Investing in American LLC as Canadian Resident

[kenmoremmm]

I am invested in, and plan to continue to invest in, real estate syndication deals (either LLC's or LP's) that issue K-1's.

Are there cross border tax implications associated with this? I don't think it will be a PFIC.

I think my understanding is that, at least from the US tax code perspective, as long as I have a US mailing address (PO Box?) this will satisfy tax requirements and K-1's.

From a Canadian tax perspective, I haven't yet researched how this will be handled, so I wanted to start here in case anyone had direct experience with it. Assuming there are no special rules or tax implications, I'm curious how depreciation is handled in Canadian tax code as I know the K-1 strategy is to front-load depreciation through bonus depreciation.

[Goldielocks]

What did you find out?  I am curious on the answer.

[kenmoremmm]

I ended up giving away my holdings. I learned that these funds would be taxed differently between the US and Canada and would not have offsetting tax treatment. In Canada, annual income would be taxed at your marginal bracket. Depreciation to offset gains would not be able to be used like it can in the US. The one item I never received 100% clarification on is whether the return of capital (a non-taxable event in the US) would be taxed as income in Canada. I didn't want to find out, so since double taxation on the bulk of income/gains was already guaranteed, I didn't want to find out about the return of capital. I am gifting my holdings to a friend (non-taxable event for me and friend) and he will now pay the US taxes required from the K-1.

[Goldielocks]

Yeah, sound like the difference between real estate REITS in Canada and the USA.   Canada terminated the tax - advantaged clause for real estate REITS a while ago (ack.  and I was holding them at the time for just that reason..).

Return of capital is not taxed in Canada, but I think these funds front load return of capital so that later gains are skewed towards distributions / income / capital gains.  They exist here, and are an advantage to high income persons with a larger taxable portfolio (doctors?) who would trigger the later profits when their personal income rate is lower.  BUT, not great for regular income earners because there is usually a drag on the overall returns.

[kenmoremmm]

Yeah, sound like the difference between real estate REITS in Canada and the USA.   Canada terminated the tax - advantaged clause for real estate REITS a while ago (ack.  and I was holding them at the time for just that reason..).

Return of capital is not taxed in Canada, but I think these funds front load return of capital so that later gains are skewed towards distributions / income / capital gains.  They exist here, and are an advantage to high income persons with a larger taxable portfolio (doctors?) who would trigger the later profits when their personal income rate is lower.  BUT, not great for regular income earners because there is usually a drag on the overall returns.

Thanks for this info.

In the US, the way they normally structured the deals I was involved with is targeted around a 5 year hold. They go in, buy, improve/remodel/expand, increase cap rate and rent rates, and basically take the unit to full occupancy and sell. The first few years are something like 7-9% returns and then in the last year, upon sale, you capture the gains resulting from increase in cap rate. Sometimes they do a refi along the way and then do a return of capital in the middle of the holding period.

If you wouldn't mind sending me a message about places you've seen/worked with in Canada, I would certainly be interested.