Sent: Thursday, July 26, 2007 10:20 AM
Subject: Mortgage and tax implications implications for US res/Cdn Citizen of buying in Canada
Hello David!
My partner and I are thinking of buying a condo in Toronto (cost around $240,000). We were married in Toronto, but currently live in the US (California). He is a US citizen, and I am a Canadian citizen (and US Permanent Resident). I last filed a Canadian tax return in 2003.
We would like to move to Toronto (timeline anywhere between very soon and in a few years), and think that a condo may be worth buying at this point. However, I'm not sure how much of a down payment we are required to make. Do we need 35%, as often required for non-residents? Is 5% acceptable? Many banks offer mortgages allowing a 5% or lower down payment, but it is unclear whether those mortgages are available to everyone.
Also, I am not sure what the term "net rental income" means, and I've seen it repeatedly in discussions of the tax implications of renting out Canadian property by nonresidents. Would we have to pay tax on our rental income if we rent the unit out for a while? There are obviously expenses in addition to the mortgage payment (maintenance fees, property tax, etc.), and the rent collected would likely be just shy of the mortgage payment.
Can we get a mortgage with 5% or less down, and what would the resident/non-resident status and tax requirements for us be?
Thanks!
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david ingram replies:
In general, you will require 35% down unless you have some sort fo family tie to a Canadian Bank from your past.
Buying a place to live in the future at today's price is a highly commendable thing to do as long as you are prepared for its going down in value in the short term.
However, it is better to buy and have it go down for a couop,le of years than it is to wait for it to go down (before buying) amnd have it go up another 20 or 50%.
Since I assume you will be renting it out, you will be needing a Canadian Tax agent (which might be a rental agent or could be your brother).
These older questions might help
Subject: US citizen buying canadian vacation property
Expert: taxman at centa.com
Date: Thursday September 16, 2004
Time: 06:02 PM -0700
QUESTION:
My wife and I have vacationed in Baddeck, Cape Breton numerious times, and want to buy a vacation home there, likely next year. I've read your "Border book" excerpt on http://www.centa.com/articles/U.S.Cdntaxation.htm
I tried to find "Border Book" by David Ingram on amazon.com, but wasn't sucessful. If I could find it, I'd buy it.
We'd like to rent the Baddeck home out mostly for the next 10-15 years, then reside there up to 3 months / year (under the magic 131 days).
Are there any special USA+Canada tax consequences to the following:
1. take a mortgage to purchase, then offset interest expense vs rental income.
2. take a 2nd mortgage on my USA home, and pay cash for the Canadian home.
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david ingram replies:
The border book is out of print and not likely to be republished in the near future. Most of the good stuff has been put on the web and you are free to download and print from www.centa.com
Beddeck is a marvelous place, home of the Alexander Graham Bell museum and the birthplace of many of Bell's inventions. Also, just down the road from Rita McNeil's coffee house at Big Pond, and around the corner (relatively speaking) from the Marconi towers, Fort Louisburg and a whole lot of North American history.
However, enough of the history lesson.
1. If you rent the place out in Canada, you are wise to have a mortgage or line of credit which will generate enough interest expense to offset the income when added to the property taxes, management fees, utilities, and repairs and maintenance.
This will create a neutral tax return for Canada and you "HAVE to file an annual return. If you do not file an annual return and the Canadian Income Tax department finds out, you will be taxed 25% of the "gross" rent received with no allowance for any expenses more than two years old.
One new client (H & P XXX) just found this out to their amazement. They were just assessed over $50,000 for taxes interest and penalties back to 1995 for a place that rented out for an average of $16,500 a year but lost money. They had been told (they say) by a Canadian Accountant that they did NOT have to file a Canadian return if they lost money.
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And just in case you think Canada is unreasonable, the US in reverse has a 30% of Gross rent penalty plus $1,000 to $10,000 a year penalty for failing to file.
Remember that the tax and penalties are then subject to late "paying" interest for the years so a 1995 tax penalty of $4,125 (25% of $16,500) plus a 17% late filing penalty plus late paying interest from 1995 to 1004 is over $8,000 by itself.
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2. If you have a paper trail showing that you borrowed money in the US to buy the Canadian property, the interest is still deductible on your Canadian return.
Of course, you will be caught up in the personal use rules. for the US, they are that you cannot use the rental vacation house as a tax deduction if you stay in it more than 14 days or 10% of the days it was rented at fair market value. So to use it for 20 days without penalty, you would have to rent it out for 200 days at a fair market value to strangers.
It is important not to file your Canadian return with a rental loss because rental losses can NOT be carried forward or saved up against future capital gains. If you do see a loss coming, you can capitalize repairs and interest expense to raise the adjusted cost base (ACB) provided you make the election in writing the first year of rental.
Hope this helps.
If you have any more questions, I am available for private consultation by phone or in person for $400 Cdn for up to an hour or you can phone the radio program on Sunday mornings for "free".
It is long distance from the US.
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QUESTION: I am an American citizen who is purchasing a new townhouse in
Vancouver. I plan to maintain my primary residence in the US and rent the
house near the UBC campus 9-10 months a year. I plan to treat the house as
a second home under US tax law which requires me to be in residence 10% of
the rental days and I will not exceed 6 weeks in any year while I work. I
have downloaded information on landlord/tenant responsibilities in UBC. My
questions relate to tax issues: (1) what do I need to do to comply with
Canadian tax law on the rental income; (2) do I need to file a Canadian tax
return; and (3) are my closing costs deductible on my US return?
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david ingram replies:
Before you rent it the first day, you need a "tax" agent who may or may not
be the actual rental agent.
You and the tax agent have to sign and submit Canadian form NR-6 which
guarantees that the agent will file your Canadian Section 216(4) income tax
return if you fail to do so.
Your closing costs are added to the ACB - Adjusted cost Base - of the unit
and depreciated over 27 1/2 years on schedule 4562 and schedule E of your US
return.
Any tax paid to
Canada will be deducted by means of US form 1116 attached to your 1040.
Glad to look after most of this for you.
David Ingram wrote:
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Disclaimer: This question has been answered without detailed information or consultation and is to be regarded only as general comment. Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Mexico family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
Phone consultations are $400 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada.
This is not intended to be definitive but in general I am quoting $800 to $2,800 for a dual country tax return.
$800 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
$1,000 would be the same with one rental
$1,200 would be the same with one business no rental
$1,200 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
$1,500 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits no move in or out
$1,600 would be for two people with income from two countries
$2,800 would be all of the above and you moved in and out of the country.
This is just a guideline for US / Canadian returns
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $150.00 up.
With a Rental for $350
A Business for $350 - Rental and business likely $450
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
Moving in or out of the country or part year earnings in the US will ALWAYS be $800 and up.
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00 each.
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
Capital gains *sales) are likely $50.00 for the first and $20.00 each after that.
Just a guideline not etched in stone.
This from "ask an income trusts tax and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily basis with expatriate tax returns with multi jurisdictional cross and trans border expatriate problems for the United States, Canada, Mexico, Great Britain, United Kingdom, Kuwait, Dubai, Saudi Arabia, Thailand, Indonesia, Japan, China, New Zealand, France, Germany, Spain, Italy, Russia, Georgia, Brazil, Peru, Ecuador, Bolivia, Scotland, Ireland, Hawaii, Florida, Montana, Morocco, Israel, Iraq, Iran, India, Pakistan, Afghanistan, Mali, Bangkok, Greenland, Iceland, Cuba, Bahamas, Bermuda, Barbados, St Vincent, Grenada,, Virgin Islands, US, UK, GB, and any of the 43 states with state tax returns, etc. Rockwall, Dallas, San Antonio Houston, Denmark, Finland, Sweden Norway Bulgaria Croatia Income Tax and Immigration Tips, Income Tax Immigration Wizard Antarctica Rwanda Guru Consultant Specialist Section 216(4) 216(1) NR6 NR-6 NR 6 Non-Resident Real Estate tax specialist expert preparer expatriate anti money laundering money seasoning FINTRAC E677 E667 105 106 TDF-90 Reporting $10,000 cross border transactions Grand Cayman Aruba Zimbabwe South Africa Namibia help USA US Income Tax Convention
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