Tax implication on Canadians on selling US vacation property
When the CDN$ was estimated at par with US $, many Canadians bought vacation properties in US. Nevertheless, as the CDN $ started weakening, some Canadians decided to sell their US vacation properties in order to receive some gain. As a result, property sales got higher withholding taxes. From the viewpoint of CDN seller, selling the vacation properties did not get profitable due to less returns than expected.
Pay US tax on your gains: When the selling price is higher than the original cost of the property, you are required to report the difference as Capital Gain to the IRS. Either resident or non-resident selling US property, the tax obligations firstly goes to the US government. The non-residents report their gain (or loss) on their US property by filing the Form1040NR (US Non-resident Income Tax Return).
Pay CDN tax on gains: Being a CDN resident, you are obligated to pay income tax on the worldwide income. Based on the $ rate at the time of sale, must be converted to CDN$ using the exchange rates.
However, capital gain is fully taxable in US and half taxable in Canada. As such, if LT capital gain is $37,650 USD or < is not taxable. Whereas, if LT gain is higher, first$37,650 USD is 0% taxable, (for single filer) the remaining difference taxable @15%.
Way to reduce Canadian income tax:
Fortunately, to avoid double taxation on the same gain, claim for Foreign Tax Credit (FTC) against CDN provincial tax. You must pay US taxes, to qualify for foreign tax credit.
It does not help to generate revenue but tends to lower down taxes owing from property’s gain.
About Withholding Rules
Basically, it ensures that you meet US tax obligations, as funds are under IRS control until US tax return is submitted and processed. Then, refunds the balance amount to you.
Case(a): consequences if US vacation property is rented out by owner (CDN resident)
They are subject to 30% withholding tax of gross rental income, remitted by the tenant to the IRS. The taxpayer must fill Form: W-8ECI and provide it to the tenant. It helps to avoid 30% flat rate on gross rental income. Furthermore, to make this election taxpayer must file Form-1040NR for US tax return (i.e. difference of tax withheld and income tax liability). For filing a 1040NR, taxpayer need to get US Individual Taxpayer Identification Number (ITIN) by filing out W-7 form.
Case(b): consequences if US vacation property is sold
Under, Foreign Investment in Real Property Tax Act (FIRPTA) non-residents are subject to 10%-15% withholding tax of gross selling price of property. If the property is is sold between $300,000 USD to $1,000,000 and the purchaser buy it with the intention of personal use, then the sales are subject to withholding of 10% vice versa.
Any gain from sale of property will be refunded it it exceeds the tax liability.
To reduce/eliminate withholding requirements
•In US, gain on sale of property is taxable even if it’s sold for <$300,000 USD to the purchaser who buys it for residential use. For which, US tax return (Form 1040NR) must be filed. Then, the withholding can be waived altogether.
•If the US non-resident gets withholding certificate from IRS based on expected US tax liability (less than 10% to 15%) of the selling price. To apply for the withholding certificate Form8288-B must be sent to IRS. It must include ITIN; within 90 days of submission the Withholding Certificate is issued by IRS. It will indicate amount of tax i.e. Withheld by the buyer rather than full 10%-15%.
Correspondingly, depending on where the property is located, the applied state income tax may vary.
Whether an investment or rental property, IDM Professional Corporation is able to help Canadians navigate dispositions with compliance and tax efficiency.
