Real Estate Case Study
A Canadian investor desires to purchase residential or commercial real property in the United States. The investor does not wish to form a US Corporation where he will be taxed at the corporate level and then again when distributions are made to the Shareholders. The investor also does not desire to form a US Limited Liability Company (LLC) where he will be taxed at the corporate level and then again when distributions are made to the LLC Members.
The investor, after consultation with his Chartered Accountant and Certified Public Accountant forms a Limited Partnership (LP).
- There is only one level of taxation. The partnership is a flow-through entity and therefore any capital gain realized by the partnership when disposing of the residential or commercial property will only be taxed at the partner (individual and CCPC) level since partnerships are non-taxable entities;
- A U.S. limited partnership is created or organized in the U.S. This means that they will be considered to be a U.S. Person. As such, the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) will not be applicable during the disposition of the residential or commercial real properties. Therefore, the 10% withholding tax of the gross proceeds will be avoided;
- As a limited partnership, it provides a limited liability protection for the limited partner (Individual Investor); and
- Unlike an LLC, the Canadian tax treatment will be the same – income is taxed on the partner-level. For Canadian taxation, for an LLC structure, the taxpayer is taxed on the corporate level and then again when distributions are made to the LLC members.