First and foremost, a Canadian should not create an LLC to acquire FL real estate, or any US real estate for that matter. This is the biggest mistake Canadians make as they fall prey to local advisors who have promoted the LLCs as the best vehicle to do business in the US or own real estate. This is true if you are a US resident but not in Canada as LLCs are treated differently in Canada vs the US and the potential for double taxation is real.
There could be a potential for US estate tax exposure of up to 40% of the value of the US real estate on death of the Canadian while owning US real estate. However, after the changes to the US tax law effective in 2018, if the Canadian’s worldwide net worth (including the US real property) is no more than USD11.2M (this is the 2018 threshold or exclusions from estate tax which is adjusted yearly for inflation and is extended to Canadians under the Canada-US Treaty), then the US estate tax should not be an issue although a US estate tax return must still be filed to clear the title. The threshold is doubled if the Canadian is married and transfers the US property to the non-US spouse on death. This is just a rule of thumb to follow. These thresholds are only good until the end of 2025 after which the exclusions would revert back to current law (unless there are changes), which is USD5.6M in 2018 (subject to inflationary adjustments) prior to the Trump Tax Reform. This is doubled for transfers of property to a non US spouse. Gifting US property during one’s lifetime creates double taxation in the US and Canada.
If the intent is to occupy the Florida real estate as a vacation home and spend much of the warmer months in Florida to avoid the harsh winters in Canada, the Canadian has to be careful about staying in the US for 183 days or more in any calendar year to avoid becoming a US resident for tax purposes. Although the Canada-US Treaty will protect the Canadian from being taxed as a US resident if the threshold is reached, the US will require a long list of information returns to report ownership in certain Canadian entities and investments, which is a compliance nightmare and may be very costly. The 183 day rule should not be confused with the immigration rule that Canadians may visit the US for up to six months within a 12 month period. Remaining in the US from July 1 to December 31 (184 days) in every calendar year may be permissible from an immigration perspective but this would cause the Canadian to be subject to US reporting requirements as a deemed US resident.
Even if the 183-day test can be avoided, the Canadian “snowbird” can still be a deemed US resident if the “substantial presence test” is met in the US which is based on a formula involving a 3 consecutive year rolling average of US presence. The US will count 100% of the current year (only if the Canadian was present in the US for at least 31 days), 1/3 of the year prior and 1/6 of the 2nd year prior to the current year and if the number of days add up to at least 183 days, then the Canadian is a deemed resident of the US only for tax purposes. For example, if the Canadian was in the US for 130 days in 2017, 125 days in 2016 and 120 days in 2015, the Canadian is all of a sudden a US resident under the “substantial presence test”. He would have 192 days in the US which is the sum of 100% of 2017 (i.e. 130 days), plus 1/3 of 125 days in 2016 (i.e. 42 days) plus 1/6 of 120 days in 2015 (i.e. 20 days). Again, the rule of thumb is to limit the stay in the US to less than 121 days in any calendar year. If the 183 day is met but the Canadian is not in the US in the current year (2017 in this example) for at least 183 days, then the Canadian can rely on the “closer connection exception” in the US which essentially provides that for as long as the Canadian can prove stronger ties to Canada vs the US, the Canadian will not be treated as a US resident. In order to benefit from the “closer connection exception”, the Canadians needs to file US Form 8840, Closer Connection Statement for Aliens, which is due June 15 following the end of the calendar year.
If the Florida real estate is to be rented out, the Canadian will have US filing requirements, even if the property is generating losses. A common misconception among Canadians is that no US tax return is required if there are losses. This is incorrect in that the IRS either requires a 30% withholding tax against rents (without the benefit of deductions) paid to the Canadian, or a filing of a US nonresident tax return that is due June 15 following the end of the calendar year in order to claim expenses and any resulting losses. Without a US nonresident tax return, the gross rents are subject to a 30% tax that is required to be withheld by the tenant or the payor of the rent. More importantly, when the US real property is sold, generally, 15% of taxes have to be withheld from gross proceeds regardless of whether the property is a vacation home or rental property. The 15% is a temporary tax and all or some can be recovered when a US nonresident tax return is filed the following year. The Canadian can elect to reduce the withholding tax by applying for a “clearance certificate” with the IRS, to limit the withholding tax to the maximum rate of tax applicable to the gain, if any. The application has to be made before closing of the sale.
