A Canadian Buying a US Vacation Rental: Personally, in an LLC, in a Canadian Corporation, or in a Trust?

The question comes up before every purchase and is usually answered by a US lawyer or a real estate agent with a US answer: put it in an LLC. For a Canadian resident that is the one structure that produces double taxation. The right answer depends on what the buyer is trying to solve for: income tax on the rent, the US estate tax on a Canadian's US property, Florida probate, liability, and the tax on the eventual sale. Personal ownership (with a revocable trust for probate) solves the most at the lowest cost for a rental of ordinary size; a Canadian corporation solves the estate tax at the price of higher income tax; an LLC solves liability at the price of double income tax; and a cross-border trust solves the estate tax with real complexity.

Key takeaways

• Personally: income tax on net rent under the section 871(d) election at graduated rates (long-term capital gains rate on sale); Canadian tax with a credit; US estate tax exposure on the property's value above the treaty-prorated exemption (usually zero for a Canadian whose worldwide estate is under about $15 million); Florida probate on death unless held in a revocable trust; liability managed by insurance. Simplest; best for most.
• Revocable living trust (personal ownership variant): the same tax result as personal ownership (disregarded for US income and estate tax; a bare trust or attributed to the settlor in Canada); avoids Florida probate; the recommended form of personal ownership for Canadians.
• US LLC (single-member): disregarded in the US (same income tax as personal, and the property is still in the US estate); treated as a corporation by Canada, so the rent is not taxed to the owner in Canada until distributed and the US tax paid personally is not creditable in the year paid; FAPI rules may apply; Form 5472 with a pro forma 1120 required annually. Liability protection at the cost of double taxation. Wrong for a Canadian resident.
• Canadian corporation: the corporation files a US 1120-F on the rental as ECI, pays US corporate tax (21%) and branch profits tax (5% under the treaty) on repatriated profits, with no capital gains rate on sale; Canada taxes the rental income as passive investment income at about 50% (partly refundable) with a corporate foreign tax credit; the shareholder's personal use is a taxable shareholder benefit. The shares are not US-situs, so no US estate tax, and no Florida probate. Solves estate tax and probate; costs income tax and personal use.
• Cross-border irrevocable trust: a Canadian-resident discretionary trust holding the property can keep it out of the US estate and out of probate; requires the trust to buy the property (not receive it), attribution and 21-year deemed disposition rules in Canada, trust returns in both countries, and professional trustees. For high-value property with real estate tax exposure.

The dimensions

Income tax on rent. Personal or revocable trust: the 871(d) election, net rent at graduated rates, depreciation, and the Canadian credit reconciles. LLC: the same in the US, but Canada's treatment of the LLC as a corporation breaks the credit timing. Canadian corporation: US corporate rate plus branch tax, then Canadian corporate tax on the same income with a credit, then personal tax on the dividend; the combined rate is high. Trust: trust returns in both countries; the income taxed to the trust or beneficiaries.

Sale. Personal: FIRPTA withholding, long-term capital gains rate (15% or 20%) plus 25% on depreciation recapture; Canada's half-inclusion with a credit. Corporation: 21% on the whole gain (no preferential rate), branch tax on repatriation, FIRPTA at 15%; Canada taxes the corporation's gain. LLC: as personal in the US; Canada's foreign affiliate rules on the gain.

Estate tax. A Canadian's US-situs assets above $60,000 are subject to US estate tax, but the treaty prorates the full exemption by the US-situs share of the worldwide estate; a $600,000 Florida condo in a $4 million estate gets $2.25 million of exemption and owes nothing. A Canadian whose worldwide estate exceeds about $15 million has exposure. Personal ownership and the LLC (disregarded) leave the property in the estate; a Canadian corporation or an irrevocable trust takes it out. Form 706-NA is required in every case where US-situs assets exceed $60,000, to claim the proration.

Probate. Florida probate on a personally held property is a court process taking months with Florida counsel. A revocable trust, joint ownership with right of survivorship, a Florida enhanced life estate ("Lady Bird") deed, or entity ownership avoids it.

Liability. An LLC or corporation isolates the property's liabilities from the owner's other assets; a trust does not; personal ownership relies on insurance (a landlord policy with umbrella coverage is the usual answer for a single rental).

Personal use. Personal or trust ownership: the owner's use is personal use under section 280A, limiting deductions proportionately. Corporate ownership: the shareholder's use is a taxable benefit in Canada at fair rental value, and reduces the corporation's deductions in the US.

Compliance cost. Personal: 1040-NR, T776, T1135. Revocable trust: the same plus the trust's existence (no separate returns). LLC: 1040-NR, Form 5472 with pro forma 1120, T1135, and the FAPI analysis. Corporation: 1120-F, state corporate return, T2 with the foreign tax credit and the shareholder benefit, T1135 for the corporation. Trust: 1040-NR or 1041 for the trust, T3, T1135, trustee fees.

Who chooses what

• A snowbird couple with one condo, a worldwide estate under $10 million: personally, held in a Florida revocable trust for probate, with a landlord insurance policy. The estate tax is zero after the treaty proration.
• A high-net-worth Canadian with a $3 million Florida home and a $20 million estate: the estate tax exposure is real (the proration leaves a taxable amount); a Canadian corporation (if personal use is limited and the income tax cost is accepted) or a properly structured Canadian discretionary trust that purchases the property.
• A Canadian who will become a US resident: an LLC becomes appropriate after the move; before it, personal ownership, converting later.
• A Canadian buying several rentals as a business: a Canadian corporation with a US subsidiary (C corporation), or a US C corporation directly, with the branch or subsidiary analysis; never a personally owned LLC.

Worked example

A Toronto couple with a $5 million worldwide estate buy a $700,000 Naples condo to rent 30 weeks a year and use for 8.

• Personal, in a Florida revocable trust. 871(d) election; net rental income after depreciation about $8,000; US tax about $800; Canada taxes the net with a credit; T1135. Estate tax: 14% of the exemption is $2.1 million; none due; Form 706-NA on death claims it. No probate. Landlord insurance with a $2 million umbrella.
• Florida LLC. Same US income tax; Canada treats the LLC as a corporation; the $8,000 is not the couple's income in Canada until distributed; the $800 of US tax paid on their 1040-NR is not creditable when Canada taxes the distribution; Form 5472 and pro forma 1120 annually ($25,000 penalty if missed); estate tax unchanged (disregarded). Worse on every dimension but liability.
• Ontario corporation. 1120-F on $8,000 at 21% plus branch tax; Canada taxes the corporation at about 50% with a credit; the 8 weeks of personal use is a taxable benefit of about $12,000 to the couple; no estate tax (already none); no probate. Worse on income tax and personal use for no estate tax gain.
• Recommendation. Personal, in a revocable trust.

Official sources

"If an NRA owns or holds in interest in real property located in the U.S. and holds the property for the production of income, then the NRA can elect under Internal Revenue Code (IRC) 871(d) to treat all income from U.S. real property as effectively connected income with the conduct of a trade or business in the U.S." — Internal Revenue Service, Nonresident Aliens — Real Property Located in the U.S., https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-real-property-located-in-the-us

"If the date of death value of the decedent's U.S.-situated assets, together with the gift tax specific exemption and the amount of the adjusted taxable gifts, exceeds the filing threshold of $60,000, the executor must file a Form 706-NA." — Internal Revenue Service, Estate Tax for Nonresidents not Citizens of the United States, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax-for-nonresidents-not-citizens-of-the-united-states

"For purposes of these instructions, a foreign-owned U.S. DE is treated as an entity separate from its owner and classified as a corporation for the limited purposes of the requirements under section 6038A that apply to 25% foreign-owned domestic corporations." — Internal Revenue Service, Instructions for Form 5472, https://www.irs.gov/instructions/i5472

The CRA lists as a shareholder benefit under subsection 15(1) the "Personal use of your (the corporation's) property (for example, house, car, yacht) without a FMV charge or return." — Canada Revenue Agency, Shareholder benefits, https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/calculating-deductions/determining-tax-treatment/shareholder.html

Practitioner note

The LLC is the structure a Canadian is told to use and the one that costs the most, and the Canadian corporation is the structure that solves a problem most Canadians do not have. For a rental of ordinary size, personal ownership in a Florida revocable trust with good insurance is the answer, and the Form 706-NA on death is the form that makes the estate tax disappear. We run the four structures on the client's numbers before the offer.

See also: For the full sequence of a Canadian move to Florida, see the Canada-to-Florida tax guide, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the holding structure analysis before purchase, the 871(d) election and annual filings on both sides, and the estate tax proration planning. See cross-border pricing or book a call.