Navigating Cross-Border Real Estate Investments for Canadian Business Owners

Ultimately, if we can create enough wealth for ourselves outside of our business, that will allow us to have what is really considered financial freedom, which is that we have enough passive investment income coming in to support our lifestyle and never have to worry about money again. One of the ways that people like to build up this type of wealth is through the use of real estate investments and building a real estate portfolio. This is what we're here for, to enable entrepreneurs and real estate investors with the right information to make informed decisions so that you guys can maximize your impact and maximize your wealth creation. Good day and welcome to the Wealthy Entrepreneur Podcast. I am your host, Bob Govro. So great to have you here today. Listen, today I want to go off on a little bit of a specialized topic, and I want to jump into the idea of a Canadian investing in U.S. real estate and what that looks like. Before I jump into that, I just want to remind you that this is the Wealthy Entrepreneur podcast, the place where we dissect the elements that contribute to entrepreneurial success, from mindset and leadership to profits and revenue. And we're going to call this episode. So you want to invest in US real estate. So this is an interesting topic, right? As business owners, we're looking at a few things. One, we're trying to create this profitable business. We're trying to create a business that can create a lifestyle that we want to enjoy. It can create wealth for us to live in retirement. Ultimately, if we can create enough wealth for ourselves outside of our business, that it will allow us to have what is really considered financial freedom, which is that we have enough passive investment income coming in to support our lifestyle and never have to worry about money again. That's really the goal. And one of the ways that people like to build up this type of wealth is through the use of real estate investments and building a real estate portfolio. And, you know, one of the common themes that we've seen as I've been speaking at many real estate investor conferences over the last last few months, last year, last couple years, you know, real estate investors typically, one, they're business owners, at least the ones that are scaling and starting to invest in multiple properties, because business owners tend to have maybe a little bit more disposable discretionary income to invest. And whether or not they spend it all on real estate or not, they tend to have it. And one of the, one of the areas that has come up quite frequently, you know, based on the. The fact that the Canadian economy is a little rocky, the US Economy is a little rocky. We've Got inflated prices in Canada. There's some regions in the US Like Texas and Florida, that seem to be real estate investment hotspots where they haven't really appreciated in value to the same extent as everywhere else. Everyone else has. So there's opportunities to buy low and ultimately, you know, gain some appreciation or that's the feeling for a lot of real estate investors. And so a lot of people are looking in and across Canada in certain remote areas. I know out east is a very affordable area to jump in and start investing in some real estate. If you're looking at Canada, you know, Ontario, a little bit more challenging. We are challenged because the real estate values are high. So to get in, you know, our return on investments pretty low. Our cash flow related to our investments are low. So we need to find areas where we can have greater appreciation. And we're actually seeing depreciation in values right now as interest rates are still high and, and the market is a little bit slowed down. So the supply is, you know, maybe coming up a little bit more because people are having trouble with financing. And the demand for properties is dropping as well, which is just driving, driving some prices down. So we're seeing that starting to happen in Canada. Again, looking at some areas out in the east coast and maybe in the Prairies in Central Canada, central West Canada, Canada, we're still seeing some appreciation in values, which is great. But, you know, the real question is, do you want to invest in the United States? And that's what I want to talk to you guys about today. So if we're making a decision that we're wanting to venture into, you know, our Canadian economy is not where we want it to be. The political environment is maybe not where we want it to be. And we're looking at venturing into US Territory because we find that the value or the bang for the buck is, is more in the US Than it is in Canada. Now, that's also taking into account currency exchange. The US Dollar is obviously quite high in comparison to Canadian dollar right now. So we've got a few, few elements that make an investment in the US a little bit trickier. But let's talk about the structure that we need to have in place in order for a US Investment to be successful. And again, we're talking to big business owners here. We're talking to entrepreneurs who already have likely have a corporation set up, a Canadian corporation set up where your operations are happening in Canada. And you want to take some of those surplus funds and you want to invest them into the US So here's how we do it. Because if you do it the wrong way, the tax can be extremely high. In fact, we can get upwards of 90% tax. If we do this the wrong way, we definitely don't want to see that. It really takes a lot away from any extra appreciation. And in investing down in the US if we're paying so much in tax, we want to make sure that the after tax cash flow into our pocket is as high as possible. So in Canada we have an entity, and I like to set this up as a blank entity and I like to call this U.S. canadian holdco. So it's a Canadian company that's set up in Canada. It's owned by you, it's owned by your family trust. However, you know, you need to structure that personally. You need to have a discussion about family trust and how you maybe could set this up to create even greater tax efficiency. Our team is here to support you. But at a minimum, despite however you want to own that Canadian corporation, whether it's individually, family members, family trust. We want a Canadian corporation. And I'll explain why in just a moment. Then we go south of the border. When we go south of the border, as a Canadian investor, we want a C corporation. All right, So a C corporation is essentially the same as a Canadian corporation in theory. It's where the entity pays its own tax on its own income and it can distribute any of the after tax proceeds to their shareholders. So just like in Canada, we've got money that we earn in the company, we pay tax in the company, we distribute it out to ourselves, we claim that as income, we pay tax on that as income. When you've got two entities, and this is Canadian tax rules, when you've got two entities, one that has a significant interest in the other. So really that interest is by definition it's, it's considered connected for the Canadian rules, which means that it has more than 10% votes in value. So Canadian company owns more than 10% votes in value of a USC corporation. Essential. Okay. It needs to be there when the US Corporation pays a dividend distribution because the Canadian entity owns more than 10% votes in value of that US entity, it's considered a non taxable dividend from one corporation to the other in Canada. Okay, so this is our Canadian dividend that we're receiving. Non taxable, with a few sort of elections and whatnot that, that we can file for you on your behalf. You don't want to really get into that. But essentially we get a dividend distribution from the U.S. to Canada, tax free. Now here, now we've got a C Corporation in the US We've got a Canadian Holdco and we want to go investing in the U.S. now there's two ways that we can do that. One, if we're going to acquire that property ourselves, we can buy it in our C Corporation. All right? So as our C Corporation we can purchase that property. Our C Corporation pays tax on the net taxable real estate income. Their dividends go back to Canada. All set and good. Now a lot of times though, when we're investing in the US what we end up seeing is that some of the investors like if we're having other partners that we're buying properties with, they like to purchase properties inside an llc, a limited liability corporation. And what that is is essentially a flow through entity. So it's almost like a partnership with some extra legal protection in an llc. And so what we would have happen there is that the LLC that you're investing in that you're buying the property in, the partner that owns the LLC would be your C Corporation. Again, what that allows us to do, and I'm just sharing this because if you're looking at investing in the US with partners or with other shareholders or as a passive investor, they likely have the project set up in an llc, the very common form of structure to own real estate in the US and what we want to have happen is that our interest in that is owned by our USC corporation. Again, the intention of that is any of the taxable rental income that is in the llc, we pay tax in the C Corp in there, which is a flat tax rate depending on the state that you're operating in with a flat tax rate of 21%. And any of the after tax distribution goes up to Canada tax free. So this is interesting, right? This is really the structure that needs to be in place. Because here's what happens. If you have an investment in the the US and you do it personally, first and foremost, you're going to have to pull money out of your Canadian company to get the deposit money to then invest down in the U.S. so you're going to pay tax on that deposit money. And then what happens is you buy this investment in the US and maybe you've mortgaged it. So every payment that you need to make likely has to come from your corporation. So you're paying tax on every payment that you have to make. But then you've got this personal investment down in the U.S. if you have a personal investment down in the U.S. you've got to pay tax in the U.S. on this investment income and then you have to pay tax on this US Investment income in Canada because our Canadian rules say we have to pay tax on our worldwide income. So you can see there's an element of double tax. We definitely have to file taxes in the US Related to this. We have to file those taxes and then we claim a foreign tax credit on the tax we pay in the US Back in Canada. Gets complicated, gets costly as well. And ultimately you could have yourself in a little bit of a challenging situation. Llc. Llc, if it's owned by you personally, could be considered taxable as a flow through to you personally. It could also be taxed as a business, which would require us to pay even higher tax. So there could be multiple facts of double taxation. You want to have your structure optimized. You have a Canadian Holdco owning a USC Corporation. That US C Corporation can either direct and invest directly in property or it can invest as a partner in an llc. Now then we get down to the interesting part. Okay, so let's say that you invest in a property, it's inside an llc. Now in the US We've all heard this before. You see everybody in the US post about this, this great depreciation sort of opportunity in the US and they do have this double declining depreciation opportunity in the U.S. so what that means is we can depreciate our buildings and our investments in real estate faster. Essentially wipe out the taxable income so that there's no taxable income. So what happens is this LLC likely ends up creating a loss because of this depreciation and the available expenses. So our C Corp really doesn't have to pay anything. But any of the distributions that go from the LLC to the C Corp we can then get back up to the Canadian Corp tax free. Guys, this is important. If you are looking to expand your investment portfolio down into the US I'm not going to belabor it any more than that, but if you're looking at doing it, we need to have that Canadian company, Canadian corporation, owning a USC corporation. That's the key to making sure that you have tax efficiency when you're doing cross border investing in real estate. All right, if you have any questions related to this, obviously it can be a fairly sophisticated topic. Feel free to drop a note in here. We're happy to answer any questions that you may have related to investing in the U.S. in fact, check out our YouTube channel as well. Under the wealthy entrepreneur. We've got lots of trainings and if it's not under there, check under govro, Govro Accounting, Tax Law Advisory. Check under there. We've got trainings related to U.S. investments in real estate. But I really wanted to make sure that you as my listeners and my subscribers are aware of the, the tax risk of not doing this properly and the importance of making sure that if you are investing down in the US that, that this is structured properly for you so you avoid double taxation on this. Listen, I think there are lots of really great opportunities down in the US Right now. I do really like Texas. I think, you know, I've spent a little bit of time down in Austin the last couple months at a speaking at a few different events. And I gotta tell you what a cool, innovative city that Austin is. And it's growing rapidly. It's considered the California of Texas. It's very Canadian, like, meaning like positive vibes, nice people, very clean, very innovative, very health consciousness. And it's got, you know, some pretty incredible venues and entertainment and stuff like that down there as well. So looking at a state like Texas, for one, that has no state tax to looking at areas where, you know, it's very safe, maybe undervalued areas that are growing, obviously these are all areas that you as a real estate investor can appreciate that you can acquire low, maybe appreciate that to be a higher value, exit higher, or just because of the demand of rooms and places to stay in areas like that, that you continue to increase the rent. And there's opportunities for that too. So I do really like some opportunities that are down there. I think, you know, what you have to make sure is that if you are going to do it, let's structure it properly, let's make sure that you maximize your roi. Because again, once you enter into foreign territory, there are a lot more rules as a non US resident, non US citizen that we have to adhere to and, and if some of those are related to tax. So that's hopefully the insight I've shared with you today. Once again, if you feel like you've got some US real estate investor friends that would benefit from hearing just some of the straight talk associated with some of the structure that needs to be in place to avoid tax, make sure you share this with them. This is what we're here for. To enable entrepreneurs and real estate investors with the right information to make informed decisions so that you guys can maximize your impact and maximize your wealth creation. So hopefully you found this really informative. Make sure you hit that follow button and subscribe. Make sure that you subscribe because we're constantly issuing areas of advice and guidance to help support you creating your wealth as an entrepreneur and as an, as an investor. And we want to make sure that you get access to that. So make sure you do that again. Share this with anyone that you feel would benefit from just understanding the appropriate structure to head down south. Listen, I'm excited for you. If you're at a point where you're looking at investing into the US Market, there are deals to be had, there's money to be made. There's lots of successful people that are investing heavily down in Florida and Texas right now. I do feel like if you're looking at that, just make sure you do it the right way. This has been the Wealthy Entrepreneur podcast so youo Want to invest in U.S. real estate. My name is Bob Govreau. I've been your host. So grateful for the fact that you're here today. Make sure you hit subscribe and I look forward to seeing you again next week.