Sale of Canadian Real Estate by U.S. Resident - david ingram expert US CANADA cross border non-resident income tax help and prep
Hello David,
I have a US client that is selling a vacation property in BC. I would
like to speak with you regarding retaining you to advise on this
matter.
Can you please contact me at your convenience to discuss.
Regards,
------------------------------
david ingram
replies:
I think you are the same person who woke me up when i took a
siesta in this heat wave.
Your client is taxable on the sale of the
house and will owe capital gains tax to Canada. Assuming that the
property has never been rented out, he or she or 'they' will both need to file a
T1 non-resident return under section 115 to report the capital gain.
The purchaser is required to deduct 25% of the gross sale price and
remit the tax to the CRA unless your client files forms T2062 and T2062A
first. The T2062 and T2062A approval from the CRA allows the purchaser to
deduct 25% of the gross calculated profit. When producing this figure for
the T2062, the seller can NOT deduct the Real Estate Commission or the legal or
other selling costs.
This means that there is always a refund when
the seller files his or her Canadian tax return to report the sale because the
seller gets to deduct legal, commission and other costs on the actual tax return
on schedule 3..
After paying tax to Canada, they have to report
the same figures on their US 1040 on schedule D if it was never rented and
schedules D, E, 4562, and if it was a rental property.
They
claim credit for the tax paid to Canada on schedule 1116 of the US 1040.
There are also 43 different states which will require the Canadian profit
to be taxed with 40 different methods (it seems like) of claiming credit for the
Canadian taxes.
-----------------------
The following older Q
& A. might / will help as well.
QUESTION:
I am a US Perm
resident (CDN citizen), looking to buy a vacation property in Canada. Can I
deduct on my US taxes the land transfer tax and other property taxes from
Ontario on my US tax return? (assuming I am itemizing). I have read IRS
publications and it was as clear as mud. Thanks !------------------------------------------------------------------------
david
ingram replies:
Absolutely yes! You can itemize these expenses on US
schedule A whether the vacation property is in France, the Cayman Islands,
Australia or Canada or any other country.
However, be careful if you
decide to rent it out. As a non-resident of Canada you have to get involved with
NR6, NR4, 1159 and T776 forms for Canada and then you have to put the same
figures on US forms Schedule E and 1116..
------------------------------
My question is: Applicable to both US and
Canada
QUESTION: My friend is selling one of her properties here in
Canada. It is elected as her PPR and she will be exempt from any capital gains
tax. However, she also currently resides in the US as is worried about any tax
implications this sale may have.
Are her worries unwarranted? She is a
Canadian and British citizen with landed immigrant status in the US.
Thanks.
---------------------------------------------------------------------------
david ingram replies:
Your friend can NOT have
a tax free Principal residence in Canada if she is a resident of the United
States unless she has continued to file a Canadian return as a resident and
reported her world income to Canada each year.
If she did that, and does
not own and live in another home in the US, she may claim it as a tax free
principal resident provided it has not been rented while she has been
gone.
If she has become a US tax resident (automatic if she has a green
card), then the house can be US tax free (up to $250,000 US profit since she
entered the US) IF she has occupied it as her residence for a full 24 months out
of the last 60.
Obviously, you should not make any decisions based upon
this email.
If she has moved to the US and has rentals in Canada, she
should have filled out forms NR-6 with a Canadian tax agent for the rentals and
that agent should be filing an NR4 by march 31st each year to report the rent
collected in her name. Just as the HSBC or B of M, or ScotiaBank would deduct
10% tax on any interest paid to a non-resident and send the non-resident an NR4
slip rather than a T-5 slip to report the interest.
When your friend left
Canada, (assuming she has not been filing Canadian returns as a resident), she
should have filed Canadian form T1161 to report the value of her assets when
leaving. This would include her personal residence, mutual funds, stock
accounts, and any other real estate holdings.
If any perceived profits
are calculated because of the deemed sale and reacquisition of capital assets
when leaving Canada (Departure Tax), she should have filed forms 1243 and 1244
to defer the tax.
The taxation in the US is determined by paragraphs
Article XIII(6) and (7) of the US Canada Income Tax Convention:
6. Where an individual (other than a citizen of
the United States) who was a resident of Canada became a resident of the United
States, in determining his liability to United States taxation in respect of any
gain from the alienation of a principal residence in Canada owned by him at the
time he ceased to be a resident of Canada, the adjusted
basis of such property shall be no less than its fair market value at that
time.
7. Where at any time an individual is
treated for the purposes of taxation by a Contracting State as having alienated
a property and is taxed in that State by reason thereof and the domestic law of
the other Contracting State at such time defers (but does not forgive) taxation,
that individual may elect in his annual return of income for the year of such
alienation to be liable to tax in the other Contracting State in that year as if
he had, immediately before that time, sold and repurchased such property for an
amount equal to its fair market value at that time.
Paragraph 6 deals with the principal residence which was tax free up to
the date of departure.
Paragraph 7 refers to the taxable profits
calculated and deferred on forms 1243 and 1244 and allows other properties to
have their cost price adjusted for US tax purposes to the values on the date of
emigration /
immigration.
------------------------------------------------
So, if she
is treating herself as a resident of the US and has another house in the US, she
will be taxable in Canada and the US on any profit or gain in value from the
date she moved to the US.
If she is still taxing herself as a resident of
Canada and does not own and live in a home in the US and lived in the Canadian
house for 24 out of the 60 months before sale, the house is tax free in both
countries.
If she is taxing herself as a resident of Canada and has a
home in the US, she has to decide which house she is going to claim as her tax
free residence for Canadian tax purposes because she can only have one. If
she elects to claim the Canadian house tax free, then she will owe CANADIAN tax
on the US house even if she bought it after moving to the US.
Your friend
needs to talk to someone who knows what to ask and what to do and we do provide
that service. You can see charging details in the following pricing
guidelines.
---------------------------------------
My question is: Canadian-specific
QUESTION: Hello,
My
situation is: Me and my husband are dual citizens (american/european).We would
like to buy an apt. in Montreal, rent it out initially and keep it as a vacation
home eventually.
Question: Is that possible?
---------------------------------------------------------------------------
david ingram replies:
Yes.
You will need to file Canadian
returns - form 1159 and T776. You will need to include it on Schedule E of
your US 1040.
It does not matter whether you are in France, Spain or Florida, the
following older Q & A should help.
QUESTION:
Hi,
I
am a US citizen living in New York, who purchased an investment home in Montreal
in 2002. The home has been rented out, but has never made a profit any year (due
to mortgage, depreciation, expenses, etc.). I am just being notified of the new
non-resident tax situation (form NR6) that I need to abide by.
I
understand I need to find an agent to help handle pass years non-resident income
taxes and current/future non-resident income taxes. If the property has
never realized a profit, how would recommend I procede. Should i secure an
accountant to act as my agent to handle all past/current/future non-resident
taxes?
--------------------------------
david ingram
replies:
There is nothing new about the NR-6. I do not know when it
was brought into play but iIhave been filling them in since the late 70's and
the following was printed in my 1989 book.
RENTAL PROPERTIES - CANADA - OWNED BY U.S.
RESIDENT
More important perhaps is the problem with rental
properties in Canada. When owned by a non-resident, they are subject to a 25%
withholding (or 15% if living in Bangladesh) tax. If the renter does not pay
this tax, the government can come along two or three or 15
years later and demand the tax.
Imagine the consternation of a tenant of a house in the
British Properties in West Vancouver, or Rosedale in Toronto. Assume the tenant
has been paying $2,000 a month for a $500,000 house owned by a Hong Kong
resident. After three years of paying $24,000 a year to the `non-resident', they
finally buy a house and move. Two months later, there is a knock on the door and
a National Revenue representative is standing there demanding 25% of $72,000 for
NON-RESIDENT withholding tax (this is a true story by the way, only the owner
was in London).
There is a way around this problem. The tenant can ask
to see, or rather DEMAND to see a copy of the landlord's filed and accepted NR6
form. (See forms in back of book). This form allows the tenant or agent of the
landlord to deduct a lesser amount (or nil if a loss) than 25% of the gross
rent. It allows for expenses to be taken off and the tax can then be withheld at
25% of the net, rather than the gross. The property management division of david
ingram & Associates Realty Inc. files about 300 of these NR6 forms a year.
(This is only necessary if you are paying directly to a landlord whom you KNOW
to be a non-resident of Canada. If you are paying to an agent
or Canadian Resident, you are okay.)
Please note, the NR6 MUST BE FILED BEFORE the first rent
cheque is received or 25% of the gross rent must be remitted. For years, we were
in the habit of filing `this years' NR6 late with last years tax return. In
1989, National Revenue stopped accepting this sloppy practice and demanded them
on time.
IF YOU SIGN THIS FORM AS AN AGENT, AND THE OWNER DOES
NOT FILE HIS OR HER RETURN BY JUNE 30TH OF THE FOLLOWING YEAR, YOU, THE AGENT,
ARE RESPONSIBLE FOR THE 30% OF THE GROSS RENT WITH NO REFUND PROVISIONS FOR
ANYONE.
RENTAL PROPERTIES - UNITED STATES - OWNED BY A
CANADIAN
If paying 25% of the GROSS rent to Canada sounds bad,
cheer up. The United States taxes the Canadian 30% in the same situation. To
avoid this, the Canadian needs to notify the U.S. Government that he wishes to
be taxed as a business rental house on the "net income" received. But if you do
not notify the IRS in advance, the IRS CAN tax you at the 30% of gross
rate.
-------------------------------------
What
you have to do is get the 2002 to 2006 returns in as soon as possible or be
prepared to pay 25% of your gross rent as tax plus penalties and interest if the
CRA catches you (remember the US IRS charges 30% in the same
circumstances).
Get someone to prepare the returns. If you would
like us to do them for you, that is what we do. Then get your NR-6 in with
a Canadian resident signing as an agent. You might even try making your
tenant the agent. Remember, if you file the NR-6, you can claim your
rental expenses and 25% is only withheld on a profit if any. Therefore, if
the gross rent was $1,000 and the expenses were $900, the agent only has to
remit $25.00 a month.
If there is a loss on a monthly basis, no tax has
to be remitted.
Just remember, it is NOT the amount of the mortgage
payment that is deductible. Only the interest portion is deductible so it
is possible to be out of pocket each month because of the principal portion of
the rental payments, but still owe tax.
When the actual return is
prepared, you can use depreciation to reduce any profit to zero and you will get
back any tax that was deducted.
Also remember, that the figures have to
be converted to US dollars and put on a schedule E of your 1040. This will
usually result in a refund on your US and New York 201 returns.
We can
prepare the Canadian and US return amendments if necessary - see
below.
---------------------------------------------------
This other
question deals with the sale
--
Hello,
I have a home at a BC interior ski hill. We had it built in
2000 and had a rental agent there make a few rentals of it in 2001 and manage
it's upkeep for those rentals. He referred us to his CPA for tax returns. We
also used this rental agent for 2002. After that we changed to the agent
we still currently use. This last spring the first rental agent came up to me
and said he had to go to tax court and expected to lose the case and would owe
the government $8000.00. He said that it was our fault for not filing the 2001
return on time. This last May he sent me an email demanding the $8000.00 .
No documentation, explanation was provided. So is this possible and if so how
could it come about. What would my responsibility be. Revenue
Canada
gets my returns , they know who I am. I might add that the rentals were $14,000
gross and of course the mortgage interest was more than that so the return we
filed shows a small loss as is always the situation.
Thank
You
xxxxxxxxxxxxxxxxxxxxxx
Seattle
------------------------------------------------------------
david ingram
replies:
I wrote the following in my ULTIMATE TAX GUIDE in
1989. You can find it at
www.centa.com about two/thirds of the way
through the 'US/Cdn Taxation Section'. Note that it says clearly that the
agent is responsible to pay 25% of the gross if the US resident does not file
the tax return. In reverse, the US charges
30%.
----------------------------------------------------------------
RENTAL PROPERTIES - CANADA - OWNED BY U.S.
RESIDENT
More important perhaps is the problem with rental
properties in Canada. When owned by a non-resident, they are subject to a 25%
withholding (or 15% if living in Bangladesh) tax. If the renter does not pay
this tax, the government can come along two or ten years
later and demand the tax.
Imagine the consternation of a tenant of a house in the
British Properties in West Vancouver, or Rosedale in Toronto. Assume the tenant
has been paying $2,000 a month for a $500,000 house owned by a Hong Kong
resident. After three years of paying $24,000 a year to the `non-resident', they
finally buy a house and move. Two months later, there is a knock on the door and
a National Revenue representative is standing there demanding 25% of $72,000 for
NON-RESIDENT withholding tax (this is a true story by the way, only the owner
was in London).
There is a way around this problem. The tenant can ask
to see, or rather DEMAND to see a copy of the landlord's filed and accepted NR6
form. (See forms in back of book). This form allows the tenant or agent of the
landlord to deduct a lesser amount (or nil if a loss) than 25% of the gross
rent. It allows for expenses to be taken off and the tax can then be withheld at
25% of the net, rather than the gross. The property management division of david
ingram & Associates Realty Inc. files about 300 of these NR6 forms a year.
(This is only necessary if you are paying directly to a landlord whom you KNOW
to be a non-resident of Canada. If you are paying to an agent
or Canadian Resident, you are okay.)
Please note, the NR6 MUST BE FILED BEFORE the first rent
cheque is received or 25% of the gross rent must be remitted. For years, we were
in the habit of filing `this years' NR6 late with last years tax return. In
1989, National Revenue stopped accepting this sloppy practice and demanded them
on time.
IF YOU SIGN THIS FORM AS AN AGENT,
AND THE OWNER DOES NOT FILE HIS OR HER RETURN BY JUNE 30TH OF THE FOLLOWING
YEAR, YOU, THE AGENT, ARE RESPONSIBLE FOR THE 25% OF THE GROSS RENT WITH NO
REFUND PROVISIONS FOR ANYONE.
RENTAL PROPERTIES - UNITED STATES - OWNED BY A
CANADIAN
If paying 25% of the GROSS rent to Canada sounds bad,
cheer up. The United States taxes the Canadian 30% in the same situation. To
avoid this, the Canadian needs to notify the U.S. Government that he wishes to
be taxed as a business rental house on the "net income" received. But if you do
not notify the IRS in advance, the IRS CAN tax you at the 30% of gross
rate.
--------------------------------
In practical
terms, the CRA is not a bogeyman here. What usually happens is that the
Agent pays the 25% of the gross rent and issues an NR$ in your name crediting
you with the 25%. You do your tax return late and the CRA refunds the
money to you and you give the money back to the agent.
However,
that is only good for ONE time, AND if 'you' the owner are chronically late, the
agent is responsible.
I do not know enough to comment further.
However, Ii can tell you that at this moment, I have not personally seen a
single case where the money was not eventually refunded if the parties
co-operated.
If you filed an NR-6 for 2001 and 2002, this situation is
clearly spelt out on that form.. If you were not on time, and the agent suffered
a penalty and / or if you have not co-operated in the process, I would think
that you do owe the agent whatever he or she is penalized because his penalty is
based upon your failure to file on time.
If your returns were filed on
time, he is not subject to penalties.
One of the problems in Whistler is
that there were a dozen unlicensed and unregulated operations acting as property
managers. I personally informed 4 of them about their duties when their
clients (individuals like yourself) came to me to prepare their US/Canadian
income tax returns.
------------------------------------
SUGGESTED PRICE GUIDELINES - Aug 5,
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:
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Calls welcomed from 10 AM to 9 PM 7 days a week
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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 www.garygauvin.com. If you forward this
message, this disclaimer must be included." -
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