Tax Implications of moving back to Canada?

MovingBackToCanada
New Member


MovingBackToCanada

Joined: 12 Jul 2008
Posts: 2
Location: Tacoma

Posted: Sat Jul 12, 2008 3:38 pm

 

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My family and I are contemplating moving back to Canada, and are getting overwhelmed by all the potential implications of this. I've been having a hard time getting helpful information, so would really appreciate any thoughts anyone had on the following:

We own a house here. We can either a) sell the house, or b) rent it out. I'm trying to understand the implications of both. If we rent, are we subject to a 30% withholding tax right off the top (i.e., the monthly rental income would right off the bat fall from $2000 to $1400!). Also, if we sell the house 2 years down the line (when we are no longer green card holders, but are full-fledged foreign persons), do we get dinged a 10% withholding tax on the sales price? With all these withholding taxes, it seems to make sense to just sell the house and swallow a massive loss.

Thanks,
MBTC

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Reba
Moderator


Canuck in NC

Joined: 16 Jul 2004
Posts: 1120
Location: North Carolina

Posted: Sun Jul 13, 2008 4:50 am

 

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Are you dual citizens, or just permanent resident in the US?
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MovingBackToCanada
New Member


MovingBackToCanada

Joined: 12 Jul 2008
Posts: 2
Location: Tacoma

Posted: Sun Jul 13, 2008 7:31 am

 

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We are Canadian citizens who are green card holders. Thanks, MBTC.

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Steven
CanuckAbroad VIP



Joined: 28 Sep 2007
Posts: 974
Location: Calgary

Posted: Mon Jul 14, 2008 9:58 am

 

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You can avoid the withholding taxes by declaring that the income is effectively connected with a US trade or business. Then you are subject to US income taxes on your US-source income. It's far better to do it this way (and the IRS will be shocked if you don't) because the withholding agent otherwise will be the renter and if the renter changes frequently it quickly becomes a farce.

You still have to file a 1040NR every year as well as a tax treaty claim (8833 or 8840 depending on the circumstances). You file for a foreign tax credit in Canada (as explained in the general guide for the T1) to avoid dual-taxation.

You must declare foreign assets valued at more than $100,000 on Form T1164 and your income from them.

It is confusing, takes awhile to get the hang of it. My usual advice is not to bother with only a single property, but I can understand why you don't want to take a howling loss on your property.

Of course if you don't rent it out you avoid all this. Vacation homes don't have to be declared on T1164.

Also bear in mind the capital gains tax. At the moment this is pretty easy on the US end as you have to have a capital gain exceeding $31,850 before you have to pay any tax (at 15%) and given the current real estate market this is unlikely. If Obama gets in and he doesn't continue the Bush tax cuts, the beginning rate for CGT will probably go from 0% to 5% in 2011 so bear that in mind.

The US rate is largely academic because the Canadian rate is higher, it's merely that you might have to pay a little bit of tax in the US, claim a foreign tax credit in Canada, and pay the remaining CGT in Canada, so it's a paperwork exercise. The Canadian rate is half the marginal rate of income tax, so given that a large capital gain puts you in the top bracket, the maximum rate (Ontario) would be 21.5%.

The amount the CGT is applied to is the increase in the value of the house from the date it ceased to be your principal residence to the time you sold it, minus any connected disposal fees, which usually means the realtor fees.

Read IRS publication 519 and also this: http://www.cra-arc.gc.ca/E/pub/tg/p151/README.html for more information.
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Steve.

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Steven
CanuckAbroad VIP



Joined: 28 Sep 2007
Posts: 974
Location: Calgary

Posted: Mon Jul 14, 2008 10:03 am

 

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Oh yeah, bear in mind withholding tax is exactly that - it's applied towards any tax that you owe, so if there is no tax owing you get it back.
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Steve.

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