Bought Investment property in Mexico -

david ingram’s CEN-TA Group            www.centa.com

4466 Prospect Road                                [email protected]

North Vancouver, BC, CANADA          voice (604) 980-0321

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Prepared for 2008 Canada to Mexico  Seminars – Vancouver Calgary Toronto

There is a misconception that Canadians and Americans in Mexico do not have to pay tax.  The REASON? Pure and simple.  Mexico has not been good at catching people.  They are very efficient at getting their money when one sells a property because if the Notario does not collect, the Notario PAYS.  As a consequence the NOTARIO always collects.  The following question and answer went to my free Q & A newsletter at www.centa.com.  There is about a 1 in 20 chance that your question will be answered. The following material tries to answer a lot of situations and raises some things to think about.  It starts off  with a question from a Mexican citizen selling his own house when he comes to Canada or the USA and proves that we do go both ways under NAFTA.

QUESTION: Hello David

I am a naturalized US citizen  and I just sold my home in Mexico . My question is, will my money be taxed when it enters the USA?

I plan to invest the money in a new house .      thanks 

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david ingram replies:

There are two problems.

One, unless the home qualified for/as a homestead in Mexico, the sale will be taxed in Mexico.

It used to be that the Mexican home was tax exempt for the Canadian or American  if it was your principal residence for two years but that was canceled in 2002.

What the Mexican Notary (Notarios) decides is critical  - the following was 'lifted' word for word from http://www.bajainsider.com/baja-business/taxes-mexico-real-estate.htm You may want to read the rest.

Under Mexican Income Tax Law, Notarios are jointly liable with the seller for all taxes due on the sale of real property in Mexico. If Hacienda (the equivalent to the Treasury Department in the US) decides the Notario did not calculate these taxes correctly, the Notario may be required by the tax authorities to make up the difference. Obviously, when they are doing dozens of transactions each year, very possibly involving millions of U.S. dollars, Notarios have to be very careful and will generally take a conservative approach.

The homestead tax exemption is still available to resident taxpayers in Mexico, and it is the Notario who decides who meets the requirements of tax residence. To make this determination, Notarios can base their decision on two different sets of laws: Mexican tax laws and Mexican immigration laws.  The main items would be Article IV of the US – Mexico or the Mexico – Canada Income Tax Treaties (see Canadian version following)

Since the Mexican Notary (Notario) is jointly responsible for the capital gains tax on real estate if it is due, the notary becomes the tax collector for the government.   As a consequence, foreigners are having a hard time  getting a tax free exemption.  San Miguel sales are a crap shoot with some people getting tax free status and others not.  Each case is being dealt with on an individual basis.  In Mexico City, Foreigners are routinely granted tax free status.  In most other places foreigners are being taxed on the sale of their Mexican home.

1.     However, if you are a Mexican National and this is/was your family home, it should be tax free. 

2.   If you have a green card in the US or a PR card in Canada or have been naturalized as a citizen or are resident in wither Canada and the US, you are taxable on your world income and the sale of a Mexican, Canadian, Australian or Ethiopian home/house is reportable and maybe taxable.  However, again, if it is the only home you own and you have physically occupied it for 24 out of the 60 months before sale, in the case of the US, you are eligible for up to $250,000 per owner tax free on your US 1040.

If you are a Canadian and a full time resident of Mexico with a FM-2 or FM-3 visa, you are NOT taxable in Canada under Article IV of the Treaty and will not be taxable on the sale if it is/was truly your personal residence.

Another factor is to 'top up' the value of the home on the day you actually immigrated to the USA or to Canada..

So the money itself is NOT taxable when you take it to the USA or to Canada to buy your home there but the Mexican sale itself may be taxable in both Mexico and /or the United States and/or Canada.

Article  IV (2) (a) of the Canada Mexico Treaty  reads as follows

2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then the individual's status shall be determined as follows:

a) the individual shall be deemed to be a resident only of the State in which the individual has a permanent home available; if the individual has a permanent home available in both States, the individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests);

b) if the State in which the individual's centre of vital interests cannot be determined, or if there is not a permanent home available to the individual in either State, the individual shall be deemed to be a resident only of the State in which the individual has an habitual abode;

c) if the individual has an habitual abode in both States or in neither of them, the individual shall be deemed to be a resident only of the State of which the individual is a national;

d) if the individual is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

As you can see, the two governments have decided what country will tax you on your WORLD INCOME.  They will ALWAYS TAX YOU ON THE INCOME FROM WITHIN THEIR COUNTRY.

So what is taxable in Mexico –

Wages – if you are down there on a working visa and are earning money, you are taxable on your wages in Mexico first.  If you are in Mexico more than 183 days or earn over $16,000 Canadian in Mexico, you are taxable in Mexico first.  However, you are subject to Article XIV of the Treaty which might exempt it if you are in Mexico for less than 183 days and earn less than $16,000 Canadian Dollars. As follows:

Article 14

Income From Employment

1. Subject to the provisions of Articles 15 and 18, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State:

a) if the remuneration earned in the other Contracting State in the calendar year concerned does not exceed sixteen thousand Canadian dollars ($16,000) or its equivalent in Mexican pesos or such other amount as may be specified and agreed in letters exchanged between the competent authorities of the Contracting States; or

b) if

(i) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the calendar year concerned, and

(ii) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and such remuneration is not borne by a permanent establishment which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of a Contracting State, shall be taxable only in that State. However, if the remuneration is derived by a resident of the other Contracting State it shall be taxable only in that other State.

Dividends – If you receive Dividends from Canada while living in Mexico, the dividends are taxable first in Canada at 15% and secondly in Mexico.  Mexico will give credit for the 15% tax paid to Canada. See Article XI of the Treaty.

Article 10

Dividends

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company that controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; and

b) 15 per cent of the gross amount of the dividends, in all other cases.

Interest Paid from Canada to you while a resident of Mexico will be taxable first in Canada at 10% and then in Mexico.  Mexico will give credit for the tax paid to Canada.   See Article XI

Article 11

Interest

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

Royalties (Art XII), Capital Gains (Art XIII) , Director’s Fees (Art XV), Art and Sports Performers (Art (XVI)  and

Pensions  (ART XVII) are all taxable in Mexico.

In the Case of Pensions, Canada and the US will withhold 15% first and Mexico will give credit for the tax paid to Canada when you prepare your Mexican return.

Article 17

Pensions and Annuities

1. Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. Pensions arising in a Contracting State and paid to a resident of the other Contracting State may also be taxed in the State in which they arise, and according to the law of that State. However, in the case of periodic pension payments, the tax so charged shall not exceed the lesser of:

a) 15 per cent of the gross amount of the payment; and

b) the rate determined by reference to the amount of tax that the recipient of the payment would otherwise be required to pay for the year on the total amount of the periodic pension payments received by that individual in the year, if that individual were a resident of the Contracting State in which the payment arises.

3. Annuities, other than pensions, arising in a Contracting State and paid to a resident of the other Contracting State may also be taxed in the State in which they arise, and according to the law of the State; but the tax so charged shall not exceed 15 per cent of the portion thereof that is subject to tax in that State. For the purposes of this Convention, the term "annuities" means a stated sum paid periodically at stated times during life or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered), but does not include a payment that is not a periodic payment or any annuity the cost of which was deductible for the purposes of taxation in the Contracting State in which it was acquired.

4. Notwithstanding anything in the Convention:

a) war pensions and allowances (including pensions and allowances paid to war veterans or paid as a consequence of damages or injuries suffered as a consequence of a war) arising in a Contracting State and paid to a resident of the other Contracting State shall be exempt from tax in that other State to the extent that they would be exempt from tax if received by a resident of the first-mentioned State; and

b) alimony and other similar payments arising in a Contracting State and paid to a resident of the other Contracting State who is subject to tax therein in respect thereof, shall be taxable only in that other State. However, where a deduction or a credit for alimony or a similar payment is not allowed for the purposes of taxation in the Contracting State in which such payment arises, such payment shall not be taxable in the other Contracting State.

There are another  22 articles.  You can read them all at

http://www.fin.gc.ca/treaties/mexico_1e.html

Be careful. Do NOT listen to your cousin when he says he keeps his money in the Bahamas and there is no withholding tax there and he doesn’t pay tax on his Bahamas or Panama or Swiss bank account or tax on his dividends from his account on the Isle of Mann.

You ARE taxable on your WORLD income if you retire to Mexico or are there more than 183 days a year.  However, the weather and the cost of living can make it more than worthwhile.

Estate Tax

If so, then if someone buys property in Mexico and then that person dies, what happens to the property? 

I appreciate your time in responding to my query. Please call me if you need me to elaborate on my request for information.

Regards,

PXXXXXX

CBC TORONTO 

416-205-xxxx

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david ingram replies:

I do NOT consider myself the ultimate source for Mexican tax information.  However, if you goto Google and type in 

Canada Mexico income tax expert

I come in as one, two three and four.  AND if you use Canada Mexico US income tax expert. I still come in one, two three and four

The truth is that the taxation of Canadians in Mexico is very hit and miss.  Most Canadians are NOT paying the tax they should be paying.  But then, few Canadians are paying the tax they should be paying to the United States either.  The following should help you with your story. If you need anything further, feel free to call me at (604) 657-8451.  I do not have a message system.  If it just rings or I do not answer, it is because I am busy and I leave it up to you to call back.  I have had to take this stand because I get some twenty phone calls and another twenty to one hundred email questions a day.  It is impossible to get back to people.   On the other hand, if you phone the office at (604) 980-0321, Gillian Bryan, Peter Ingram, David Holroyd (Mexican Citizen) or Mitchell Ingram can just about always look after a serious matter for me. 

The Following should answer your enquiry:

Mexico does not have an Estate Tax.  It does have a capital gains tax which affects the sale of the property.  Unlike Canada and the United States, Mexico has an inflation index which acts to increase the ACB (adjusted cost base) of the property so that you only pay tax on the profit adjusted for inflation.  

Let us assume that you bought a condo two years ago at $100,000 and then sold it at the end of the second year. Inflation during that period was 11% and 10% respectively. The price would be adjusted to $111,000 the first year and to $121,100 for the second year.  If sold for $221,100 the capital gain for Mexican purposes would be $100,000 and the profit for Canadian purposes would be $121,100.

In addition, if the appraised value of the condo was only $200,000, you have the option in Mexico of using that as the sales price so for Mexican tax you would be reporting $78,900 and for Canada you would still be using $121,100.  Do not ask me why the Mexican Revenue People allow the lower figure.  It is a peculiar Gallic custom unique to Mexico.

And, just to confuse the issue, if your son or daughter or other direct family member happened to have lived in the Mexican condo full time for the last two years, there is a further exemption and the property is exempt from Mexican income tax but still subject to Canadian Income tax. There is no limit on the amount of gain that can be tax free in Mexico and this would apply if you used the property part time for twenty years but full time for the last two years of ownership.  And, Of course, if you did not own a house in Canada, there is nothing stopping you from claiming the Mexican house tax free as your principal residence for Canadian Tax purposes.

The tax rate starts at 3% and rises rapidly to 35% which results in a higher capital gains tax than Canada's Rate.

In general, if a Canadian sold a property and made $100,000 and paid $25,000 tax to Mexico, there would be Canadian Tax because most provinces have an effective highest rate of tax on a Capital Gain of about 22% so the Tax paid to Mexico would wipe out the tax owing to Canada. 

I will explain the 22% Canadian Capital Gains tax in this manner.  We tax one half of the Capital Gain at the taxpayer's highest marginal tax rate which is 43 to 46% depending upon which province you are in.  Therefore, the example of $100,000 capital gain which Mexico taxed at 25% for $25,000 of tax, Canada would tax $50,000 at 44%  for a net of 22% of $100,000.  Canada would allow a foreign tax credit of one half of the $25,000 paid to Mexico and there would be very little tax paid to Canada.

Last but not least, when the Canadian dies and owns property in Mexico, the property would transfer to his or her heirs with no estate tax in Mexico.  Canada would deem the property to have been sold at death and the estate would have to pay any capital gains tax owing on any accumulated capital gain "unless" the property was left to a spouse, in which case the capital gain would be deferred until disposition by the surviving spouse.

Hope this helps you PXXXX!

The following is the front page of the Vancouver Mexican Consulate and gives a general overview of the visa rules to go to Mexico.