2 ND BIENNIAL ONTARIO NEW YORK LEGAL SUMMIT

2

ND

_{BIENNIAL ONTARIO –}

NEW YORK LEGAL SUMMIT

CANADIAN INVESTMENT IN U.S. REAL ESTATE –

STRUCTURING FOR COMMERCIAL AND PERSONAL

INVESTMENTS

Co-Chairs: Thomas Nelson, Hodgson Russ LLP

Lorne Saltman, Gardiner Roberts LLP Panelists: Mary Voce, Greenberg Traurig, LLP

Agenda:

I.

U.S. Income Taxation of Income From U.S. Real Estate

– In General

II.

U.S. Estate and Gift Taxation of Interests in U.S. Real

Estate Owned by Canadian Residents (Who Are Not

U.S. Citizens) - U.S. Federal estate and gift taxation

I. U.S. Income Taxation of Income From U.S.

Real Estate – In General

U.S. Income Taxation of Income From U.S. Real Estate – In General

A.

Non-U.S. persons – two types of income from U.S.

sources, with different rules:

1)

Investment Income

2)

Business Income

B.

There is a further sub-characterization:

1)

Ordinary Income

U.S. Income Taxation of Income From U.S. Real Estate – In General

C.

Investment Income includes, e.g., interest, dividends

and rents that are not earned in an active trade or

business (sometimes referred to as “fixed,

determinable, annual or periodic income” or “FDAP

Income”) – Canadian individuals and corporations

taxed the same:

1)

30% gross withholding tax unless reduced or

eliminated by a treaty (or, in the case of interest, by

the portfolio interest exemption)

U.S. Income Taxation of Income From U.S. Real Estate – In General

2)

Withholding Rates under U.S.–Canada Treaty:

a)

Interest – 0%

b)

Dividends from U.S. corporations

i. 5% if paid to a Canadian corporation that owns at least 10% of the voting stock of the payor (special rules apply to REITS)

ii. Otherwise 15%

c)

Passive rents from real property – 30% (no benefit from

treaty)

3)

Election is available to treat rental activities as Business

Income rather than Investment Income to allow taxation on

a net basis

U.S. Income Taxation of Income From U.S. Real Estate – In General

D.

Business Income is income that is “effectively

connected” with a U.S. trade or business (referred to

as “ECI”)

1)

Subject to tax the same as a U.S. person carrying on a

trade or business

2)

Under the U.S.-Canada Treaty, U.S. source business

income is only taxable if it is attributable to a

“permanent establishment” (“PE”) in the U.S.

U.S. Income Taxation of Income From U.S. Real Estate – In General

E.

Capital gain is gain from the sale or exchange of a capital

asset (which may be an asset held either in connection

with a trade or business or for investment)

1)

As a general rule, capital gain from the sale of property that

is not used in a U.S. trade or business is sourced to the

country of the seller (in this case Canada) and therefore is

not subject to U.S. tax, whereas gain from business property

is sourced to the U.S. and is subject to U.S. tax

2)

Under the “Foreign Investment in Real Property Tax Act”

(“FIRPTA”), gain from the sale or exchange of a “U.S. real

property interest” (USRPI”) is deemed to be Business

Income and is therefore subject to U.S. tax even if it is not

actually used in a trade or business

U.S. Income Taxation of Income From U.S. Real Estate – In General

a)

A USRPI includes:

i.

Direct holdings in U.S. real property (which includes land,

buildings, crops, timber, mines, wells and other natural

deposits, and “associated” personal property)

ii.

Indirect interests in U.S. real property (other than an

interest solely as a creditor), such as rights to share in the

appreciation in value of U.S. real property, gross or net

proceeds or profits from real U.S. property, contracts and

options to acquire U.S. real property and certain leases with

respect to U.S. real property.

U.S. Income Taxation of Income From U.S. Real Estate – In General

a)

A USRPI includes: (continued)

iii.

Most interest in partnerships (U.S. or Canadian) that own

U.S. real property interests

iv.

Stock in a “U.S. real property holding corporation”

(“USRPHC”), which is a U.S. corporation the value of

which is, or was at any time during the prior 5 years, at

least 50% attributable to USRPIs with three exceptions:

A. if a USRPHC disposes of all of its USRPIs in fully taxable transactions it ceases to be a USRPHC

B. Publicly traded stock generally is not subject to FIRPTA if the Canadian investor has less than a 5% interest

U.S. Income Taxation of Income From U.S. Real Estate – Taxation of Canadian Individuals

F.

Taxation of Canadian Individuals

1. Ordinary Business Income:

a) The U.S. federal income tax graduates to a maximum rate of 39.6%

b) Plus state and local taxes (which can range from zero to >15%, depending on the locality) (deductible against federal income tax)

2. Capital Gain:

a) Long-term capital gain is subject to U.S. federal income tax at a maximum rate of 20% (25% in the case of depreciation recapture)

b) Plus state and local taxes (which can range from zero to >15%, depending on the locality) (deductible against federal income tax)

U.S. Income Taxation of Income From U.S. Real Estate – Taxation of Canadian Corporations

G.

US Taxation of Canadian Corporations

1)

Ordinary Business Income and Capital Gain:

a)

U.S. federal income tax graduates to a maximum of

35% (no reduced rate for capital gains realized by a

corporation)

b)

Plus state and local taxes, which can range from

zero to >15%, depending on the locality

(deductible against federal income tax, subject to

certain limitations)

U.S. Income Taxation of Income From U.S. Real Estate – Taxation of Canadian Corporations

c)

Plus a Branch Profits Tax –

i. Imposed on after-tax income not reinvested in the business in the year earned (or when withdrawn from the business in a later year), except that there is an exclusion for gains from final sale of U.S. assets and withdrawal from U.S.

ii. Under the U.S.-Canada treaty the branch profits tax rate is limited to 5%, and the first C$500,000 is

exempt

iii. However, treaty benefits generally not allowed for Canadian corporations directly owning interests in U.S. limited liability companies. Branch profits tax is 30% for such structures

U.S. Income Taxation of Income From U.S. Real Estate – U.S. Tax Returns

H.

Requirement to File U.S. Tax Returns

1)

If a Canadian person has only Investment Income – No

requirement to file U.S. tax return provided the payor

has properly withheld the required taxes

2)

If a Canadian person has Business Income (including

FIRPTA gains, which are treated as Business Income) –

Must file U.S. tax returns

3)

Note that even if a Canadian individual or corporation

is not required to file a U.S. tax return, the U.S. entity

in which it invests might be required to identify such

person and report payments made to such person on

its own tax return

U.S. Income Taxation of Income From U.S. Real Estate – U.S. Withholding

I.

US Withholding Taxes

1)

Three types:

a)

Withholding at source on Investment Income is a final tax

b)

Some withholding taxes are merely collection

mechanisms and are credited against the Canadian

taxpayers’ U.S. taxes reported on their U.S. tax returns

i. Withholding at maximum applicable rates is required of

partnerships and certain trusts on allocations or distributions of Business Income (including FIRPTA gains, which are treated as Business Income)

i. Note: U.S. source business income earned directly is not subject to U.S. withholding tax (the recipients are expected to file U.S. tax returns and report the income)

ii.

Purchasers of U.S. real property from Canadian

sellers must withhold 10% of gross proceeds

U.S. Income Taxation of Income From U.S. Real Estate – U.S. Withholdng

c)

FATCA (“Foreign Account Tax Compliance Act”)

Withholding

i.

A 30% U.S. withholding tax is imposed on payments made

to certain foreign financial institutions (“FFIs”) and

non-financial foreign entities (including certain partnerships and

trusts) (“NFFEs”) of

A.

certain U.S. source Investment Income,

B.

beginning in 2017, gross proceeds from sales of

assets that produce U.S.-source interest and

dividends

C.

also beginning in 2017, payments treated as “foreign

passthru payments” made to foreign intermediaries

U.S. Income Taxation of Income From U.S. Real Estate – U.S. Withholding

i.

Unless:

A.

in the case of a Canadian FFI, such FFI has complied with the Intergovernmental Agreement (“IGA”) between the U.S. and Canada, and

B.

in the case of a Canadian NFFE, such NFFE has provided

information on its substantial U.S. owners to the U.S. payor of the above amounts

ii.

Pursuant to the IGA, the Canadian government will collect

from Canadian financial institutions information on their

U.S. account holders and will annually provide that

information to the U.S. Internal Revenue Service and,

correspondingly, the U.S. government will collect from U.S.

financial institutions information on their Canadian account

holders and will annually provide that information to

U.S. Income Taxation of Income From U.S. Real Estate – Use of Leverage

J.

Use of Leverage to Reduce U.S. Tax

1.

In many investment structures, the foreign investors in U.S.

real estate may make loans to the entity that owns the real

estate or, more often, to a U.S. holding company that is

owned and controlled by the foreign investors.

a) Ideally, interest paid on the loan may provide a deduction to the U.S. entity that can be used to offset income from the property

b)

If properly structured, the interest can be paid to

the foreign lender(s) with little or no withholding

tax imposed (either as a result of a favorable

income tax treaty or the portfolio interest

exemption)

U.S. Income Taxation of Income From U.S. Real Estate – Use of Leverage

c)

As noted above, interest paid to Canadian persons

generally is exempt from U.S. withholding tax under the

U.S.-Canada treaty

d)

Portfolio Interest Exemption – Key requirements:

• Foreign shareholder holds less than 10% of the payor’s voting stock

• Debt instrument must be in “registered form” (not bearer paper)

• Not applicable to contingent interest or interest paid to banks

• Generally not a significant factor in US-Canada structures because of the exemption provided by the U.S.-Canada treaty (unless note is issued or assigned to person not eligible for U.S.-Canada treaty benefits)

U.S. Income Taxation of Income From U.S. Real Estate – Use of Leverage

2.

There are many limitations on the extent to which the

above benefits may be fully achieved in the case of

loans from the investors in the real estate

a)

First, the advances must qualify as debt and not

disguised equity for U.S. federal income tax purposes,

which is a factual inquiry

b)

There is no statutory definition of debt and its

characterization is governed primarily by principles

developed in case law and IRS rulings. In Notice 94-47,

the Service listed eight factors that are relevant in

determining the proper characterization and courts

have indicated several others:

U.S. Income Taxation of Income From U.S. Real Estate – Use of Leverage

i. Whether there is an unconditional promise on the part of the issuer to pay a sum certain on demand or at a fixed maturity date that is in the reasonably foreseeable future;

ii. Whether holders of the instruments possess the right to enforce the payment of principal and interest;

iii. Whether the rights of the holders of the instruments are subordinate to the rights of general creditors;

iv. Whether the instruments give the holders the right to participate in the management of the issuer;

v. Whether the issuer is thinly capitalized;

vi. Whether there is identity between holders of the instruments and stockholders of the issuer;

vii.The intent of and label placed upon the instruments by the parties;

viii.Whether the instruments are intended to be treated as debt or equity for non-tax purposes, including regulatory, rating agency, or financial accounting purposes; and

U.S. Income Taxation of Income From U.S. Real Estate – Use of Leverage

3. Other Considerations:

a. Section 163(e)(3) and Treas. Reg. Section 1.267(a)-(3)(b) provide that

interest owed to a “related” foreign person is not allowed as a

deduction until actually paid. An investor is “related” to the borrower if the investor owns (directly, indirectly, constructively or via attribution) 50% or more of the borrower

b. Section 163(j). Section 163(j) disallows a deduction for some or all of

the interest paid by a corporation to a related person (as defined

above) if the corporation’s ratio of debt to equity exceeds 1.5 to 1 and certain other conditions are met.

c. Section 482 Transfer Pricing Rules. Section 482 allows the IRS to

recast interest charged in transactions among related parties, including parties acting in concert unless the interest is computed and payable on arm’s length terms.

d. Must consider tax imposed on the interest in the home jurisdiction of the lenders (i.e., if they will pay a high rate of tax upon receipt, the joy comes out of the deduction to the U.S. investment vehicle)

U.S. Income Tax – a brief recap:

U.S. Source Investment

Income

U.S. Source Business Income Long Term Capital Gain from Sale of U.S. Real Property Treaty Rate:

Interest - 0%

Dividends – 5%-15% Rent from real

property - 30%

Individual: up to 39.6%, plus State and local taxes

Corporations: up to 35%, plus branch profits tax (5% under Treaty), plus State and local taxes

Individual: up to 20% (25% for depreciation recapture), plus State and local taxes Corporations: up to 35%, plus branch profits tax (5% under Treaty), plus State and local taxes

Tax imposed via withholding

No withholding if earned directly; but withholding at maximum rate if earned through partnership or trust

10% gross withholding by purchaser; also withholding at max. rate if earned

through partnership or trust

II. U.S. Estate and GIFT Taxation of Interests in U.S.

Real Estate Owned By Canadian Residents (Who Are

Not U.S. Citizens) - U.S. Federal Estate Taxation

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by

Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate

Taxation

A.

General Considerations

1)

A non-resident alien individual is subject to U.S. estate

tax on his or her assets that are located or deemed to

be located within the U.S. on date of his or her death

2)

A non-resident alien individual is subject to U.S. gift

tax on lifetime gifts of U.S.-situs property, which

includes directly-owned U.S. real estate but generally

does not include intangible property such as shares of

corporations

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by

Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate

Taxation

B.

Rates

1. Imposed at rates of up to 40% on value of assets

C.

Direct Ownership by Individual

1. Estate tax: U.S. real estate subject to estate tax at death.

2. Gift tax: U.S. real estate subject to gift tax for lifetime gifts.

3. Estate tax exemption amount: Under the Treaty, a pro rata portion of the amount available to U.S. citizens based on relative values of U.S.-situs property and worldwide property. Under the Treaty, possible doubling of exemption amount for spousal transfers.

4. Estate tax: Generally disadvantageous for spouses to own U.S. real estate through joint ownership. Tenancy-in-common ownership is generally better to reduce taxable estate of second-to-die.

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by

Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate

Taxation

D. Ownership Through a Canadian Corporation

1) Estate tax: Shares in a Canadian corporation generally treated as a foreign-situs asset. No U.S. estate tax at death.

2) Gift Tax: Shares in a Canadian corporation are an intangible asset. No gift tax upon a lifetime transfer.

E. Ownership through a Canadian Partnership

1) Estate tax: Lack of definitive authority whether partnership interest is a foreign situs asset? Is the position the same for commercial and personal-use property?

2) Estate tax: Can a “check-the-box” election strengthen the U.S. position? Are postmortem retroactive elections viable? Is there a timing mismatch at date of death in Canada and the U.S.?

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by

Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate

Taxation

F. Ownership Through a Family Trust

1. Gift tax: Trust must acquire and own U.S. real estate from inception 1. – must be a gift of cash, not a gift of U.S. real estate. For already owned property, consider possible bona fide sale to family trust.

2. Estate tax: Terms of trust are critical to provide U.S. estate tax protection. Settlor of trust must surrender sufficient dominion and control over trust assets, which limits rights as trustee and beneficiary. Limitations also encompass others who are

“gratuitous transferors.”

3. Estate tax: Works best if spouses are involved – one spouse is settlor and other spouse is trustee and beneficiary. Children can also be trustees and beneficiaries. “Ascertainable standard” needed to limit trustee discretion. Independent trustee used for certain purposes.

4. Estate tax: Could be combined with partnership ownership, where family trust owns LP interest.

U.S. Estate and Gift Taxation of Interests in U.S. Real Estate Owned by

Canadian Residents (Who Are Not U.S. Citizens) - U.S. Federal Estate

Taxation

G.

Recap of Estate/Gift Taxation

Type of Asset Subject to U.S. estate taxation?

US real property Yes

Stock of U.S. Corporation Yes Stock of Foreign Corporation No

US Grantor Trust Depends on terms

US Discretionary Trust Settlor: Depends on Terms Beneficiaries: No

Interest in U.S. or Canadian Partnership that owns U.S. real estate or business assets (including entities treated as partnerships for U.S. tax purposes)

III. Alternative Structures for Investing in U.S. Real

Estate

Alternative Structures for Investing in U.S. Real Estate

Structuring Objectives

:

1)

Minimize U.S. taxation on income and exit gains

2)

Avoid exposure to U.S. estate or gift tax

3)

Avoid U.S. tax reporting obligations

Alternative Structures for Investing in U.S. Real Estate

A.

For personal residences or other personally owned real

property, the investment may be direct but typically is through a

trust or flow-through entity

B.

For commercial property that will have both U.S. and foreign

investors, the U.S. investment entity typically is a U.S. limited

partnership (LLCs are generally avoided if possible for

Canadian-owned structures due to possible denial of Treaty benefits)

because the U.S. investors and/or the general

partners/managers generally prefer a tax transparent

investment entity so their share of the income is subject to only

one level of U.S. tax

1) As a partnership, the U.S. investment entity is not itself subject to tax; rather, the income, gains, losses, deductions and credits generated by the investment entity are allocated to the

Alternative Structures for Investing in U.S. Real Estate

2) The income or losses of the partnership retain their character as ECI or FDAP Income and as ordinary income or capital gain in the hands of the members of the partnership

3) For individuals, U.S. or foreign, the tax transparent nature of the

investment entity permits them to claim the individual rates applicable to capital gains (20% - 25%) on a sale of the underlying real property or a sale of their interests in the investment entity

4) For corporate investors, or for individual investors who want to invest through a corporate blocker or REIT (e.g., to mitigate exposure to U.S. estate tax or to avoid filing personal U.S. income tax returns), a

corporation or domestically controlled REIT may be inserted into the structure between the investors and the investment entity

5) For commercial property owned by an LLC (e.g., if it 5) has majority U.S. members who insist on an LLC rather than an LP), Canadian

members may need to interpose a U.S. corporation in ownership chain to avoid denial of Treaty benefits, including potential 30% U.S. branch profits tax

Alternative Structures for Investing in U.S. Real Estate – Direct Investment

C.

Direct Investment by Canadian Individual in Personal

Use Property

Operating income from real property, if any

39.6%

Capital Gains on sale of real estate or interest in Investment Partnership 20% - 25%

File U.S. Income Tax Returns? Yes, on sale Exposure to U.S. Estate Tax? Yes Canada U.S. Canadian Individual

Alternative Structures for Investing in U.S. Real Estate – Direct Investment

Canadian Tax Implications

>

Direct investment by a Canadian resident individual without an

intervening entity creates an obligation in Canada to report any income or capital gain realized from U.S. sources. Generally, the Canadian

resident individual would be permitted to claim a foreign tax credit for the U.S. tax paid on such income or capital gain as an offset against the Canadian tax otherwise payable.

>

Care must be taken in using an intervening entity. A partnership (whether general or limited) will generally be treated as fiscally transparent, or a pass-through vehicle. Accordingly, the Canadian resident individual partner will be considered to have realized his/her U.S.-source income or capital gain based on the allocation of partnership income and gains. A trust of which the Canadian resident individual is a beneficiary will permit the same flow-through treatment if the U.S.-source income or capital gains are distributed to such beneficiary in the year of realization.

Alternative Structures for Investing in U.S. Real Estate

Canadian Tax Implications (continued)

>

It is not recommended that a Canadian resident individual invest through an LLC, as the anti-tax-avoidance rule in Article IV-7(a) of the Canada-U.S. Tax Convention (the “Treaty”) will apply to deny relief from U.S. tax otherwise available under the Treaty.

Alternative Structures for Investing in U.S. Real Estate - Through Canadian Partnership

D.

Investment in Personal Use Property Through

Canadian Partnership

Operating income from real property

39.6%

Capital Gains on sale of real property

20% - 25%

File U.S. Income Tax Returns? Canadian Partnership Canadian Individuals Yes Yes

Exposure to U.S. Estate Tax? Maybe – law unclear Canada U.S. Canadian Individual Canadian Partnership Canadian Individual

Alternative Structures for Investing in U.S. Real Estate - Through Canadian Partnership

Canadian Tax Implications

>

The Canadian Partnership will be considered to be fiscally transparent for Canadian income tax purposes. As noted earlier,, the Canadian resident individual partner will be considered to have realized his/her U.S.-source capital gain based on the allocation of partnership income and gains.

Modified Structure

>

The Canadian partnership makes a “check-the-box” election to be

treated as a corporation for U.S. tax purposes. This may strengthen the U.S. estate tax position. Timing of election may be important. However, potential disadvantages are (1) increase in U.S. capital gain rate on sale of real property to 35% plus potential 5% branch profits tax, and (2) potential timing mismatch at death of Canadian individual in Canada (disposition event) and U.S. (general no disposition event).

Alternative Structures for Investing in U.S. Real Estate – In U.S. P’ship

E.

Direct Investment by Canadian Individual in U.S.

Limited Partnership

Operating income from real property

39.6%

Capital Gains on sale of real property or interest in Partnership

20% - 25%

File U.S. Income Tax Returns?

Yes

Exposure to U.S. Estate Tax? Yes, likely Canada U.S. Canadian Individual US Partner US Partnership

Alternative Structures for Investing in U.S. Real Estate – in U.S. P’ship

Canadian Tax Implications

>

Again, the US Partnership will be considered to be fiscally transparent for Canadian income tax purposes. As noted earlier,, the Canadian resident individual partner will be considered to have realized his/her U.S.-source capital gain based on the allocation of partnership income and gains.

Alternative Structures for Investing in U.S. Real Estate – by Canadian Corp

F.

Direct Investment by Canadian Corporation

Operating income from

real property

35% income tax plus 5% branch profits tax

Capital Gains on sale of real property or interest in Investment Partnership 35% on capital gain plus 5% branch profits tax

File U.S. Income Tax Returns? Canadian Corporation – Canadian Individual -- Yes No

Exposure to U.S. Estate Tax? No Canada U.S. Canadian Individual US Partner US Partnership Canadian Corporation

Alternative Structures for Investing in U.S. Real Estate – by Canadian Corp

Canadian Tax Implications

>

The Canadian corporation will be required to report any income or capital gain realized from U.S. sources. Generally, the Canadian

corporation would be permitted to claim a foreign tax credit for the U.S. tax paid on such income or capital gain as an offset against the Canadian tax otherwise payable.

>

Generally, the Canadian system for taxing investment income of a Canadian-controlled private corporation (through so-called

“integration”) involving refundable taxes in the corporation and the ability to pay out one-half of tax-free capital gains through the capital dividend account as well as the dividend tax credit for the shareholder ensures that the individual pays the same ultimate tax whether earned directly or through the investment corporation. However, when it comes to foreign investment income, the integration is imperfect and there is a small penalty in additional tax for such US capital gains.

Alternative Structures for Investing in U.S. Real Estate – by Canadian Corp

Canadian Tax Implications (continued)

>

It also used to be the CRA’s administrative policy to permit a special purpose Canadian corporation to be used by a Canadian resident as a shield against U.S. estate tax, without adverse Canadian tax

consequences.. However, that is no longer the case, and the Canadian resident shareholder(s) will be faced with a taxable benefit from the use of the corporate asset unless the shareholder(s) pays fair market

Alternative Structures for Investing in U.S. Real Estate – Double Blocker

G.

Double Blocker Structure

Operating income from real property

35% income tax (no BPT)(U.S. tax may be reduced by leverage into U.S. Blocker

Capital Gains on sale of real property or interest in Investment Partnership

35% on capital gain (no branch profits tax)

Withholding tax on dividends paid to Canadian Blocker Corporation

Regular dividends –

Liquidating dividend after taxable sale -- 5% 0%

File U.S. Income Tax Returns? U.S. Corporation – Canadian Corporation – Canadian Individual - Yes No No Canada U.S. Canadian Investor US Partner US Partnership Canadian Blocker Corporation U.S. Blocker Corporation

Alternative Structures for Investing in U.S. Real Estate – Double Blocker

LLC Considerations

> If the “U.S. Partnership” is a limited liability company (“LLC”), this structure may be the most advantageous manner for Canadian owners, to invest in the LLC so s to (1) avoid U.S. estate tax (use of Canadian corporation) and (2) avoid a denial of Treaty benefits on operating income (use of U.S. corporation).

Canadian Tax Implications

> The income or capital gain realized by the US Blocker Corporation may be considered income from property realized by a controlled foreign affiliate of a Canadian

shareholder. As a result, such income or capital gain may be characterized as foreign accrual property income (or FAPI) and attributed on a current basis to the Canadian Blocker Corporation. Thus, the Canadian corporation will have a liability for Canadian tax on this US-source income or capital gain regardless of whether any distribution has been made from the U.S. Blocker. There generally would be a credit for any US tax paid to avoid double taxation.

> On the other hand, if the US Blocker corporation employs more than 5 employees full-time in conduct of its real estate business, it may be able to take the position that its earnings are from an active business and the FAPI rules do not apply. In that case, there would be no current Canadian tax on such US-source income or capital gain.

Alternative Structures for Investing in U.S. Real Estate – Double Blocker

Canadian Tax Implications (continued)

>

Instead, when a dividend is paid from the US Blocker corporation to its corporate shareholder, the Canadian Blocker corporation, the dividend could be received tax-free as an exempt surplus dividend (recognizing that there will be the additional 5% US withholding tax on top of the US corporate tax already paid by the US Blocker corporation). Personal tax would only be payable if and when the Canadian Blocker corporation decided to pay a taxable dividend to its shareholder(s). The total tax on such income flowing all the way up to the Canadian individual

shareholder would approach 60%. Accordingly the benefit of the double blocker structure is greatest if the capital can be kept within the

Alternative Structures for Investing in U.S. Real Estate - REIT

H.

Domestically Controlled REIT Structure

Operating income from, and gain on sale of, real property 0% (Dividends Paid Deduction) Withholding tax on operating income 15% - 30%

Withholding tax on capital gain dividends

35%

Gain on sale of REIT stock 0% (as long as REIT is more than 50% owned by U.S. persons)

File U.S. Income Tax Returns? REIT – Canadian Blocker – Canadian Investor -- Yes No No

Exposure to U.S. Estate Tax? No Canada U.S. Canadian Investor US Partner US Partnership Canadian Blocker Corporation Domestically Controlled REIT * U.S. tax liability may be reduced by leverage into the REIT

Alternative Structures for Investing in U.S. Real Estate – Canadian Trust

I.

Canadian Complex Trust Structure

Trust Beneficiaries Settlor Canada U.S. Foreign Settlor US Partner US Partnership Family Members

Alternative Structures for Investing in U.S. Real Estate – Canadian Trust

Canadian Tax Implications

>

As noted earlier, the US partnership would be viewed as fiscally transparent for Canadian tax purposes. Similarly, the Trustees of the Canadian trust can treat the trust in the same way and distribute any US-source income or capital gain to the Canadian resident beneficiaries. Such beneficiaries will be considered to have realized such US-source income or capital gain directly and will be entitled to a foreign tax credit for any applicable US tax payable thereon.

>

Tax Advice Disclosure: To ensure compliance with requirements imposed

by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.