Ontario resident sold Lake Havasu, Arizona property

My question is: Canadian-specific

QUESTION: Dear David Ingram: I am a Canadian Citizen who has just sold an empty lot in Lake Havasu City, Arizonia. The Title Company has the buyer withold 10% of the sale proceeds for Captital Gains Tax to send to the I.R.S. I was told that I would receive this 10% back when I file a tax form with the I.R.S. for this year 2004. This property was simply an investment. Empty land. The Captital Gain on it is around 95,000 U.S. How much of this am I able to get back for myself? Or have I been misled here. The lawyer in Ontario who notorized the documents for me said I would get a credit. The Canada Customs & Tax Agency told me that I would "get it back" which I understood to mean as a refund in cash. Which is it? Thank You for offering some light. Sincerely,

david ingram replies:

Well there is bad news and more bad news.

1. You will NOT get back the $10% and will likely owe another 10% PLUS to the US federal government and the Arizona State government.

2. You will then have to convert the figures to Canadian Dollars and report the profit on Schedule 3 of your Canadian return. Assuming you already have $60,000 of Canadian Income, your tax to Canada will be in the 17 1/2 to 20% range.

3. You get to claim a tax credit for the tax paid to the US and State of Arizona on Schedule 1 of your Canadian Return.

However, the official policy of the CRA is to only allow 50% of the tax you paid as a credit because Canada says "we only tax fifty percent of the gain".

This is a silly position for them to take although it is the official one and you can find it referred to on schedule 1 in the foreign tax section. I suggest you claim the whole thing and be prepared to appeal it if it is turned down.

There is also a question right now as to whether or not you are required to pay Federal Alternative Minimum Tax on the US profit. From 1986 to 2002, there is no doubt that you owed AMT. However, One of George W Bush's capital gains reforms last year seems to have overlooked the AMT continuation I am told. (I am still not convinced but will have an answer in the next month or so - If Kerry wins, we can expect it to be reinstated for sure as an example).

I would be glad to look after these returns for you when the filing season comes up.

We would look after the Ontario, Arizona, and US Federal return for you. If the property is in joint tenancy, both parties have to file but the tax rates would drop somewhat.

Hope this helps.


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