Ask An Expert with George E. Dube

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I have a Canadian who has been living in the U.S. for two years now (therefore considered a non-Canadian resident) who wants to do a joint venture with me. His part of the investment is about $50K. I will give him a return of 15% annually, then capital gain in five to ten years.

What’s the best way to get him his money? Can we set it up as a loan (which may be higher tax for him?) or should I incorporate my business and give him dividends?

His main concern is that he previously sold his house in Canada and the government took a 30% tax withholding. What’s the best way to reduce that?

To save the suspense, it depends! 

Different facts are stated with assumed conclusions that I would resist jumping to immediately, such as this person being considered a nonresident after two years and a capital gain in five to ten years resulting from this investment.

Let’s start with forgetting the tax and legal implications. What would the ideal investment look like from the perspective of each of you?  With this, advisors can help make suggestions that will fit what the two of you need as compared to what the advisors may like to see. Certainly the advisors can provide suggestions to open up some possibilities that perhaps were never considered.

A few quick comments and questions (in no particular order and certainly not all of them), for your consideration:

How will you provide a 15% return?  And will this be regardless of whether the investment is made via loan or equity?

  • Is he truly a nonresident for tax purposes?
  • Will he return to Canada at some point in the future?
  • If he is a U.S. resident, have estate taxes been considered?
  • If he is a U.S. resident, corporate share ownership can result in deemed taxes later (plus interest) for having income accrue over the years but not paid out annually.

In many cases Canadian withholding taxes can be reduced for nonresidents provided proper planning and action have taken place.

Are both of you prepared for the Canadian government requirements for nonresidents, such as monthly withholding taxes, annual filing requirements, and extra requirements at the time of selling a property? All these can be dealt with, but again, planning and action is important.

There’s much more to say and discuss, but I suggest beginning with your ideal end result in mind.

George E. Dube, CPA, CA is a veteran real estate investor and accountant. He has spoken, written various articles, and co-authored two books on real estate accounting. Reach George at: gdube@bdo.ca or @georgeEdube.

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