PART II Capital Gains Tax when moving back into Canadian rental. -

QUESTION: Hello David,

I'm living in Vancouver, finally paid off the student debt but don't see myself getting into 

the expensive Vancouver market. I do however like to ski and was thinking of buying an 

inexpensive trailer (25k Cdn) in Maple Falls Washington. 

However I'm not sure what other expensives I should expect given that it's in the US. 

I'm not trying to make this an investment with a high return, but I would like to do some 

handy work to it to increase the value. If I add about 10k worth of value, how would that 

affect my taxes in the long term?

Thanks for the advice.

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david ingram replies:

One of my favourite weekends ever was in 1973 at the Chandelier (think it has a different name now) when marooned at SnowLine  because of the gas shortage when one could only buy gas on odd days if your licence plate ende dwith an odd number and even days when it was an even number.

Strangely, it was that weekend 34 years ago that lets me answer you question now.

The cabin I was staying in was not a rental but was built by the fellow who owned it.  When he was building it, buddies would come down and help him and one weekend, the INS raided the spot and deported a bunch of his friends for working in the US .

He was fine building it because he owned it but no one else can hammer a nail, paint a board, install a sink, or carry a shingle if they are not either an owner or a legal US citizen or US resident with a green card.

If your buddy is working and living inthe US with a TN, H1, O1, P1, L1 or any other visa but a green card, they cam NOT help you either.

And, if you are intending to rent the trailer out 'EVER', 'you' can NOT hammer a nail, sweep the front steps or clean the toilet.


Assuming you are buying this trailer on its own lot, when you go to sell, you will owe the US income tax on the profit.

If it is your only pioece of real estate at that time, you will not owe Canada any tax because you can claim it as your personal residence if you have not bought another place.
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However, I would far prefer that you stretched your resources to buy something in Canada to live in and combine your present rent and the payments you would have to make for the trailer to buy your home in Canada. If you can't afford a one bedroom, buy a studio.  Go down to Ikea onteh Lougheed highway and look at how much they can put into a small space.  

Interestingly, I read the other day that Ikea has now sold enough furniture in North america that 10% of all children are conceived in an Ikea Bed.  Now that is information worth knowing.

Good luck

My wife and I are Canadian citizens and own a rental property (house) in Arizona. 

Do I need to file income tax in the USA? Can we deduct the mortgage interest 

and any expenses associated with the rental on our Canadian income tax return?
Thanks and regards,
______________________________________________
david ingram replies

If you do not file a US 1040NR with Schedule E and Arizona 140PY or 140NR return, you face the likely Federal penalties of a $1,000 to $10,000 fine each per year for failure to report rental income as a non-resident plus 30% of the gross rent with no expenses allowed.  

That is for each of you if you both own the property.  And, I  have never seen a $10,000 penalty.

Then, you will EACH be assesed 30% of the gross rent with no expenses allowed.

(Canada's penalty of  just 25% of the gross rent with no expenses in reverse seems mild in comparison.)

FILE the US returns for every year you have missed.

THEN - There is NO responsibility for you to claim any rental expenses on your Canadian return.  You can claim them if you wish on form T776.  HOWEVER, you MUST report the gross rent on line 126 of your T1 if you do not claim expenses and the net rent if you do,.If there is a legitimate rental loss which has not been created by your using the unit personally, you can use the loss to reduce your other taxable income.

A Warning.  There is ample evidence that the IRS and CRA are pro-actively sharing information about these.  And, if you are in a complex and using the unit personally NEVER talk about the fact you have not filed a US tax return and don't ask a local.  I personally know of two people who make their living turning in Canadians who are not filing their US returns.  There is a 10% to 30% reward for turning you in by filing US form 211. See it at www.irs.gov - click on forms, etc.

If you need help with this, you now know where we are.
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--QUESTION:

We have a rental property in the US.  Can I claim the property taxes paid on my condominium as a rental expense deduction on my Canadian taxes?  Form T776 mentions only Canadian property taxes however, the general guide states that all expenses can be deducted.


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david ingram replies:

Anything that can be claimed on schedule E of the US return can be claimed on form T776

You need to do your Schedule E 1040NR first and then convert the US figures to the T776 on  your Canadian return.  If the condo is in Arizona, you would do a 140NR or if in Califormnia, a 540NR.

There is no 
state tax in Florida, Texas or Nevada, the other three popular places for a Canadian to have a rental US condo.

The difference between the two counties is the method of claiming depreciation.  In the US, you MUST calculate thedepreciation and include it even if it creates a loss.  The good news is that the operating loss caries forward as a future deduction against rent OR Capital Gains as opposed to non-resident losses in Canada which unfairly disappear into the ether.

In Canada, you do NOT have to claim it and if you do, can only claim enough to create a zero rental. Depreciation or CCA (capital cost allowance) as we call it can NOT be used to create or increase 
a loss.

Make sure that you do the US returns, particularly if you are losing money.  The penalty can be a minimum of $1,000 to $10,000 PLUS 30% 
of the gross rent for failure to file a US rental return by a non-resident.

We, of course, are ideally suited to look after these for 
you by fax, snail mail, email or courier.

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_____________________________________________

QUESTION:
I have not lived in Canada for 6 years and have worked and lived internationally for that time. When I left Canada in 2002 I received a letter from Revenue Canada stating that I was a "deemed non-resident". I owned a house which I still own and rent out to a third party. I do all of my renting through an agency as well. When I return to Canada I plan to move back into the same house. Is there any tax on appreciation of the property during my absense. I am currently paying non resident income tax on rental revenues and I file an income tax return each year. ----------------------------------
david ingram replies:


The minute you move in, you have created a deemed disposition and owe tax on the increased value on the Canadian tax return for that year. The amount would be calculated on schedule 3 and the result put on line 127 of the return.

If you have claimed CCA (depreciation or capital cost allowance) you must pay recapture tax on that amount on form T776. the recapture would be included in the final rental statement and show up on line 126.

That is the answer if you claimed CCA.

If you did NOT claim CCA, there is no recapture and you can defer paying tax on the capital gain by filing an exemption under Section 45(3) of the tax act.  This must be in writing and you would put the same amount you had on line 127 on line 256 and subtract it.  The CRA keeps track of this amount and when you do sell teh house in the future, you will owe the tax at  that time.

This situation does not exist in the USA. 

These older questions will help and of course, you know where we are at the time.



Hi David,
 
Just to refesh your memory, I'm a Canadian teacher living/working in xxxxxxxxxxxx, who spent an afternoon with you at your house last summer.
I own 2 condos in Vancouver. Haven't lived in Canada nor paid any tax there for 15 years. Bought my condos 3-4 years ago.

They are worth a lot more now than then. What if I moved back to Vancouver & lived in one of my condos? Would I avoid the Capital Gains tax on that condo?

For how long do I need to actually occupy a place in order to fulfill residency rules & not pay the Capital Gains? 
Please advise. Thanks.
 
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david ingram replies:

The second you move in, you would owe tax on the increased value because of the legislated deemed disposal. these older questions will give you the idea.

Dear David,

I am a Canadian citizen. I was a factual resident in Finland for 10 years and have returned to Canada - 2007. The house that I own in Canada has been rented the entire time when owning it, from 1990 until now. I have never lived in this house.

I spoke to a CCRA employee about capital gains tax when selling a house when living in Canada or living in Finland . She happened to mention that there might have been an amendment in the Canadian 2007 Federal Budget. She read somewhere that when the capital gain is less than $350,000 CAD, there would be no tax. This would even pertain to me when never living in the house.

I contacted the Department of Finance 3 times to find out the true answer. No answer yet. I’ve checked their website also. I’m not anxious about moving into this house and get stuck in it for 2 years. Culture shock has taken place and it will also remain. This is a fact. Some day in the near future, I wish to return to Finland and live there.

Furthermore, I am seriously considering getting a Finnish citizenship. Deadline is May 2008. Very much easier and cheaper to do this in Canada than in Finland . But, I don’t know if both countries can tax me, when having a dual citizenship during retirement.

What should/can I do before retiring? Sell the house in Canada or when living in Finland , or …? I don’t even know anything about the amendment idea. If there was an amendment, I would simply continue to rent the house and not have to live in it. The house of course would be a so-called ‘mattress’ to fall back on when moving back to Finland and then have to return to Canada for some unknown reason.

This scenario no doubt looks like a ‘cobweb’. What are your thoughts about this?

Br,

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david ingram replies:

There is no such thing as a $350,000 capital gains exemption on a house and never has been.

If you have never lived in the house and sell it, it is subject to capital gains tax in Canada.  If you were to move into it, IT WOULD BE A DEEMED DISPOSAL AND is is subject to capital gains tax the day you move in although if you never claimed CCA (capital cost allowance or depreciation) when you move in you can defer the capital gains tax until actual sale by filing an election uder section 45(3) OF THE INCOME TAX ACT.

.I am going to ignore the rest of the question.  If these things are a problem, you need to do a consultation with me or someone like me.  There ae too many specific "what ifs" that will not or never apply to my general audience to deal with in this free forum.

I hope that you have been filing your rental returns under Section 216(4) while out of the country.  That would involve forms 1159 and T776.

This older question might help a bit.

----------------------

My question is: Canadian-specific

QUESTION: Hi David,

I am a Canadian citizen. However, from March 2000 to Nov 2004, my family and I became non residents while I worked overseas. During the period that we were overseas we rented our home in a long term lease agreement. When we returned to reside in Canada we purchased another home to live in and we have continued to rent our original house. Could you please explain how capital gains will be handled? Do we need to file anything forms with CRA prior to selling the rental house? Also, how would capital gains be handled if we sell our current personal residence and move back into the rental house?

Best regards,

________________________________________________________________
david ingram replies:

The first house has incurred capital gains tax from the moment you left the country.  Although it is possible to rent a house out for 4 years and claim it capital gains tax free by filing an election under section 45(2), this does NOT apply to non-residents.  We have had a couple of cases lately where the capital gains tax on the house is more than the tax saved bt becoming a non-resident for three or four years because the houses went up so much in value.

I am assuming here that the second house you are living in has increased in value more than the rental since you returned and it should be your principal residence for that time because it would have been possible to declare the rental capital gains tax free after your return by filing the election.

Deemed Disposition!

Moving in to a rental house 'triggers' the capital gains right now although it does not have to be paid right now. The capital gains is calculated on schedule 3 an dthe amount put on line 127 of the T1 General Canadian Tax return.  You then make an election to defer payimng the tax until actual sale under section 45(3) and deduct the line 127 amount on line 256.

This older question will likely help you understand it.


QUESTION:

We have moved out of country for job reasons and now look to return to
Canada.  Before leaving we tried to sell  our home and were unable.  For the
last 10 years we have been renting it.  We plan to move back into and then
sell it.  What must we do in order to avoid paying capital gains tax.

Dan

PS  We did not know that we could have declared it our principal residence
as we moved for job reasons and thus, did not do that!
====================================================================
david ingram replies:

When you moved out of Canada, you should have done a departing Canada return and filled in either a T1161 or the former form (number escapes me at the moment) to declare assets left behind.

At any rate, if you became a non-resident of Canada from your job move, there is no exemption from capital gains tax on the increased value of the house unless you were a deemed or factual resident of Canada while you were gone.  A deemed or factual resident status can apply to people who are working on CIDA projects, are members of the armed forces, are members of a Canadian Diplomatic mission, working for the United Nations and a couple of other esoteric items covered by Regulation 3400.

Your Belgian email address makes most of these possibilities unlikely.

In addition, you would have had to report your earned income to Canada every year and I presume that you did not do that but did file a Section 216(4) rental return to report the rent received.

A further complication is that if you returned to Canada and bought another house which you moved into, there would not be an immediate tax bill but if you move into the rental house, it is deemed to have been sold and you (and your spouse if joint) owe tax on the increased value.

Fortunately, under section 45(3) of the Canadian Income tax act, you can notify the CRA (Revenue Canada when you left 10 years ago) that:  I hereby elect under section 45(3) of the Income Tax Act to defer the payment of tax on the residence at XXX your street, until the actual sale.  Attach a proforma Schedule 3 to calculate the profit and then pay it when you
actually sell the house.

In other words, if your intention was to move in for a short time to try and make it tax free, you are just doubling your moving expenses and increasing your accounting and legal fees.

If the idea is to move into a new house on your return, you are better off to sell the one you have first and buy the new one
before you come back so that you have the most capital freed up to buy the next house and move directly.

-  Incidentally - If you decided to keep the old one as a rental and borrow money against it to use to purchase the new one, the interest on the borrowed money is NOT deductible against the rental income even though the mortgage is registered against the rental house because the money was USED
to buy the personal residence you are about to occupy.

You can learn more about this by reading CRA Bulletin IT-533 at:
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf

You can find out more about interest as a deduction by reading my November 2001 newsletter by going to www.centa.com, clicking on newsletters in the top left box, click on 2001 and click on November.
-------------------
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Every Sunday at 9:00 AM on 600AM in Vancouver, I, david ingram am a permanent guest on Fred Snyder of Dundee Wealth Managers' LIVE talk show called "ITS YOUR MONEY"

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Call (604) 280-0600 to have your question answered.  BC and Alberta listeners can also call 1-866-778-0600 .

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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.

 

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 recieved as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

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.

 

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