As promised, here’s the second half of one of my favorite chapters of my book,
Owning U.S. Property- The Canadian Way – Chapter 10: Selling Your U.S. Vacation Home. Click here to read Part 1.
Chapter 10: Selling Your U.S. Vacation Home – Part 2
Declaring the Gain to Canada Revenue Agency
A Canadian resident is obligated to declare her worldwide gains or losses wherever they may occur. Accordingly, the above sale must be reported on the Canadian income tax return of the Canadian resident/seller.
Here’s how it works: You file your Canadian income tax return, all the U.S. numbers are the same – although converted to Canadian dollars.
Is there a Credit in Canada for the U.S. Tax Paid?
There may be a foreign tax credit available to reduce your Canadian capital gain tax by the amount of the capital gain tax paid to the U.S. This could be achieved by applying the U.S./Canada Tax Treaty. However, you are out of luck if your property is in a standard U.S. revocable trust or a standard U.S. living trust, since the Canadian Income Tax
Act will not allow for the credit in such case. But should you have the title to the property in your Cross-Border TrustSM
or individually, you will qualify for a foreign tax credit so that the $52,500 paid to the IRS as a capital gain tax will be a full credit against the Canadian capital gain tax of $66,500 minus the $52,500 for a total combined capital tax of $66,500 (unless further reduced by the currency exchange loss).
If you, as the seller, reside in Alberta, the capital gain tax rate is a maximum of 19.5% of the net gain. In Quebec, the maximum taxable gain would be 24%, and in Ontario it is 23%. (Must be nice to live in the oil patch!)
Can you Defer the U.S. Capital Gains Tax?
This is another area where there is much misinformation circulating, an area known in the business as the Like-Kind Exchange. Internal Revenue Code Section 1031 provides that the capital gain tax payable upon the sale of real estate may be deferred should the seller purchase another similar real property within a prescribed delay. Certain U.S. professionals, such as realtors, attorneys and CPAs, have suggested to Canadians that the foregoing capital gain deferment plan is
applicable to the Canadian resident selling a personal U.S. vacation home, should he/she purchase another similar one within the prescribed delay. There are specialty firms that handle these types of “like-kind exchanges”. There is no IRS approval procedure required.
But guess what? The IRS Code Section 1031 “like-kind exchange” does NOT work for Canadians for the following reasons:
• You must be a U.S. resident
• It must be a property with the purpose of investment
• The Canadian capital gain tax is payable anyway, so deferring the tax on the U.S. side simply means losing the foreign credit against the Canadian capital gain tax. That means double taxation!
So, even if the Canadian resident was able to defer the tax under Section 1031 of the Internal Revenue Code, it would ultimately turn into double taxation. That’s because the Canadian capital gain tax would be payable to the Canada Revenue Agency upon the sale, and the U.S. capital gain would be deferred and then payable upon the subsequent sale of the exchanged property.
So, please, beware of this type of information that works great for American residents but not for Canadians!
