Many Canadians have purchased homes south of the border encouraged by a strong Canadian dollar and a buyer’s market for U.S. real estate. In 2012, Canadians were the leading international buyers of U.S. real estate, accounting for 24% of sales to international buyers.[1]
When considering a U.S. property as a vacation home it is important to consider how title and ownership to the property should be structured and Canadian and U.S. legal and tax consequences.
U.S. real estate can be held directly in sole ownership, or jointly with right of survivorship. A U.S. estate tax liability can arise at a maximum rate of 40% for 2013 on death, and where real estate is held jointly, on the death of each joint owner, and accordingly holding title this way is often not recommended. Even where no U.S. estate tax is owing, there may be filing obligations to the U.S. taxing authorities on an owner’s death, and as well there may be a requirement for probate and additional legal costs and court fees where property is held directly at death.
A few years back, it was popular to use a Canadian corporation to hold U.S. real estate. However, the Canada Revenue Agency now considers there to be a taxable benefit from the use of the property and additional income taxes can arise. Corporations holding U.S. real estate pre 2005 are grandfathered. As a result, using a corporation to hold a personal use property is generally not recommended.
One option to consider is the use of a trust to hold U.S. real estate. A trust is a relationship between the settlor, who provides assets to the trust; and the trustees, who hold these assets and administer them for the benefit of the beneficiaries. For example, a person can settle a trust for the benefit of their spouse and children and gift funds to the trust. The trustees then use the funds to purchase a U.S. vacation property, which is registered in the trust’s name. The person contributing to the trust retains no interest in the trust or control that would put it offside the U.S. tax rules in order to keep the value of the property out of his or her estate for U.S. estate tax purposes. As well, because the property is not considered part of the settlor’s estate, it does not require probate and additional legal costs and court fees as a result.
When considering the purchase of U.S. real estate, particularly properties of significant value, consideration should be given to use of a trust to hold the property as well as other planning options and obtaining professional advice for such purpose well prior to any purchase.
Stay tuned for our next blog post, in which we discuss marriage contracts – can they be attacked?
[1] According to a study by the U.S. National Association of Realtors (2013).
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.