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Canadian Capital Gains Liability for Non-Resident Investor - Canadian--Global tax help -

I am planning on moving to Vancouver, BC and intend to become a permanent resident but I understand that could take a couple of years. In the meanwhile, I have purchased a mixed-use retail/commercial property as an investment. I originally thought that the upstairs of the property would enable me to live there but I have since found that it is not approved for residential purposes. As such, I may need to sell the property earlier than planned and am wondering what the tax implications would be for me. I am under the impression that capital gains might be payable on any profit and that 50% of the gain would be taxable. I am also concerned that I might be liable for an additional withholding amount as a non-resident. I am wondering if there are acceptable ways to avoid this if a person is applying for residency to Canada? Also, would I be able to defer the capital gains taxes if I re-invested in another property within a certain time of the date of the sale ? I would appreciate any advice that you can give. I look forward to hearing from you. --------------------------------------
david ingram replies:

If you sell the property as a non-resident, the purchaser must withhold 25% of the gross purchase price UNLESS

You have approved T2062 and T2062A forms which allow them to withhold nothing (you have proven there is no profit) or 25% of the expected gross profit (no deductions for legal or real estate commissions at this point).

The T2062 and T2062A forms must be filed within 10 actual days of the sale or there is an up to $2,500 penalty for late filing (min $100.00 - max $2,500 at $25.00 per day).

The withholding tax is credited against the actual tax which is levied against 50% of the profit when you file the actual tax return.

You also get to deduct legal, and real estate fees when doing the actual tax return.

Let's pretend:

You bought a place for $800,000 and are selling it for $1,020,000 Canadian.

You fill in the T2062 and the tax office demands 25% of the gross profit of $220,000 be withheld.  The purchaser withholds $55,000 and sends it in your name to the CRA.

Later - by April 30th of the next year, you file the section 116 Canadian Tax return and report the sale and after deducting the $19,000 real estate commission and $1,000 legal fees, you have a net profit of $200,000 of which $100,000 is taxable.

The Canadian Tax on that $100,000 is about $30,000.  You would file the return and get back a refund of $25,000,

You would then report the sale on Schedules D and 1116  of your US return.  The $30,000 paid to Canada (adjusted for exchange) would then be a credit against the tax on the $200,000 which the IRS would tax. 

The main difference is that Canada (as the US USED TO do) taxes one half of the gain at the full tax rate.  The IRS taxes the whole gain at a lower tax rate.

Again, if you earned $50,000 in the state of Washington, were single and had no deductions, your tax would be $6,613 (2008 rates of course).

If you added a short term capital gain of $200,000, the tax would go up to about $69,000.

If this is a long term capital gain, the tax goes up to $39,926 which works out to $33,813 tax on the $200,000.

This is pretty similar to the $30,000 paid to Canada.

You would then put the $30,000 tax paid to Canada under Foreign tax paid on schedule 1116

You would then receive a foreign tax credit for the entire $30,000 on Page 2 line 47 of your 1040. This would then leave you with a $3,381.30 further bill to pay to the IRS --- Part of the $33,813 of tax mentioned above was $3,101 of Alternative Minimum tax.

Since the AMT is recoverable in most cases in subsequent years when income drops the actual extra tax would be $3,381 - $3,101 or about $281.00

-----------------------
Now note that I had you with a salary or other income total of $50,000.  $200,000 added to that is still below the maximum tax rate in the USA which is why AMT was triggered.  If you had earned $400,000 the tax on the $200,000 would be exactly $30,000 and the foreign tax credit would wipe out any US tax debt.

This was originally rejected but just seemed like a fun question to answer.

You know where to get the paperwork done when and if the time comes.

Remember, if this property is rented out, you also need to do an annual return under Section 216

This older Q & A will give you an idea of what you have to do or should already be doing,  If you are not, you better invest $450 in a phone consultation.
georgearora@centa.com: Please see bottom of message if you wish to unsubscribe.
------------------------------------------



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 (time line 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!
 
--------------------------------------------------------------------
david ingram replies:
 
In general, you will require 35% down unless you have some sort of 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 couple of years than it is to wait for it to go down (before buying) and 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@centa.com
Date:           Thursday September 16, 2004
Time:           06:02 PM -0700

QUESTION:

My wife and I have vacationed in Baddeck, Cape Breton numerous 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 successful.  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.
=======================================
 
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.
-----------------------
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.
-----------------------------
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.
------------


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?

---------------------------------------------------------------------------
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:
---------------------------------------------------------------------------------------------------------------
 
It is very unlikely that blind or unexpected email to me will be answered.  I receive anywhere from 100 to 700  unsolicited emails a day and usually answer anywhere from 2 to 20 if they are not from existing clients.  Existing clients are advised to put their 'name and PAYING CUSTOMER' in the subject and get answered first.  I also refuse to be a slave to email and do not look at it every day and have never ever looked at it when i am out of town. 

However, I regularly search for the words"PAYING CUSTOMER" and always answer them first if they did not get spammed out. As an example, as I write this on June 28th, since June 16th (12 days), my 'spammed out' box has 7,118 unread messages, my deleted box has 2630 I have actually looked at and deleted and I have answered 63 email questions I have answered for clients and strangers.  I have also put aside 446 messages that I am maybe going to try and answer because they look interesting.

Therefore, if an email is not answered in 24 to 36 hours, it is lost in space.  You can try and resend it but if important, you will have to phone to make an appointment.  Gillian Bryan generally accepts appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321

David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
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North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office)
 
 
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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SUGGESTED PRICE GUIDELINES - April 8, 2008
 
david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & 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 $450 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. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 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.
 
$1,600 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

$1,700 would be for two people with income from two countries

$3,000 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 $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
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 $900 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.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.

--
IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.--

-
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 or http://www.david-ingram.com/staticpages/index.php/GaryGauvin.  If you forward this message, this disclaimer must be included." -


 





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