selling rental, capital gains options

QUESTION:

I started building a house for myself in Canada and then married an American and moved to the USA. The next year I finished the house and have rented it out for 9 years. If were to move into it for a year but would travel abroad much of that time, would I be able to avoid the capital gains tax when I sell a year later

________________________________
david ingram replies:

The house has been subject to Canadian rental tax returns under section 216(4) each year. I hope you have reported it on form T776 and your T1 return in Canada and then converted the figures to US dollars and reported them again on scheule E of your 1040.

You do NOT escape Canadian or American Capital gains tax by moving into it. The second you move in, you have done a deemed disposal in Canada and are subject to Capital gains tax in Canada and owe that tax on your next tax return. If you make an election under section 45(3) you can delay 'paying' the tax until the actual sale but you still trigger it the day you move in.

These older questions might help.

My question is: Canadian-specific

QUESTION: Hi David,

I am a Canadian citizen. However, from March 2000 to Nov 2004, my family and I became non residents while I worked overseas. During the period that we were overseas we rented our home in a long term lease agreement. When we returned to reside in Canada we purchased another home to live in and we have continued to rent our original house. Could you please explain how capital gains will be handled? Do we need to file anything forms with CRA prior to selling the rental house? Also, how would capital gains be handled if we sell our current personal residence and move back into the rental house?

Best regards,

________________________________________________________________
david ingram replies:

The first house has incurred capital gains tax from the moment you left the country. Although it is possible to rent a house out for 4 years and claim it capital gains tax free by filing an election under section 45(2), this does NOT apply to non-residents. We have had a couple of cases lately where the capital gains tax on the house is more than the tax saved by becoming a non-resident for three or four years because the houses went up so much in value.

I am assuming here that the second house you are living in has increased in value more than the rental since you returned and it should be your principal residence for that time because it would have been possible to declare the rental capital gains tax free after your return by filing the election.

Deemed Disposition!

Moving in to a rental house 'triggers' the capital gains right now although it does not have to be paid right now. The capital gains is calculated on schedule 3 and the amount put on line 127 of the T1 General Canadian Tax return. You then make an election to defer paying the tax until actual sale under section 45(3) and deduct the line 127 amount on line 256.

This older question will likely help you understand it.

QUESTION:

We have moved out of country for job reasons and now look to return to
Canada. Before leaving we tried to sell our home and were unable. For the
last 10 years we have been renting it. We plan to move back into and then
sell it. What must we do in order to avoid paying capital gains tax.

Dan

PS We did not know that we could have declared it our principal residence
as we moved for job reasons and thus, did not do that!
====================================================================
david ingram replies:

When you moved out of Canada, you should have done a departing Canada return
and filled in either a T1161 or the former form (number escapes me at the
moment) to declare assets left behind.

At any rate, if you became a non-resident of Canada from your job move,
there is no exemption from capital gains tax on the increased value of the
house unless you were a deemed or factual resident of Canada while you were
gone. A deemed or factual resident status can apply to people who are
working on CIDA projects, are members of the armed forces, are members of a
Canadian Diplomatic mission, working for the United Nations and a couple of
other esoteric items covered by Regulation 3400.

Your Belgian email address makes most of these possibilities unlikely.

In addition, you would have had to report your earned income to Canada every
year and I presume that you did not do that but did file a Section 216(4)
rental return to report the rent received.

A further complication is that if you returned to Canada and bought another
house which you moved into, there would not be an immediate tax bill but if
you move into the rental house, it is deemed to have been sold and you (and
your spouse if joint) owe tax on the increased value.

Fortunately, under section 45(3) of the Canadian Income tax act, you can
notify the CRA (Revenue Canada when you left 10 years ago) that: I hereby
elect under section 45(3) of the Income Tax Act to defer the payment of tax
on the residence at XXX your street, until the actual sale. Attach a
proforma Schedule 3 to calculate the profit and then pay it when you
actually sell the house.

In other words, if your intention was to move in for a short time to try and
make it tax free, you are just doubling your moving expenses and increasing
your accounting and legal fees.

If the idea is to move into a new house on your return, you are better off
to sell the one you have first and buy the new one
before you come back so that you have the most capital freed up to buy the
next house and move directly.

- Incidentally - If you decided to keep the old one as a rental and borrow
money against it to use to purchase the new one, the interest on the
borrowed money is NOT deductible against the rental income even though the
mortgage is registered against the rental house because the money was USED
to buy the personal residence you are about to occupy.

You can learn more about this by reading CRA Bulletin IT-533 at:
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf

You can find out more about interest as a deduction by reading my November
2001 newsletter by going to www.centa.com, clicking on newsletters in the
top left box, click on 2001 and click on November.

Eligibility for Canadian Citizenship

QUESTION:

Hi, I am an Inidan citizen and am a Canadian Permanent Resident and currently working in the US, have doing so ever since marriage.

My wife is a Canadian citizen and lives on and off with me in the USA and also in Montreal, Canada.

She does not have stable job in Canada and I provide for her expenses.

So, my question is, "Can I apply for Canadian citizenship, my residency criteria being met by marriage and supporting a Canadian citizen". If so what is the procedure.
________________________________________
david ingram replies:

To qualify for Canadian citizenship, you must be physically present IN Canada for 1,095 out of 1,460 days (3 out of 4 years).

To keep your permanent residence status current you must be physically in Canada for 24 months out of 60, or 730 out of 1,825 days OR living out of the country with a Canadian Citizen.

If your wife was linving with you in the US, you could be in the US for 20 years and keep your PR card alive.

However, if your wife is living in Montreal and visiting you in the USA for a couple of months at a time, and remains a member of the Quebec Medical Plan, it is my opinion that your PR card is at risk.

Even if she was living with you on a full time basis and you were supporting three children, it would NOT qualify you for Candian
citizenship if you are not physically living in Canada, or, in your case, the province of Quebec.

To keep her Quebec medical alive, your wife must be in Quebec 183 nights or more.

Now, Quebec is a different animal when it comes to immigration. If you talk to the immigration people in Quebec itself, they may give you a different answer because they are eager to encourage immigration to Quebec and their rules do superseded the Federal rules to some degree.

However, if you do get a contrary opinion (to mine) from a Quebec government official, make sure that you have it in writing with your name on it and that it specifically describes YOUR situation and applies to YOU. THEN, make sure that you live within the parameters in your comfort letter and do not change them one bit. If the letter says that your wife has to be with you in the US for four months a year (as an example), make sure that you have documentary proof that she 'was there' for four months a year.

tax on rental and eventual sale income on Canadian Real Estate owned by US resident

QUESTION:

I'm a Canadian citizen living and working in US on a work visa. I may or may not return to Canada. I was thinking of investing in real estate in Canada and so renting out the property. In terms of taxes would I be way better off just investing in US? As a non resident of Canada it appears I would have witholding tax on gross rental income, then would also have to fill tax return in Canada as well as US (taxed as foreign income?) ie taxed 3 time in instead of once?
_________________________________________________________________________________________
david ingram replies:

If you live in California and buy rental real estate in Arizona, Oregon, New York, another 40 states or Canada, you will have to file a tax return for the other jurisdiction.

If you live in no tax form states like Washington, Alaska, Texas, Florida, or Nevada, and invest in real estate in another state with a tax return, you have to file that other state's return even though there is no state tax return in your state.

Although there can be some extra taxation, in general, foreign tax credits mitigate the tax to where you only pay the higher tax.

If you file Canadian form NR6, the Canadian withholding is reduced to 25% of the 'net' rent, rather than 25% of the gross. And in either case, when you file your Canadian return, there is usually a refund.

This older short Q & A might help

My_question_is: Applicable to both US and Canada
Subject: Canadian rental property while working in USA
Expert: [email protected]
Date: Tuesday March 27, 2007
Time: 11:53 AM -0500

QUESTION:

How do I handle my real estate taxes if I am Canadian citizen (nonresident) working the USA with a rental property in Canada?

_____________________________________________________-
david ingram replies:

CANADA

You should have filed an NR-6 first before the first month's rent. Then your agent should have filed a NR-4 Supplementary for the rent and any tax deducted by March 31, 2007 for the 2006 year.

Then you must file a Canadian Rental return with a T776 under Section 216(4) for 2006 by June 30th.

USA

Then you convert the figures on the T776 to US figures and put them on US forms Schedule E and 4562. If there was any income tax paid to Canada, you use US form 1116 to claim that credit on your 1040.

Deferring capital gains - real estate - Only in America, Not in Canada you say. Pity!

We have just recently sold real estate at a profit. If we purchase another
> investment property, can we defer paying capital gains?
> I found reference to this for the US but not Canada.
>
> Personal situation:
> Bought bare lot in 1993. Sold at $100,000 profit recently.
> Husband relocated to another city. Would like to buy home to live in but
> principal residence will continue as original (family not moving).
> May also take in boarders/roommates - what is tax implication?
>
> Is there a time limit to purchase another property from the sale of the lot
> to quality for capital gains deference?
> Is there a form that needs to be filled out?
> Are there advantages to doing this, or disadvantages, or better options?
>
> Can you guide me to website or information re Canadian tax laws in this
> regard.
>
>
> This is the information I found regarding US law:
> Capital Gains Tax
> One of the reasons people choose to use a 1031 exchange is to defer paying
> capital gains tax on their business or investment real estate. Capital gains
> tax is defined as the tax levied on profits from the sale of capital assets.
> Section 1031 of the Internal Revenue Code provides for the deferral of
> capital gains taxes with a tax-deferred exchange. A tax-deferred exchange or
> a like-kind exchange is a method by which a real property owner can sell his
> property and then reinvest the proceeds in ownership of like-kind property
> and defer the capital gains tax.The process gives the 1031 exchanger more
> buying power because the capital gains taxes are deferred. Capital gains
> taxes on the sale of the property are deferred until the like-kind property
> is sold at a future date. To estimate your capital gains, use our capital
> gains calculator <http://www.spectrusgroup.com/cgcalc.aspx?ct=26>; . This
> calculator will help to determine the amount of capital gains tax due if you
> were to sell your property. However, this information is not intended to
> replace qualified legal and/or tax advice regarding capital gains taxes.
> Each buyer should review any investment or transaction with their own legal
> and/or tax counsel to determine the amount of capital gains they owe. To
> qualify as a like-kind exchange and avoid capital gains taxes, property
> exchanges must be done in accordance with the rules set forth in the tax
> code and in the treasury regulations. In order to defer all capital gains
> tax in a like-kind exchange, the real estate buyer should follow these
> guidelines:
> * The exchange proceeds must be reinvested in the acquired property
> and the acquired property must have the same or greater value.
> * Obtain equal or greater equity in the replacement property.
> * Obtain equal or greater debt in the replacement property or have a
> reduction in debt that is offset with additional cash at closing from the
> taxpayer.
> * Receive nothing except like-kind property.
> Besides deferring capital gains tax, there are numerous other benefits of a
> 1031 exchange. Please visit our 1031 Exchange
> <http://www.spectrusgroup.com/facts1031~ct~11.aspx>; facts page to learn
> more.
>
> Thank you for your consideration.
> _________________________________________________________
> david ingram replies:

Although hinted at in the last election, the Stephen Harper government has not made any motions to bring in a rollover for general Capital gains in Canada.

There 'are' TWO situations where a rollover is possible.

1. The land or property is expropriated by a government authority for the common good. and / or

2. The property is / was used by an active business. Therefore, a car lot could sell its car lot for a profit and buy another because the property was the active business or a tool rental business could sell its building and buy another or a doctor could sell his or her stand alone medical building and buy another. If the doctor used one office out of 25, it would not work because the rest of the building was rented and rental buildings do not qualify although they could use the percentage they used that was active. A feed lot could sell its premises and move out of town to buy another property for its feed lot.

The US 1031 rules have no place in Canada.

As for taking in boarders, you would simply fill in a T776 or a T2124 to report the income.

withholding tax on US gambling winnings

QUESTION:

A Canadian partner of mine was in the United States and won some money at one of the casinos on one of the slot machines. The casino withheld 30% taxes. We want to know how to apply to get this money back. We were told to go through Management Refund Services, but they keep 25% of this money. Can we do this on our own? Do you need to apply for a ITIN # first and then do an income tax return, can it be done all at once or what is the procedure. Also what are the form numbers that have to be completed and in what order.
___________________________________________________________________________--
david ingram replies:

We would likely charge you $400 to $600 whether the refund was $10,000 or $300.00

The form you need is a US 1040NR To this should be attached a statement showing 'all' your winnings and all your losses.

You will also need an ITIN (Individual taxpayer identification number) which you get by filling in and filing form W7 with the 1040NR.

These older questions might help. It also includes the latest (2004) IRS bulletin on the subject

Sirs

Do you provide a service to recoup the 30% withholding tax from the IRS.
If so what are your charges to do the work in total or to provide some advice to overcome the pitfalls (ie Article number of the Tax Treaty)

-----------------------------------------------------------------------------------------
david ingram replies:

WE CAN PROVIDE THAT SERVICE but The 30% tax is only recoverable if you have in fact lost money in your gambling.
OLDER QUESTIONS FOLLOW

QUESTION:

I recently had taxes withheld on slot machine wins in Reno, NV. I
understand, as a Canadian resident, that I can apply to have the taxes
refunded. Do I have to wait until the calendar year ends to apply?
Thanks!
=============================================
david ingram replies:

You have to wait until 2008 for a 2007 refund but you have to have gambling
losses to offset gains to get a refund.

The following is the answer to an older question.

As a non US citizen, you must file a 1040NR along with a form W7 to get an
ITIN (Individual Taxpayer Identification Number).

The following is a previous answer given in January to someone who had
received a W2G for a win of $1,200.

We can help you.
===============
older answer

For non-residents of the United States, the withholding is 30% of wins of
$1,200 or more. You would file a 1040NR to report the winnings and claim
your losses as itemized deductions.

Remember that reporting just your win of $2100 and claiming gambling losses
does not make sense. If you won $2,100 (or any other amount) and lost that
much, there were more winnings in between which should be reported even if a
slip was not issued.

Non-residents do not usually get a W2-G - they are issued a 1042-S

david ingram

IRS TAX TIP 2004-33

GAMBLING INCOME AND EXPENSES

Hit a big one in 2003? With more and more gambling establishments, the IRS
reminds people that they must report all gambling winnings as income on
their tax return.

Gambling income includes, but is not limited to, winnings from lotteries,
raffles, horse and dog races and casinos, as well as the fair market value
of prizes such as cars, houses, trips or other noncash prizes.

Generally, if you receive $600 ($1,200 from bingo and slot machines and
$1,500 from keno) or more in gambling winnings, the payer is required to
issue you a Form W-2G. If you have won more than $5,000, the payer may be
required to withhold 27% of the proceeds for Federal income tax. However,
if you did not provide your Social Security number to the payer, the
amount withheld will be 30%.

The full amount of your gambling winnings for the year must be reported on
line 21, Form 1040 or the equivalent line on form 1040NR. If you itemize
deductions, you can deduct your
gambling losses for the year on line 27, Schedule A (Form 1040). You
cannot deduct gambling losses that are more than your winnings.

It is important to keep an accurate diary or similar record of your
gambling winnings and losses. To deduct your losses, you must be able to
provide receipts, tickets, statements or other records that show the
amount of both your winnings and losses.

For more information on record keeping, see IRS Publication 529,
"Miscellaneous Deductions," or Publication 525, "Taxable and Non-taxable
Income." You may also want to check out Form W-2G or Form 1042-S and its
instructions and
Tax Topic 419, "Gambling Income and expenses." All are available on the
IRS Web site at www.irs.gov. You may also order free publications and
forms by calling toll free 1-800-TAX-FORM (1-800-829-3676).

Canada-US Tax Treaty for Canadian Diplomats abroad

QUESTION:

Hi David,

I am a Canadian Citizen working for the Canadian Consulate as a Locally Engaged Staff with an A2 Visa. I am married to a U.S. Citizen and own a home. I was determined to be a Deemed Resident of Canada and pay Canadian Taxes.

Do I have to file U.S. Fed or State returns? Although I was under the impression my income is exempt from U.S. tax under article XIX of the Canada-U.S. Tax Treaty, someone mentioned I have to pay State Tax. Is this true? If so, isn't this double taxation?

Appreciate the guidance.

_________________________________________________________________
david ingram replies:

In my opinion, as a matter of courtesy, the Canadian diplomat should report their world income to the US government and exempt it on the return under Article XIX of the US Canada Income Tax Convention (1980) (We usually call it a Treaty but it is technically called and named a 'Convention'). If you read your handbook, you will see that rental houses and other invest,ment income in the US 'IS' taxable.

In your case, it is to your families advantage for you to file a joint US return with your spouse and if you have not done so for 2003, 4 and 5, you should file a 1040X quickly to do so because the joint income tax rate will result in less tax for your US spouse if they are working.

All states but California honor the Treaty. In California, one would pay tax and then claim it as a foeign tax credit on their Canadian return.
___________________________________________________________
This actually was given the following reply but I pulled it out in a weak moment and then took 10 days to get to it.

First Time Builder needs GST number

My question is: Canadian-specific

QUESTION: If I buy a building lot and pay GST on that lot, build a house on it and sell it, does the person buying that house have to pay GST? I am NOT a licensed builder or have a business etc. If they do have to pay GST can I claim what GST I paid back as a credit?

_____________________________________________________________________________________
david ingram replies:

If you have bought the lot, built the house and are selling it for $29,999 or less, you do not need to be registered. However, that is unlikely in today's economy although a $5,000 lot and the $24,000 log cabin I saw in a flyer today might qualify.

You are required to be registered as a GST registrant because you will be selling the house for over $30,000 I am sure.

You 'MUST' charge the purchaser GST or pay it yourself.

Register at: https://www.businessregistration-inscriptionentreprise.gc.ca/ebci/brom/bro/start.do?language=english

More information can be found at: http://www.cra-arc.gc.ca/tax/business/topics/gst/corporation/registering/menu-e.html

And yet more at: http://www.bdc-canada.com/BDC/services/gst_registration.htm

and specific information for builders can be found at http://www2.ccnmatthews.com/scripts/ccn-release.pl?/1999/06/21/0621005n.html?cp=cca

Canadian buying and selling US vacant land on Internet

My question is: US-specific

QUESTION: I am a Canadian citizen and interested in purchasing land in the US and selling it on my website. I will not be living in the US, I will only buy and sell property and never live or build on the property myself. My question is, is this possible? Do I require a Visa or any specific documents? Any help would be greatly appreciated. Love the site.
xxxx

---------------------------------------------------------------------------

david ingram replies:

An interesting proposal. You do not need a specific visa. If you do go to the US to buy land, you would tell the Homeland security person at the airport or the border you were entering the US to buy a lot. They would admit you to the US as a business visitor and give you a 'B1' status.

When you sell, you must file a 1040NR and a state return to report the capital gain. You will be taxable in the US at full rates if held for less than 1 year and a reduced US rate if held for more than a year.

Next is a real problem though. Officially, if Canada accepts it as a capital gain, you will only receive credit for 1/2 of the tax you pay the US because that is Canada's official policy.

The reason is that the US taxes 100% of capital gains and Canada only taxes one half of the capital gain.

However, and of course, since you are stating that you are buying and selling land, Canada will consider you a trader and tax you at full rates which means that you will get credit for 100% of the tax paid to the US.

Line 18 1040NR

When reporting the federal income tax withheld from Form W-2 on line 18 of the 1040NR EZ form, does one only report the amount from box 2 (because that box is stated to be the Federal income tax withheld), or do you add the tax withheld on the social security and medicare as well.
>
> If not, where do you report the social security tax withheld and the medicare tax withheld.
>
> I am an athlete reporting less than 15,000.00 employment earnings exempt under a tax treaty with Canada, so even if I meet the substantial presence test, I understand I am still considered a nonresident alien for US tax purposes.
>
> It seems like such an elementary questions, but the guide does not mention what to do with those other two taxes.
>
> Thank you very much
>
> ________________________________________________________________________
david ingram replies:

If you were in the US for more than 183 days in 2006, you are likely NOT a non-resident.

Article XVI of the US CANADA Income Tax Convention (Treaty) is NOT intended to apply to anyone who is physically living in the US for more than 183 days.

On the other hand if you are saying that you meet the substantial presence test because you have been there long enough for the three year calculation to catch you, you are required to file form 8840 to claim your closer connection to another country and form 8833 to claim Treaty Benefits along with the 1040NR. Remember that the $15,000 includes expenses as well.

AND, the most important part is that the income you are exempting in the US is 100% taxable in Canada.

There is no place on a 1040EZ, 1040, or 1040NR for the deduction of Medicare or FICA (Social Security) payments. They are NOT a deduction or credit on a US return as CPP and EI are in Canada.

However, when you report the US income on lines 104 and 433 of your Canadian return, you can claim the Medicare and FICA you paid as a tax credit (usually dollar for dollar) on line 431 of schedule 1 of your Canadian return.

Hope this helps.

Moved to USA on TN - What forms to fill out

QUESTION: Hi David,

I really need your help in filling U.S tax and I am getting mixed messages which forms to file.
I am a Canadian Citizen in U.S on TN visa for more than a year.
I have RRSP in canada over 10,000 put in fixed bond and saving account in a bank.
What do I need to file here and what forms do I need to fill.
Do I still have to file tax in Canada for canadian earning? Please help.
____________________________________________________
david ingram replies;

You need to file a departing Canada tax return and file T1161 if you left more things than your RRSP behind. The Canadian return will only include Canadian earnings although if you had a Home Buyers Plan, it is all due and taxable on the departing Canada return unless you have paid it back.

For the US, you have two choices:

1. File a 1040NR dual status statement and a Dual Status 1040 Income Tax return with no standard deduction

or

2. File a full 1040 which includes your Canadian income and gives you a full standard deduction and the right to file a joint return if married. This is usually the best if you left Canada early in the year as you did.

If you can't figure it out, file an extension form 4868 (find it at http://www.irs.gov/pub/irs-pdf/f4868.pdf )

and then send the information to us at the address in blue below to complete for you.

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selling rental, capital gains options

Eligibility for Canadian Citizenship

tax on rental and eventual sale income on Canadian Real Estate owned by US resident

Deferring capital gains - real estate - Only in America, Not in Canada you say. Pity!

withholding tax on US gambling winnings

Canada-US Tax Treaty for Canadian Diplomats abroad

First Time Builder needs GST number

Canadian buying and selling US vacant land on Internet

Line 18 1040NR

Moved to USA on TN - What forms to fill out

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