The two main considerations when owning property in the United States are:
The estate of an individual who personally owns real estate on U.S. soil at the time of their death may have to seek probate in the U.S. courts, depending on the state in which the property is located. For example, in Florida, upon the death of a person who is the sole owner of a property, this probate procedure is required. This Floridian procedure can result in a fee amounting to 3% of the property's market value and anywhere from 9 to 15 months delay before the heir to the estate can take possession of the property. It is therefore often advantageous to provide a detention structure to avoid this procedure.
U.S. estate tax is calculated using the value of U.S. property. Under the Canada-U.S. treaty, Canadians benefit from an exemption that will reduce or even eliminate this tax. Thus, in 2020, anyone with a global estate of less than $ 11.58 million U.S. will have no inheritance tax payable upon death. In addition, it should be noted that this exemption is expected to return to approximately U.S. $ 5.6 million in 2026.
Different structures can be put in place to avoid an estate settlement and / or minimize estate tax applicable at death, such as the use of a revocable trust (Living Trust). Each case is unique, so please contact us to see what strategy would be best for your specific situation. We will be able to assist you and set up the appropriate structure.
Yes, your Quebec testament is valid in the United States. However, it will be necessary to have it translated and proceed with recognition procedures with the Chamber of Notaries and the American Consulate. Having an American testament could avoid these steps.
As mentioned above, an American will / testament avoid translation issues and is more easily recognized before the Chamber of Notaries and the American Consulate. However, an American will / testament does not avoid the inheritance settlement described above.
Unless earning income in the United States, a non-resident of the United States does not have to file a tax return in the United States. Thus, owning a property on American soil does not require filing an annual tax return.
However, rental income from a property located in the United States, even if no profit results after deducting eligible expenses, must be disclosed to the tax authorities through the filing of a United States tax return.
If no tax return is filed and you are assessed by the IRS, the result will be a 30% GROSS rental income tax payable (without the right to deduct your eligible expenses).
Among other things, filing a U.S. tax return allows you to choose to be taxed on your net income and at marginal U.S. rates, rather than being taxed at a rate of 30% on your gross income.
It is never too late to start estate planning. It is important that you know what will happen when you die or if you become incapacitated. Please do not hesitate to contact us for more information and to get an overview of possible planning strategies.
Withholding tax (FIRTPA) on the sale of a property by a non-resident of the United States.
As a non-resident of the United States, the sale of your property located on American soil is possibly the last opportunity for the United States Federal Government (IRS) to recover any taxes owed. To prevent the non-resident seller from leaving the United States before paying tax on the sale of their property, the government requires the buyer to withhold withholding tax of 15% of the sale price gross when the property is sold by a non-U.S. resident. It is the "Closing Agent" who is responsible for protecting the buyer in this transaction.
Thus, for a property whose sale price is $ 100,000 U.S., an amount of $ 15,000 U.S. will be withheld by the '' Closing Agent '' and sent to the IRS (as a tax advance) within 20 days. following the transaction. If the "Closing Agent" does not forward the $ 15,000 U.S. to the IRS within 20 days of the transaction, the buyer will face a significant penalty.
It is important to understand that this $ 15,000 U.S. is a withholding tax (a tax payment made in advance) and that this amount will be considered when you file your U.S. tax return to report the sale of your property (see the section on the U.S. tax return below).
There are two possibilities for avoiding the withholding tax:
Possibility # 1: If the selling price of the property is less than $ 300,000 U.S. AND the buyer agrees to sign an affidavit stating that he/she does not intend to rent the property for more than 50% of his ownership period for the next two years, withholding tax will be set at $ 0 U.S.
Possibility # 2: If possibility # 1 is not applicable, it is possible to file a request for a certificate from the IRS which will certify that you have no tax to pay, or that the sum of $ 15,000 U.S. (referring to our example above) will be higher than your final tax. The IRS will issue a certificate stating that the amount of $ 15,000 U.S. will be partially reduced or eliminated.
Our team can assist you in these certificate requests. Requests for certificates should be sent to the IRS no later than the date of sale of the property. By showing that the certificates have been requested, the '' Closing Agent '' will withhold the amount equivalent to 15% in a trust account (rather than sending the amount directly to the IRS within 20 days of the transaction) until IRS issues the certificate.
IRS typically takes 60 to 90 days to issue certificates. Requests for certificates must, at a minimum, include a signed sales agreement between you and the purchaser. We cannot request certificates until we have a signed agreement.
If you have never filed a tax return in the United States, you will need to apply for a Tax Identification Number (ITIN) which we will attach to the certificate request. This request for an ITIN, which we will prepare for you if necessary, will require a certified copy of your Canadian passport. This is issued by Passport Canada upon request. If you’re planning on selling your U.S. property in the near future, you should make an appointment with Passport Canada to request a certified copy of your Canadian passport.
If you wish to use our services for certificate requests, contact us as soon as you have an accepted offer to purchase, we will send you our procedures and the information required to proceed.
Yes, a U.S. tax return will need to be filed by June 15 of the year following the transaction. For example, for a sale that takes place in May 2020, a U.S. tax return will need to be filed by June 15, 2021.
This answer applies regardless of the 15% withholding tax.
A tax return must also be filed in the United States if no profit was made on the sale of your property.
Ideally, we file the U.S. tax returns as early as possible in the year following the transaction, so that the information is available to your Canadian accountant when preparing the Canadian return.
The transaction will also need to be disclosed in your Canadian return. Please note that any tax paid on your U.S. return will, in most situations, be fully recoverable in Canada, via foreign tax credits.
Do not hesitate to contact us for all your needs related to your withholding taxes (FIRPTA) and the preparation of your U.S. tax returns. Our team will be happy to answer your questions.