QUESTION:
I am a US permanent resident who is a Canadian citizen (as are my spouse and
children). We've been here about 6 years with our green cards granted 1 year
ago.
We were thinking of purchasing a vacation home in Canada for use
periodically when we travel there on vacation, and for investment purposes.
Is this an issue from a taxation point of view (residency)?
Is any mortgage interest tax-deductible in the US?
Thanks.
=============================================
david ingram replies:
If you are a "real" resident of the united States with children in school, a
job, a house and your cars registered there, the ownership of a vacation
property in Canada and the use of it for 45 to 70 days a year will NOT make
you a resident of Canada for tax purposes.
On the other hand, if your children are toddlers and you bought a place a
Mont Tremblant (as Michael Douglas and Catherine Zeta-Jones have just done
without becoming taxable in Canada) or Whistler or Peggy's Cove or PEI and
your wife was there for 8 months of the year because you are always on the
road, the CRA could make a run at you.
However, if they did and you are in the process of going for US citizenship
and intending to stay there, the best they could do would be to tax you on
any Canadian Income you might have. You would report your world income and
then exempt all out of country (Canada) income under Article IV of the US
Canadian Income Tax Convention.
Any mortgage interest and property taxes paid on a seasonal or vacation
property in Canada can be deducted on Schedule A of your US 1040.
Article IV reads as follows:
to 1995.
Article IV - Fiscal Domicile - (it is the same number in most treaties)
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 that person's domicile, residence,
citizenship, place of management, place of incorporation or any other
criterion of a similar nature, but in the case of an estate or trust, only
to the extent that income derived by the estate or trust is liable to tax in
that State, either in its hands or in the hands of its beneficiaries. For
the purposes of this paragraph, a person who is not a resident of Canada
under this paragraph and who is a United States citizen or alien admitted to
the United States for permanent residence (a "green card" holder) is a
resident of the United States only if the individual has a substantial
presence, permanent home or habitual abode in the United states and that
individual's personal and economic relations are closer to the United states
than any other third State. The term "resident" of a Contracting State is
understood to include:
(a) the Government of that State or a political subdivision or local
authority thereof or any agency or instrumentality of any such government,
subdivision or authority, and
(b) (i) A trust, organization or other arrangement that is operated
exclusively to administer or provide pension, retirement or employee
benefits, and
(ii) A not-for-profit organization that was constituted in that State,
and that is, by reason of its nature as such, generally exempt from income
taxation in that State.
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.
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. Notwithstanding the preceding sentence, a company
that was created in a Contracting State, that is a resident of both
Contracting States and that is continued at any time in the other
Contracting state in accordance with the corporate law in that other
Contracting State shall be deemed while it is so continued, to be a resident
of that other State.
You can see that the countries themselves have set it up so that they will
get tax. It is up to you to arrange your affairs to pay the least tax
possible.
Both Canada and the U.S. will tax you on any money you earn within the
country.
===================
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