Sent: Friday, March 17, 2006 12:13 AM
To: taxman at centa.com
Subject: How to claim Section 149(a)(1) exemption when a U.S.
Government official sells their principal residence upon
departing Canada
David --
A number of U.S. Government officials reside in Canada for their
work, such as diplomats, consular officials, and airport
immigration and customs pre-clearance officials. Some buy their
houses in Canada to live in, and then when they sell, they need
to know whether, and how to claim, any Canadian tax exemption on
the capital gain that is not availabe to other non-residents of
Canada.
I understand:
1.. Under the U.S.-Canada tax treaty, U.S. diplomats and
consular officials residing in Canada for their work are
residents of the United States and therefore deemed non-residents
of Canada under the Income Tax Act.
2.. Notwithstanding the above, under Section 149(1)(a) of the
Income Tax Act, U.S. offiicials residing in Canada for thier work
are entitled to an exemption of their taxable income in Canada
such as a capital gain upon selling their principal residence in
Canada.
Is this correct?
What are the procedures for claiming such an exemption and
avoiding withholding of any tax from the sale of the principal
residence?
Thanks for your answer.
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david ingram replies:
Over the years we have handled a dozen of these and they all are
slightly different. Many of the people keep their home and rent
it for a few years which interferes with the process.
However, in general, there are two types of US government
employee living in Canada.
One type is the person who is transferred here with a Consulate,
the Embassy, FBI, Dept of Justice, Homeland Security or maybe
even Tourism. These people are transferred here on a Diplomatic
Passport and are exempt from Canadian Income tax on their Income
from any source other than Canada.
A second type is an American who is in Canada as a permanent
resident and is married to a Canadian citizen. He or she may
have worked for someone else and then goes to work for the US
government in customs or law enforcement or Immigration (Homeland
Security). At this moment, their income from the US Government is
tax free in Canada under Article XIX of the US / Canada Income
Tax Convention (Treaty). If they sell their home, it is tax free
in Canada because they are a resident of Canada even though -
The joint US / Canada Technical explanation states unequivocally
that the US government salary of any US government employee is
not taxable by the Canadian Government, no matter why they are in
Canada or vice versa for that matter). This means that a US
government employee in Canada can be a taxable resident of Canada
for interest, dividends, rents or a part-time job and still
exempt his US Government salary on line 256 of the tax return.
In the case of the first type you refer to, the person should be
filling in a Canadian return and report the US government salary
on line 104 and deduct it on line 256 under Article XIX of the
US/Canada Treaty (I know, almost no one does this but we do it as
a matter of course when preparing the US income tax return).
Then, when they sell the house, there is a precedent and they
calculate the profit and report it on line 127 and deduct it on
line 256 under Section 149(1)(a). To stop the withholding in the
first place they should fill out form T2062 and submit it to The
CRA Non-resident department within 10 days of the sale.
This will work in three territories and 9 provinces of Canada for
sure. But, I also recognize that you are in the Province of
Quebec and have to confess to never having dealt with the matter
in La Belle Province. I will make the most dangerous comment
anyone in my position can say and suggest that it is likely the
same because of Quebec's desire to act as its own autonomous self
on the world stage. It would be a big negative if they did not
provide the same courtesy to diplomats. However, you should check
with someone knowledgeable about the Quebec Act and find out if
there is a related section.
I hope this helps
The relevant part of section 149 follows:
Miscellaneous exemptions
149. (1) No tax is payable under this Part on the taxable
income of a person for a period when that person was
Employees of a country other than Canada
(a) an officer or servant of the government of a country
other than Canada whose duties require that person to reside in
Canada
(i) if, immediately before assuming those duties, the
person resided outside Canada,
(ii) if that country grants a similar privilege to an
officer or servant of Canada of the same class,
(iii) if the person was not, at any time in the period,
engaged in a business or performing the duties of an office or
employment in Canada other than the person's position with that
government, and
(iv) if the person was not during the period a Canadian
citizen;
Members of the family and servants of employees of a
country other than Canada
(b) a member of the family of a person described in
paragraph 149(1)(a) who resides with that person, or a servant
employed by a person described in that paragraph,
(i) if the country of which the person described in
paragraph 149(1)(a) is an officer or servant grants a similar
privilege to members of the family residing with and servants
employed by an officer or servant of Canada of the same class,
(ii) in the case of a member of the family, if that member
was not at any time lawfully admitted to Canada for permanent
residence, or at any time in the period engaged in a business or
performing the duties of an office or employment in Canada,
(iii) in the case of a servant, if, immediately before
assuming his or her duties as a servant of a person described in
paragraph 149(1)(a), the servant resided outside Canada and,
since first assuming those duties in Canada, has not at any time
engaged in a business in Canada or been employed in Canada other
than by a person described in that paragraph, and
(iv) if the member of the family or servant was not during
the period a Canadian citizen;
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-------------------------------------
David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa
Specialists
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email to taxman at centa.com
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