If you already own, or are thinking about buying, a U.S. property, you’ll have lots of Canuck company.
According to the U.S.-based National Association of Realtors, Canadians are the largest group of foreign buyers in the U.S., accounting for 24 per cent of international sales in 2012.*
So, you’re making a popular choice when you purchase a U.S. property — and when it comes to paying the bills that come with it, being taxed like a Canadian is a good thing. Here’s why.
• Know your ‘visit limits’
Most people think that if their U.S. stay is shorter than six months, they won’t have to file a U.S. tax return. But the formula is more complicated than that: When you reside in the U.S. for more than 182 days in the current year or exceed 182 days in combination with the current year, one-third of the days in the preceding year, and one-sixth of the days in the second preceding year, under most circumstances, you will be required to file a U.S. tax return.
You may be able to avoid being deemed a U.S. ‘resident’ for tax purposes by filing a Closer Connection Exemption for Aliens (IRS form 8840) which provides proof that your economic and social ties (such as the location of your permanent home, family and business activities, banking relationships, and so on) are more significant to Canada than to the U.S.
• Rent or not?
If you intend to rent your property, you will be required to file a U.S. tax return and be subject to a 30 per cent withholding tax. The net rental income is also subject to Canadian tax less a Foreign Tax Credit for taxes paid in the U.S.
• When you sell
Canadians are taxed on their worldwide income — which means that if you decide to sell your U.S. property, the sale must be reported on your Canadian tax return and on a U.S. tax return. The full amount of any capital gain is taxable in the U.S. and you might also have to pay state tax, depending on where your property is located.
If the sale price is north of $300,000, the U.S. Internal Revenue Service (IRS) imposes a withholding tax of 10 per cent on the gross amount of the sale. To prevent double taxation, Canada allows a Foreign Tax Credit up to the amount of U.S. tax paid.
• Gift and estate taxes and probate are different in the U.S. and there may be Canadian taxation, as well, which could complicate passing your property to your kids.
Taxes are only one of the many things you need to consider when you own a cross-border property. That’s why you should talk to your professional adviser about the best ownership strategies for you.
*National Association of Realtors, Profile of International Buying Activity 2012, www.REALTOR.org/research
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc.