For Canadians Purchasing Real Estate in the United States Impact on Taxes - Capital Gain - Estate Planning __________________________________________________________________ Pinellas Realtor Organization August 5, 2015 Clearwater, FL.

Agenda Real Estate: Market Conditions Canada-US Taxes Estate Planning Who is KeatsConnelly? Questions

Real Estate Market Conditions Changing  3 Essential Elements Canadian Dollar ~ 1.3 X $US (-) Prices higher/reasonable(-) Low interest rates (+)

Canadian Dollar 4

Real Estate: Florida Market Mortgage rates: US 30 y: ~ 4.07% (+) CDN 10y: ~2.6% US 15 y: ~ 3.23% (+) CDN 5y: ~ 2.74% Sales: June 2015/2014: Existing Condos: % (+) Existing Homes : % (+) Inventory: June 2015/2014 Existing Condos: 5.5/5.8 months (+) Existing Homes : 4.6/5.6 months (+) (Source: Florida Realtors Media Centre) Market conditions robust

Florida Real Estate: Pricing Situation Median Selling Price: June 15/14/13/12/Dec11 Condos: $152,100 /$141,000 /$130,000 /$110,000 /$90,000 SF Homes : $203,500 /$185,000 /$175,900 /$152,000/$135,000 Average Sales Price: June 15/14/13/12/Dec11 Condos: $234,800 /$227,700 /$215,200 /$190,200/ SF Homes: $288,900 /$279,500 /$268,100 /$233,800/$210,000 Pricing conditions stabilizing 5 (Source: Florida Realtors Media Centre)

Real Estate: The Canadian Buyer 49% purchase condos vs. 38% SF homes 7%purchased new homes-11% for foreign buyers 48% will use home 3-6 months each year 32% of all Florida sales to Foreign Buyers were to Canadians (39% in 2011) 31% want to rent in total or partialy 89% paid cash International Sales represent approx. 8 % of all Florida Real Estate sales (Source: Florida Realtors Media Centre Sept 2013)

Know Where You Fit The Vacationer - a casual short-term visitor looking to get a break from Canadian winters by using their 2 to 4 week vacation time to enjoy the warmth of the beaches in Hawaii or some other US Sunbelt state. The Snowbird - the regular longer-term visitors that wish to spend the majority of the winter in the US Sunbelt and will limit their stay to less than 6 months per calendar year. The Settler - those that are committed or will be committed to settling into a full-time cross-border lifestyle. They want the best of the Canadian and US income tax and medical systems; they live in the US a great deal or most of the time and visit Canada pretty much whenever they want. Settlers have some immigration status in the US, e.g. dual citizen, green card holder or immigrant visa holder. 4

Cross-Border Issues Status: Snowbird Snowbird Value US situs property Ownership titling of assets US rental and investment income Social Security / ITIN Derivative US citizen Non-resident estate tax and probate Non-resident income tax Amount of time spent in US Treaty exemptions Disposition of US property NO VISA VISA OR GREEN CARD US CITIZEN DUAL CITIZEN CITIZEN CANADA NON-CITIZEN US NON-RESIDENT US RESIDENT CANADA RESIDENT US NON-RESIDENT CANADA NON-US CITIZEN VISA HOLDER I US CITIZEN DUAL CITIZEN

Basic Immigration Rules Basic Immigration Rules The Swinging Door for Vacationers or Snowbirds Know the visitor/B-2 visa rules (generally never spend more than 6 months at a time in US or more than 6 months out of the last 12) Settlers can ignore this rule Subscribe to Nexus, Global Entry, TSA Pre √ or similar trusted traveler programs and never breach the Trust Always travel with your Border Kit/proof of your status Avoid the Red Flags of the border crossing Understand and follow any IRS income tax rules that may apply to you Ignore the Rumor Mill 6

Types of ownership Direct Ownership Own it personally Indirect ownership Own it through an entity

Types of Ownerships: Direct Fee Simple (Sole Ownership) – Probate at Death Joint with Right of Survivorship – Probate at second death Joint as Tenants in Common – Probate at Death Tenancy by Entirety – Probate at second death Community Property – Probate at Death Community Property with Right of Survivorship Beneficial Deeds/Transfer on Death – (FL,CA pending)

Types of ownership – Indirect US Living Trusts Not needed; Beneficiary Deeds can accomplish the same function in those states that allow them Limited Liability Company (LLC) Recognized in Canada, subject to double taxation, do not use Limited Liability Partnership (LLP) Allows for the limited liability, recognized in Canada, use when property will be used for business purposes, e.g. rental, use LLLP if other than couples are the partners

Types of ownership – Indirect Canadian Corporation Double Tax, avoids US estate tax, US tax filing requirement (1120F), rent needs to be paid – Generally do not use Canadian Trust Avoids US estate tax, subject to 21 year rule in Canada, can cause double taxation - Generally do not use Cross Border Revocable Trust™ Avoids probate, but nothing else Cross Border Irrevocable Trust™ Avoids probate, US estate tax, trust filing requirement, expensive

Individuals Subject to US Income Tax US citizen (no matter where resident or domiciled) “Green card” holder; or Satisfy “substantial presence” 1/6 days yr-2 + 1/3 days yr-1 + days current yr > or more days present in US in current year Closer connection exception – Form 8840 Tax treaty rules Nonresidents earning US sourced income as per the Canada/US Tax Treaty

How to calculate the days allowed: Taxes EXAMPLE: days – calculate 100% = 125 days days – divide by 3 = 40 days days – divide by 6 = 20 days _______ 185 days Since the total >182 days Then a Canadian must file the Form 8840 *A Record of the dates present in the US should be kept

Can/US Tax Treaty – Key Rules: Residency Permanent Home Individual’s habitual abode The Individual’s citizenship Center of Vital Interest (his or her closest economic and personal relations) If the Treaty says you are a US Treaty Resident then you are automatically a non-resident of Canada

UNITED STATES Florida Taxable Income Tax Rate Married Filing Jointly $21,455 or less 10% $21,456 - $87,100 15% $87,101 - $175,815 25% $175,816 - $267,800 28% $267,801 - $478,500 33% $478,501 - $540,050 35% $540,051 and over 39.6% CANADA Ontario Taxable Income Tax Rate $43,953 or less 22% $43,954 - $87,907 31% $87,908 - $136,270 40% $136,271 -$220, % $220,001 and over 49.5% Canada-US Tax Rates 2015 Canada-US Tax Rates 2015 In Canadian Dollars

US – A Canadian’s Best Tax Haven: Taxes US – A Canadian’s Best Tax Haven: Taxes Ordinary income - Wages, Rent, Interest, Royalties

Real Estate - Rental in the US US Rental Income is taxable in the US and in Canada Two options: 30% withholding on the Gross rental income (form W-8ECI to complete/remit to tenant or property manager) No withholding if Form W-8ECI is filed File a Tax return on net rents Form 1040 NR Form 1040NR must be sent before June 15 th Need a tax identification number (W-7) Depreciation must be taken- Canada does not require When US property is purchased for investment purposes Form BE15 or BE 605 must be filed

Sale of the property Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) If selling price is $300,000 or less for a property AND buyer intends to occupy the property at least 50% of the total time it will be occupied, withholding is not required on the sales proceeds. Otherwise, FIRPTA requires 10% withholding on the gross proceeds Unless, Form 8288B is filed, then the 10% withholding will be on the “adjusted gain.” A clearance certificate must be issued by the IRS

Sale of the Property – Other elements W-7 – Application for IRS Individual Taxpayer Identification Number (ITIN) should be filed with 8288B No $250k/$500k exemption for Canadian Non-Resident Must file US non-resident tax return (1040NR)

Real Estate: Capital gains Sale Price: $200,000 Purchase price: $150,000 Cap Gain: $50,000 In the US Withholding tax will be: $20,000 (10%) if applicable Capital gain Tax: $7,500 (15%) IRS will send back after filing 1040 NR: $12,500 In Canada Capital gain Tax (25%) $12,500 - Income tax already paid to the IRS in the US $7,500 = Must pay CRA $5,000 Total taxes paid US $7,500 + Canada $5,000 = $12,500 You always pay tax equal to the tax of the higher taxed country.

Tax Filing Requirements Canadian Buying RE in the US SituationHow owned US filing requirements Potential US Forms to file Second home - no rental activity Individual or joint names None until sold8288-B, W7 and 1040NR InitiallyW7 and W-8ECI Second home - with some rental activity Individual or joint names Annually1040NR, BE-15 and BE-605 Upon sale8288-B and 1040NR InitiallyW7 and W-8ECI Rental property Individual or joint names Annually1040NR, BE-15 or BE-605 Upon sale8288-B and 1040NR InitiallySS-4 and W7 Rental property Limited Liability Partnership Quarterly or Annually 1065, 1040NR, 8804, 8805, 8813, BE-15 or BE-605 Upon sale8288-B, 1065 and 1040NR InitiallyNone Buy and flip Individual or joint names Upon saleW7 and 8288-B Quarterly or Annually 1040NR, BE-15 or BE-605 InitiallySS-4 and W7 Buy and flip Limited Liability Partnership Upon sale8828-B Quarterly or Annually 1065, 1040NR, 8804, 8805, 8813, BE-15 or BE-605

US Estate Tax: Deciding elements Year of death US Estate (Taxable Assets) Worldwide Estate (Taxable Assets) Everything you own at date of death whether in Canada, the US or elsewhere. RRSP, RRIF and even the insurance payable at death

Estate Tax, Death Tax and Deemed Disposition United States Taxes on: Fair Market Value (FMV) Worldwide assets FMV- exemption $5,430M = US taxable estate US taxable estate *tax rate 40% = US estate tax liability Canada Taxes on: Appreciation Worldwide assets FMV – Cost basis = Taxable Gain Taxable Gain *capital gain rate 25% = deemed disposition tax liability

Legal procedure before the County Probate Court: process of proving by presenting the will what the deceased person legally owned and how that person wanted his or her property distributed. Cost in Florida is 3% of market value of property at date of death + legal fees Estate is usually frozen up to one year Some solutions to avoid include Trusts

US Estate Tax for nonresident aliens Taxed only on US domiciled assets $60,000 exemption for nonresident aliens (NRAs), per person Unlimited marital deduction is not allowed for non-citizens US taxable estate is net of US debt ONLY if the debt is non-recourse! General Rule

US Estate Tax: Nonresident US Taxable Assets US Real Estate property US Certain tangible property: Furniture, vehicles, boats Shares of US Corp. regardless of location of certificates US Pension Plans and annuity amounts (IRA, 401(k), etc.)

US Estate Tax: Nonresident US Taxable Assets Interests in partnerships owning US real Estate Golf Club Equity membership Options on US company stocks US Mutual Funds

US Estate Tax: Nonresident Issues Banking and Savings & Loan deposits, including CDs, savings accounts and money market funds US Treasury bonds, notes, bills & agency issues US Corporate bonds and specially structured mutual funds Some investment company or brokerage house money market funds Life insurance death proceeds A Partial List of US Non Taxable Assets

The Canada – US Treaty Dealing with the Double Tax at Death FORMULA FOR EXEMPTION NON-RESIDENT CANADIANS US SITUS PROPERTY X CURRENT EXEMPTION TOTAL WORLD ESTATE

US Estate Tax Exemption 2015 $5,430,000 40% 2016 $5,520,000est 40% For US Residents / Citizens

The Canada – US Treaty Person with US$2,000,000 worldwide estate and a US$350,000 winter home purchased for US$250,000 Exemption Available ~ $350,000 / $2,000,000 x $5,430,000 = $950,250 Taxable US Estate ~ $350,000 – $950,250 = $0 US Estate Tax Due ~ $0 Capital Gains Tax Due CRA ~ $24,000 - $0 = $24,000 TOTAL DUE US & CDA ~ $24,000 Vacationers/Snowbirds US Estate Tax

The Canada – US Treaty Person with US$7,000,000 worldwide estate and a US$350,000 winter home purchased for US$250,000 Exemption Available ~ $350,000 / $7,000,000 x $5,430,000 = $271,500 Taxable US Estate ~ $350,000 – $271,500 = $78,500 US Estate Tax Due ~ $20,000 Capital Gains Tax Due CRA ~ $24,000 - $20,000 = $4,000 TOTAL DUE US & CDA ~ $24,000 Vacationers/Snowbirds US Estate Tax

KeatsConnelly: Who are we? Our Focus: Cross Border Financial Planning, US and Canadian Taxes, Investment strategies (tax credits) Since 1990, we have offered our clients comprehensive financial planning on a fee-only basis As a fee-only firm, we do not accept commissions or pay commissions on products or services we recommend We are paid for our services only by our clients only - there are no hidden costs or surprises 36

The Team Approach Charitable Giving Planning Wealth Management and Family Office Services Immigration Assistance Money Management Estate Planning Tax Preparation Trusts Insurance Education Funding Retirement Planning Cross-Border Tax Planning

Other resources: Property Tiltle Service Promotional Code keat0008 Pr

KeatsConnelly Cross-Border Series KeatsConnelly Cross-Border Series Take Your Money and DRIVE! Are YOU at Risk? The Concise Guide for Canadians A Canadians Guide to Living, Working and Investing Across the Border

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