If you’ve heard that the changes to the corporate capital gain tax rate that may impact Canadians who own real estate in the U.S., we thought that this article may be helpful. It gives an overview of information that may inform your understanding of the changes.
If you are a Canadian citizen who owns real estate in the United States, you were likely advised to hold title as a cross-border trust (CBT) rather than as a corporation because of the 35% U.S. corporate capital gains tax rate. Since the 2017 Tax Cuts and Jobs Act lowered the tax rate to 21%, you may be wondering if that means you could hold title as a corporation since the rate on a CBT is just one percent lower at 20%.
If the U.S. tax rate was the only consideration, that might be true. However, there are other things to take into account. For example, there are also state-level capital gains tax rates involved, which affect corporations but not CBTs.
Another thing to consider is the Canadian Income Tax Act, which applies a taxable benefit to a shareholder and director of a corporation for the rental value of the property, whether it is rented out or not. If your U.S. real estate is in a corporation, you’ll face taxes on phantom income, but this doesn’t happen with a CBT.
The last thing to consider is what would happen upon your death. With a CBT structure, probate is avoided completely. Otherwise the U.S. estate tax can kick in. The act increased the exemption to $11.2 million U.S., so this may not be of great concern, but this exemption drops back to $5 million U.S. on January 1, 2026. In addition, a CBT also protects the Canadian heirs with creditor protection. To further protect your property from estate tax, consider a cross-border irrevocable trust.
In conclusion, despite some of the provisions of the U.S. 2017 Tax Cuts and Jobs Act, here at BlueRock Wealth Management, we still usually advise Canadian snowbirds to hold U.S. real estate in a CBT instead of a corporation. If you have additional questions about how your specific situation applies to these new regulations, contact us for more information.
* The opinions expressed in this article are those of the author and do not necessarily reflect those of PEAK Investments Inc.