Are you a Canadian real estate investor looking to buy property in the United States?
Canadians investing in the United States don’t usually think about the ugly prospect of litigation. But it's something you should take into account.
“The U.S. is a very litigious country,” says Scott Smith, lead attorney at Royal Legal Solutions. “That’s why you need proper asset protection in place.”
You can’t depend on insurance companies to cover you, either. You need asset protection structures to protect your holdings. For Canadian investors, that’s usually a Limited Partnership.
While American investors are generally better off holding their real estate assets in a Series LLC or other LLC structure, the Canadian real estate investor has a different legal obstacle course to navigate.
So how does a Limited Partnership benefit Canadian real estate investors with assets in the United States? For one thing, it means you’ll only lose one asset at most if you are ever sued—and hopefully none at all. Let’s take a closer look.
A Limited Partnership is formed and filed at the state level (like an LLC). It must contain four parts to be legally binding:
The General Partner is typically a traditional LLC or shell company filed in the state where the Limited Partnership will be conducting business.
The Partnership Agreement must be drafted to isolate all of the operations to the General Partner while allocating all of the profits to the Limited Partner(s). You (the investor) are the Limited Partner.
Accurate execution is vital to ensure that liability attaches to the General Partner/LLC, while all of your actual assets and profits are protected. Get help from a qualified attorney to make sure you’re protected! Overlooking minor details in a Partnership Agreement or during the purchase, sale, or transfer of property can result in costly and time-consuming errors.
Limited Partnerships offer liability protections similar to the LLC, but without the costs. On the U.S. side they are treated just like an LLC for asset protection and for financing purposes. Some of the internal paperwork is different, but that’s it.
Under Canadian law, the Limited Partnership is treated as if it is just you (the individual) purchasing the property.
“When you establish a domestic (U.S. based) Limited Partnership structure in the state where you’re going to buy the assets, then purchase the assets, they will be held inside of that Limited Partnership structure,” Scott says.
This gives you a structure to purchase your property through in a way that protects your American-based assets and minimizes your tax responsibilities.
“The goal of my firm is always to put our clients in a position that makes it look like they own nothing on paper," Scott explains.
That's why the best asset protection strategies make Canadian real estate investors unattractive targets for litigious lawyers.
“And if you are sued, you lose little to nothing because of the protection and the structures are there to minimize damage.”
You need to know how the U.S. and Canadian governments will tax your business. Canada’s income taxes can be high, but the Limited Partnership agreement helps you manage real estate profits in a tax-friendly manner.
Limited Partnership income can be “passed through” and reported on your personal income tax return. While the LLC qualifies for pass-through treatment in the American tax system, Canadian laws treat the LLC differently. Corporate taxes apply to LLCs in Canada! As a result, the taxes are often too high for most investors to justify when a Limited Partnership can accomplish similar goals.
Scott helps Canadian investors and their families with wealth-building strategies that include asset protection and tax savings. These strategies may include using a business structure that has a separate entity status for Canadian taxation (C Corp, S Corp, LLC, etc).
Remember: In Canada, an American LLC alone would be taxed as a foreign corporation.
“So if you use LLC, C Corps, S Corps etc, Canada actually makes you pay a corporate tax,” Scott explains. “This is true even if it’s just you as a solo individual. That’s one way the Canadian tax law is different.”
You’re a first-time Canadian investor in the U.S. Where do you start?
We’ve found that our friends in Canada want one source to help them on every step along the way. A lot of investors want to work with turnkey providers. They want coaching, preferred vendors, and connections to people who can help with their U.S. investments. A coach will help you clarify your situation. Goals and tactics from books and websites are great, but you need to know something beyond “I want to invest in apartment complexes.”
Royal Legal gives you access to a network of other investors and to turnkey professionals, including tax and accounting specialists who understand Canadian investing issues. You’ll have a team that can break down the numbers you need to hit to reach financial freedom. When you partner with Royal Legal Solutions, you will have some of the industry’s finest attorneys and CPAs on your personal real estate dream team.
Start with our investor quiz and we’ll help you get started. Royal Legal Solutions has years of experience creating Limited Partnerships. We stay current on state laws regarding these matters. We maintain relationships with CPAs licensed to practice in both the United States and Canada.
As investors ourselves, we take pride in setting you up for investment success. There is no good reason to take unnecessary risks with your hard-earned assets.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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