Implications of Buying Canadian Property for Canuck in US

Folks,
My wife and I live in the States. She's Canadian on a green card; I'm American.

We're thinking of paying off the note on a relative's house in Ontario.

Does anyone have any info on what the tax implications for my wife might be? We've heard that it can be a bad idea for a Canadian expat to own property in Canada. We don't plan to move to Canada any time soon.


Thanks for any feedback.


Best,

Chris in Cackalacky

You can purchase property in Canada as long as it is for investment purposes. If you rent the property, you need to file a non-resident rental return at end of year with Revenue Canada. Other than that, you are fine.

Thanks
CH

Folks,
My wife and I live in the States. She's Canadian on a green card; I'm American.

We're thinking of paying off the note on a relative's house in Ontario.

Does anyone have any info on what the tax implications for my wife might be? We've heard that it can be a bad idea for a Canadian expat to own property in Canada. We don't plan to move to Canada any time soon.


Thanks for any feedback.


Best,

Chris in Cackalacky

Does anyone have any info on what the tax implications for my wife might be? We've heard that it can be a bad idea for a Canadian expat to own property in Canada. We don't plan to move to Canada any time soon.

Yes it is a bad idea for two reasons, the first is that if you're a Canadian citizen and you own Canadian real estate then there is a possibility the CRA might decide you are resident for tax purposes. Given that she's on a green card in the US though, that is unlikely to happen, it's more of a problem for people who are in a non-immigrant alien classification.

The second problem is the capital gains tax, which happens whenever you own a property that is not your principal residence wherever it may be. CGT in Canada is 15%. I.e. if you take ownership of a house (whether you buy it or not) and the fair market value is $100,000, and you sell it when it's valued at $150,000, you owe 15% of $50,000 to the CRA.

Canadian law does not recognise split principal residence for married couples, i.e. you cannot say that her principal residence is the house in Ontario and yours is in the US. It has to be one or the other. Even if you did that, it would make her resident in Canada for income tax purposes.

The premise would be that we just pay off the note and the current occupants could continue to live in it indefinitely. We wouldn't sell it for a long time if ever.

Well, the longer you leave it the higher the tax would be. Not necessarily a problem as you would have the money from the sale of the house. As soon as it becomes your house then for tax purposes the fair market value at that point is where the starting point for the capital gains tax is.

At the moment the US and Canadian CGT is the same rate on real estate, but the general view is that the US rate will go up. You need to check with the IRS at that point as to how they assess the tax on the sale of foreign real estate. I suspect you will have to pay the CRA, then claim a foreign tax credit in the US, and pay whatever amount is remaining to the IRS, i.e. if the US rate is 20%, and the Canadian rate is 15%, your total is 20%, but three-quarters of it goes to the CRA, you claim a foreign tax credit, and the remaining quarter goes to the IRS.

But you don't really need to worry about it until you sell the house, and if you leave it for a decade or more the tax rate could be almost anything by then.

You might want to think about doing it a different way though to avoid the CGT altogether, for example you loan the residents of the house the money to pay it off, then if you're going to sell the house when they die for example, the loan repayment is made by the estate. As the house is the principal residence of the estate, there is no CGT payable.

Even if you take possession of the house at that point, the CGT will be tiny because it will have only been in your possession for a short time.