Sale of Canadian Real Estate by U.S. Resident - david ingram expert US CANADA cross border non-resident income tax help and prep

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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.
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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.. 

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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.
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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.

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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.
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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.

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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.

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This other question deals with the sale

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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.

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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. 
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