Buying US commercial property: entity choice decides more than the tax rate

Entity choice decides more than the tax rate

A US LLC is the most common trap for Canadians buying US real estate: the US treats it as a flow-through, but the CRA treats it as a corporation, and that mismatch can strand US tax paid at the LLC level without a matching Canadian foreign tax credit once the income flows up to the Canadian owner. Holding through a US C-corporation avoids the LLC mismatch but layers US corporate tax and, on repatriation, a branch profits tax that the Canada-US treaty reduces but does not eliminate. Holding personally or through a Canadian corporation exposes the property directly to FIRPTA withholding and, for individuals, US estate tax — both covered below. There is no option that avoids every downside; the right one depends on how long you plan to hold, how you plan to exit, and whether other Canadian investors are in the deal with you. See our guide to buying US real estate personally versus through a corporation for the general trade-offs.

Whichever structure you choose, the property triggers a US federal filing obligation from year one — a rental-election return or a corporate return depending on the entity — and in most cases a separate state income tax return in whichever state the property sits in, since state tax follows the property regardless of who owns it. We coordinate the state filing alongside the federal one rather than treating it as an afterthought once the federal return is done.

FIRPTA withholding on the way out

When a non-resident sells US real property, the buyer generally must withhold 15 percent of the gross sale price under FIRPTA and remit it to the IRS — regardless of whether the sale actually produces a gain, which turns it into a cash-flow problem on top of a tax one for a leveraged commercial building. Filing a US non-resident return afterward recovers any withholding above the actual tax owed, but that means carrying an ITIN, a US filing history, and a real gap in time between closing and refund. A withholding certificate application filed before closing can reduce the amount withheld up front instead of waiting months to recover it after the fact. Some states layer their own withholding on top of the federal FIRPTA amount for a non-resident seller, which we check for at the specific property's state before closing so the total cash held back is not a surprise on the settlement statement.

US estate tax on US-situs real property

Non-resident individuals face US estate tax on US-situs assets — including US commercial real estate held personally or through a flow-through entity — starting from a very small exemption, but the Canada-US tax treaty allows a Canadian resident's estate to claim a credit prorated by the ratio of US-situs assets to the worldwide estate, which in practice extends meaningful relief for most estates below the full US resident exemption. Exemption amounts and the surrounding rules change with US legislation, so we confirm the current-year numbers before sizing anyone's actual exposure rather than quoting a figure that may already be out of date. This exposure is one more reason a holding structure gets modelled before closing, not after the purchase agreement is signed — unwinding an estate tax problem after the fact is far more expensive than planning around it up front.

A US tenant paying your Canadian building's rent isn't a cross-border problem

The reverse situation — a Canadian owning a Canadian plaza or industrial building leased to a US-headquartered tenant — is not a cross-border tax issue for the landlord at all. Rent paid by a US company for Canadian real property is ordinary Canadian-source rental income, taxed exactly like rent from a Canadian tenant; there is no US withholding obligation created by having a foreign tenant, and no permanent establishment question, since the landlord is not carrying on business in the US. The only real adjustment is bookkeeping: invoicing and collecting in USD if that is how the lease is priced, and translating it to CAD consistently, which is a currency question covered on our bookkeeping page, not a tax one. The broader cross-border toolkit is at cross-border tax services.

Source: IRS — FIRPTA withholding.