: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.
Gillian Irving: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.
Michael Matthew:The way I look at it is you have to assess the risk. And to me, having 10 individual homes is less risky than to have one ten unit apartment building. It 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
Gillian Irving:Mhmm.
Michael Matthew: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.
Gillian Irving:That's true.
Michael Matthew:As an example, most people would be surprised to learn that if their rental unit lies vacant for more than thirty 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 thirty 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. 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, a hundred and twenty days of coverage.
Gillian Irving:So you
Michael Matthew:can get these extra coverages, but you have to be aware of the need in the first place.
Gillian Irving: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 research into The States and purchasing there, 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?
Gillian Irving:Is it best to wait or is it best to just get started with the setup of this entity now?
Michael Matthew: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 gonna need what's called an employer's identification number. Even if you don't have any employees, that's what The US 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.
Michael Matthew: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. And while you need it to file your taxes, the more pressing concern is you're gonna need it to open up a bank account for your US entity. You cannot open up a bank account without it. Right.
Gillian Irving:So 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 it might be weeks or even possibly months for that to happen.
Michael Matthew:Possibly months. And, yeah, obviously, there are ways around it, but in an ideal world, you don't wanna 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 its thing set up. At to set up a numbered Ontario corporation. I mean, say a week.
Michael Matthew:Just between us, though, it can be happening that much faster, especially if there's just an if there's no name, it's and it is truly a numbered company. And setting up the c corp and the LLC takes usually about two weeks. The fly in the ointment, so to speak, is that EIN number because they're very you think CRA's 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.
Michael Matthew: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 forty five days to read it. I'm thinking, just read it. Why are you sending me this letter?
Gillian Irving: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 forty five days. Exactly.
Michael Matthew: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. It's So
Gillian Irving:you'd have to apply again?
Michael Matthew: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. The only reason I know is because I've had clients that did that. They lost the paperwork.
Gillian Irving:Right. Public service announcement. If you get an EIN, take a picture of it. Yes.
Michael Matthew:Take a picture of it so that you can reproduce it for 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.
Gillian Irving:Fascinating. And what are there sort of classic mistakes that you see? Do you have people who come to you and they're like, Oops, I set that up. That was not correct. And do you try to tidy up the messes for people?
Gillian Irving: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 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.
Michael Matthew:I think of it as a mistake if they're buying a property that they're gonna 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.
Gillian Irving:Problem What's mistake with that?
Michael Matthew: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's appreciating. 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 6 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.
Gillian Irving:Right.
Michael Matthew:And there's no rollovers that apply to foreign corporations. We just said, ugh.
Gillian Irving:Let's not do that again.
Michael Matthew: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. Other mistakes are just not following up with the various bits of paperwork that has to be submitted on a timely basis, not understanding that while we have a similar tax system, it's not identical, and so they have different requirements in The US. And you basically need to be on top of things. And what I do is I work with American CPAs who handle all the entity creation in The US, and they also file all the tax returns and also the information returns. Those don't involve taxes directly, but that love letter I referred to earlier for I received from the IRS was because they said you paid money to a related foreign entity, I.
Michael Matthew:E. Yourself, and you didn't file this information return, please send us $10,000. And that got my attention.
Gillian Irving:Yes. It would.
Michael Matthew:And I don't file my own US tax return. So I contacted the same CPAs that I just mentioned and say, I know we filed an extension to file the corporate tax return, and I know we filed it well within the extension timeframe. Yes. That's correct. Now just curious, no real reason, did you happen to file this information return related to related party payments?
Michael Matthew:He said, oh, absolutely, that's a very important form to file. I said, good, why? Because the IRS says, I didn't file it and they want $10,000 Oh no, we filed it. And why did they send this? Oh, they don't know they have it.
Michael Matthew: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.
Gillian Irving:They were hoping you might just pay.
Michael Matthew:It's a pretty good
Gillian Irving: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. That would make you want to be sick if you thought that you owe me $10,000 So 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.
Michael Matthew: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 Mhmm. On a timely basis.
Michael Matthew:And provided that's done, then everything falls into place after that.
Gillian Irving:And then do 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 do the the monthly expenses and all that kind of stuff as well, or is that something that they would have to take care of?
Michael Matthew:I I I can handle that. I don't directly do it myself because I'm frankly too expensive.
Gillian Irving:Mhmm.
Michael Matthew: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.
Gillian Irving:It's too much.
Michael Matthew:It's too much work for them, and it's gonna 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. They're not bookkeepers because if they were, they'd already be doing it as a business.
Gillian Irving:So any last tips for new investors as they start on their journey to investing in The US?
Michael Matthew:Get some education and take action. You both because there's some people that get no education, just take action, and and that's made 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 gonna know everything. The deal's a good deal because it's generating the return that you're looking for. Just understand you will have some extra cost.
Michael Matthew:No question about it. There is some extra complication, but that that's 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.
Gillian Irving:That sounds like fantastic advice. And if our listeners want to reach out to you to get your help in setting up this mythic mythical three stage corp that only you do. Where can I find you, Michael?
Michael Matthew:The easiest way to get ahold of me is through email at Michael, that's michael,@askmichael.ca. So michael@askmichael.ca.
Gillian Irving:That sounds great. And of course, if anyone needs assistance with The US mortgages, you can reach out to me directly as well at gillian at lendcity. Ca. And Michael and I are looking forward to helping you with your next US purchase. Thank you very much, everyone, and I hope to see you back here soon.
Michael Matthew:Thanks, everyone. Bye now.