Canadian Capital Gains Liability for Non-Resident Investor - Canadian-USA-Global tax help -

I am planning on moving to Vancouver, BC and intend to become a permanent resident but I understand that could take a couple of years. In the meanwhile, I have purchased a mixed-use retail/commercial property as an investment. I originally thought that the upstairs of the property would enable me to live there but I have since found that it is not approved for residential purposes. As such, I may need to sell the property earlier than planned and am wondering what the tax implications would be for me. I am under the impression that capital gains might be payable on any profit and that 50% of the gain would be taxable. I am also concerned that I might be liable for an additional withholding amount as a non-resident. I am wondering if there are acceptable ways to avoid this if a person is applying for residency to Canada? Also, would I be able to defer the capital gains taxes if I re-invested in another property within a certain time of the date of the sale ? I would appreciate any advice that you can give. I look forward to hearing from you. --------------------------------------
david ingram replies:

If you sell the property as a non-resident, the purchaser must withhold 25% of the gross purchase price UNLESS

You have approved T2062 and T2062A forms which allow them to withhold nothing (you have proven there is no profit) or 25% of the expected gross profit (no deductions for legal or real estate commissions at this point).

The T2062 and T2062A forms must be filed within 10 actual days of the sale or there is an up to $2,500 penalty for late filing (min $100.00 - max $2,500 at $25.00 per day).

The withholding tax is credited against the actual tax which is levied against 50% of the profit when you file the actual tax return.

You also get to deduct legal, and real estate fees when doing the actual tax return.

Let's pretend:

You bought a place for $800,000 and are selling it for $1,020,000 Canadian.

You fill in the T2062 and the tax office demands 25% of the gross profit of $220,000 be withheld.  The purchaser withholds $55,000 and sends it in your name to the CRA.

Later - by April 30th of the next year, you file the section 116 Canadian Tax return and report the sale and after deducting the $19,000 real estate commission and $1,000 legal fees, you have a net profit of $200,000 of which $100,000 is taxable.

The Canadian Tax on that $100,000 is about $30,000.  You would file the return and get back a refund of $25,000,

You would then report the sale on Schedules D and 1116  of your US return.  The $30,000 paid to Canada (adjusted for exchange) would then be a credit against the tax on the $200,000 which the IRS would tax. 

The main difference is that Canada (as the US USED TO do) taxes one half of the gain at the full tax rate.  The IRS taxes the whole gain at a lower tax rate.

Again, if you earned $50,000 in the state of Washington, were single and had no deductions, your tax would be $6,613 (2008 rates of course).

If you added a short term capital gain of $200,000, the tax would go up to about $69,000.

If this is a long term capital gain, the tax goes up to $39,926 which works out to $33,813 tax on the $200,000.

This is pretty similar to the $30,000 paid to Canada.

You would then put the $30,000 tax paid to Canada under Foreign tax paid on schedule 1116

You would then receive a foreign tax credit for the entire $30,000 on Page 2 line 47 of your 1040. This would then leave you with a $3,381.30 further bill to pay to the IRS --- Part of the $33,813 of tax mentioned above was $3,101 of Alternative Minimum tax.

Since the AMT is recoverable in most cases in subsequent years when income drops the actual extra tax would be $3,381 - $3,101 or about $281.00

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Now note that I had you with a salary or other income total of $50,000.  $200,000 added to that is still below the maximum tax rate in the USA which is why AMT was triggered.  If you had earned $400,000 the tax on the $200,000 would be exactly $30,000 and the foreign tax credit would wipe out any US tax debt.

This was originally rejected but just seemed like a fun question to answer.

You know where to get the paperwork done when and if the time comes.

Remember, if this property is rented out, you also need to do an annual return under Section 216

This older Q & A will give you an idea of what you have to do or should already be doing,  If you are not, you better invest $450 in a phone consultation.

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