USA Deemed-Resident vs. Non-Resident House Sale - Expert Income Tax help on cross Border tax and immigration and divorce & R
My_question_is: Applicable-to-other-jurisdiction
question: Dear David
I have lived in the UK for 10 years, mostly as a graduate student, and recently (2009) gained residency. My wife is a dual Canadian/UK citizen and has filed taxes as a UK resident since 2006. I own a house in Toronto, which I have rented since moving here. I have paid taxes on the income (and all other investment income) as a Canadian resident. I have noted filed an NR6. For 2009 I am filing (late) as a "deemed-resident" rather than as a "non-resident", on the advice of my accountant. I am currently in the process of selling the house, but I am concerned about my residency status. I have the following questions:
1) Does filing as a "deemed resident" pose problems, especially for selling a house?
2) Will I be penalized for not filing an NR6?
3) If I return to Canada before the sale, and take up occupancy in the house, does that re-establish my principle residence status?
Thanks
3) If I filed income in the UK,
david ingram replies:
You need more detailed advice than this response is likely to give you.
Graduate students are usually paid where they are studying / working.
If you were being paid in the UK, then your UK wages had to be put on the Canadian return. They were not necessarily taxable in Canada, because you could claim a Foreign tax credit for the taxes paid to the UK on Canadian forms 2209 and 2036.
Students are usually allowed to remain tax residents of their home country for up to five years. If that is / was the case, you would have become a tax resident of the UK in 2005 or 2006 and had to give up any Provincial Hospitalization or medical plan and your Canadian Provincial driver's licence.
At the same time, under Article IV of the UK Canada Tax Treaty there is little doubt that you have been a tax resident of the UK since 2006 or earlier. you have not had a home available to you in Canada since you rented out the house ten years ago..david ingram replies:
You need more detailed advice than this response is likely to give you.
Graduate students are usually paid where they are studying / working.
If you were being paid in the UK, then your UK wages had to be put on the Canadian return. They were not necessarily taxable in Canada, because you could claim a Foreign tax credit for the taxes paid to the UK on Canadian forms 2209 and 2036.
Students are usually allowed to remain tax residents of their home country for up to five years. If that is / was the case, you would have become a tax resident of the UK in 2005 or 2006 and had to give up any Provincial Hospitalization or medical plan and your Canadian Provincial driver's licence.
At the same time, under Article IV of the UK Canada Tax Treaty there is little doubt that you have been a tax resident of the UK since 2006 or earlier. you have not had a home available to you in Canada since you rented out the house ten years ago..
Article 4
Fiscal Domicile
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;
(d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Convention to such person.
The house in Canada became taxable for Capital Gains tax on one of two dates.
1. The date you left he Country if you are deemed a non-resident
or
2. The date you rented it out for the first time UNLESS you filed an election under section 45(2) to keep it as your principal residence even though you did not live there. For this to be valid, the election had to be filed with the first rental return and is only good for 4 years although the necessary form that needs to be filed actually gives you 5 years tax free.
In that case and only "IF" you filed the election and if you were a valid student out of the country, you can claim the house gain tax free for 5 out of the 10 years but again there is a big "IF"
If you claimed depreciation on the property even once in ten years, you can NOT claim it tax free from the day you rented it out. In that case, you will owe capital gains tax on any profit from the day you left.
If you return to Canada and move in to the previously rented house, you have a deemed disposal and owe tax on the increased value immediately although you can defer the tax until actual sale under section 45(3) of the tax act IF and I say IF you did not claim any depreciation or CCA (Capital Cost Allowance) during any of the ten years it was rented. this is of absolutely NO advantage if you have the house for sale already.
You likely need a new accountant. It does not sound to me that your present help understands out of country returns.Article 4
Fiscal Domicile
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;
(d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Convention to such person.
The house in Canada became taxable for Capital Gains tax on one of two dates.
1. The date you left he Country if you are deemed a non-resident
or
2. The date you rented it out for the first time UNLESS you filed an election under section 45(2) to keep it as your principal residence even though you did not live there. For this to be valid, the election had to be filed with the first rental return and is only good for 4 years although the necessary form that needs to be filed actually gives you 5 years tax free.
In that case and only "IF" you filed the election and if you were a valid student out of the country, you can claim the house gain tax free for 5 out of the 10 years but again there is a big "IF"
If you claimed depreciation on the property even once in ten years, you can NOT claim it tax free from the day you rented it out. In that case, you will owe capital gains tax on any profit from the day you left.
If you return to Canada and move in to the previously rented house, you have a deemed disposal and owe tax on the increased value immediately although you can defer the tax until actual sale under section 45(3) of the tax act IF and I say IF you did not claim any depreciation or CCA (Capital Cost Allowance) during any of the ten years it was rented. this is of absolutely NO advantage if you have the house for sale already.
You likely need a new accountant. It does not sound to me that your present help understands out of country returns.
Today, I realized I have some 500 unanswered questions. I do not know how they get to be that many. I had them down to a very few at the end of December but have been swamped since and have hardly answered any even though my intention is to answer two free strange questions a day..
For a quick free question
You might try calling me on Fred Snyder's radio program "ITS YOUR MONEY" for an answer.
Fred Snyder's "IT'S YOUR MONEY" radio show. on CISL, 650 AM on the dial in Vancouver from 9 to 11:00 AM every Sunday (604) 280-0650 or (877) 280-0650 - You can listen live from anywhere in the world at www.am650radio.com from anywhere in the world. click on the button in the top left hand corner.
This is a live interactive program dealing mostly with Investment vehicles but we welcome tax questions and even a bit of immigration. We try and limit our calls to three or four minutes however, so make your question succinct and get that answer. If there is a follow up question, please call back.
The following was my April 27, 2008 version of a "too many questions email" when i gave up on ever getting to about 1,000 emails. The problem is that I keep on putting things aside that I want to answer but just do not get to. I have, by the way, answered over 600 unsolicited emails during this time.
david
---------------------
This email has NOT been read because of the sheer number received each day. Two unidentified emails are picked to be answered each day. The rest receive this email. Contact information is provided further on. As I am amending / updating this automatic reply, there are over 400 today. I have cleaned out over 45,000 messages from my spam box and over 14,000 that I actually looked at and deleted. Sometimes, you will receive this a loooonnnnggg time later. This is because I put it aside to answer and finally gave up at ever getting at two or three hundred of them.
In general, I pick out two or three or four random questions to answer a day. Unfortunately, I am sorry that I cannot reply to your question at the moment because you do not show as a client. If I am incorrect and you are a client with a new email address, etc., please resend your question or inquiry with YOUR NAME (i.e. John Smith) and the words "PAYING CUSTOMER" in the subject matter. Please indicate when you saw me or consulted me in the last six months and what name the bill would have been under. I am also going to limit my free follow up questions to two from now on.
That does NOT mean I am going to charge automatically for the question. A simple yes or no question is never charged for. However, it does identify your question as being a priority and should stop it from being spammed out or automatically sent this rejection letter.
At the moment, I am limiting my free replies to two to four per day (I get up to 50 questions) from non-clients. I am just too busy to answer many questions and am limiting myself to 2 a day except for my regular paying customers whom I do my damnedest to answer the same day. And, if I have already answered one of yours free in the last six months, it is unlikely that the system will let you through with another free one now. And, if i have not answered a client's question within 48 hours, it is unlikely that it survived the filters and you should resend it or phone (604) 980-0321 to point out that you are a client and that this is one of your two follow-up questions.
If you are not an existing client and decide to retain me to answer your question(s), please be advised that I have a minimum charge of $450 Canadian (plus GST if in Canada - as shown in the suggested price guidelines in RED below. Please call Gillian Bryan or Peter Ingram at (604) 980-0321 to set up a phone consultation time.
They will ask you to email your question again (likely with more detail since you are paying for it) to myself [email protected] and either Peter at [email protected] or Gillian at [email protected] and they will set up a phone consultation time for us to talk.
I am, however, adding your name to our Q & A list and another question may answer yours. AND, I have answered over 8,000 questions at http://www2.jurock.com/askexpert/expert.asp?aid=121&cid=63 or www.centa.com (see the archives) and you should be / might be able to find your answer by going there or more specifically, to http://www.centa.com/search.htm
Every Thursday noon and evening, Fred Snyder of Dundee Wealth Management conducts one of 23 different financial seminars at his office
Time: 7:00 to 9:30 PM
Date: Every Thursday evening
Place 1764 West Seventh
Vancouver (corner of Burrard)
Phone (604) 731-8900 to register and there is usually a Noon hour seminar as well. At the noon hour seminar, Fred even provides Sandwiches and coffee.
No cost - no obligation
Topics always cover mortgage interest as a deduction
other topics - getting the mortgage, estate planning, critical care insurance, income taxation (3 nights), differences between stocks and bonds, and usually the most innovative HELOC mortgage offered in Canada from Manulife Bank as presented by Stuart Rodger of Manulife (604) 351-6133,
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$1,700 would be for two people with income from two countries
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.
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