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Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
I live in XXXXXX, and still a Canadian passport holder, and am a permanent resident of the US.
My property on Galiano Island is listed by Sotheby’s, and the home has been for sale since last October.
We had an offer in February which in the end fell through. I’ve dropped the listing price to $800,000 and is it appraised for at least that.
We owe roughly $300,00 with a mortgage held by BMO on Salt Spring Island.
Of course I am wondering what will happen with the Canadian Capital Gains tax once the home is sold. We caught the home for $150,000 in the early 80’s, vacationed each year there for about 3 – 4 months, and sometimes rented it out. During the past 3 years we rented it for 10 months of the year.
I have kept records of the numerous upgrades to the home, but they are not all meticulous. The work was done over the past 30 years.
I have tax records and records of mortgage and insurance of course.
I have also explored this issue with a tile company located in North Vancouver. They did some work last fall for me, to make sure that I alone am on the title, since my husband passed away last summer. Otherwise, I have not signed on with anyone for legal help with the concerns I mentioned above.
If you could let me know your thoughts and opinions I would be grateful,
Hi XXXXX, thanks for the email. Let me try to outline your situation below:
- If you rented the property in the past you were required to prepare Canadian tax returns, NR6 and NR4 forms. Did this happen?
- Once you sell the property you’ll have 10 days to file for a clearance certificate from CRA e.g. form T2062 and T2062A if the property was rented
- You’ll need to calculate your estimated gain on the property and subsequently pay 25% of this amount to CRA
- Your lawyer will need to withhold 25% of the proceeds in trust until such time as the clearance certificate is obtained from CRA
- Once you received the clearance certificate from CRA the lawyer can send the 25% of the gain calculated and send you the difference in the trust account
- In the following year (2019 if the house sells in 2018) you’ll need to file a Canadian tax returns to report the gain on the property by April 30th
- Any taxes owing for Canadian purposes can be a credit on your US tax returns
I hope that helps, please let me know if you have any more questions.
I had also spoken to them with regards to the Real Estate transaction, and our firm’s clients have moved forward and purchased a Hawaiian property within their Canadian Corporation. They are now being told by an accountant in Hawaii that due to Article X of the US / Canada tax treaty, that when the unit is sold their will be double tax on the gains, as they will have used up their $500,000 profit exemption on the rental earnings. Can you please comment on whether that is indeed the case?
From our reading of Article X, this relates to dividends. Would another Article apply in its place, to effectively double tax gains within a Canadian Corporation, for a US property? We feel that our clients may be getting incorrect advice from their US professional. The accountant is advising on a quick flip of title from the corporation to them personally, before the corporation earns any rental income on the property.
This will relate to a purchase of US property by a Canadian corporation:
That being said, let me do my best to help with some more general information. The accountant is correct, if they have used up their $500,000 US income exemption they would be subject to 30% branch profits tax on the rental income and/or future gains. However under the treaty this amount is reduced to 5%.
The total of US tax on the rental and/or gain will also be a credit against tax on their T2.
It’s surprising that they used up the full $500,000 in previous years. I’m assuming the client earned over this amount in the US in previous years and has filed US income tax returns?