Tax Implications of moving back to Canada?

[MovingBackToCanada]

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

[Reba]

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

[MovingBackToCanada]

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

[Steven]

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.

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.

[Steven]

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.

[brookliner]

Pardon me for jumping in, but there is mention of capital gains tax on the sale of a home in the US.

My understanding is that there is no CGT on the first $200K of gains on the sale of a home in the US. Is the CGT being mentioned something that Canada would charge on the American sale?

Thank You.

[Steven]

Depends on whether you are a resident of the US or not. If you sell the house while it is still your principal residence and your tax home is the US (i.e. residential ties such as DL, etc.) then you can claim that exemption because you are still subject to US tax laws as a resident.

If you move back to Canada, and establish your principal residence in Canada, then two things happen - first of all your old home is no longer your principal residence, so there is no tax exemption. Second of all it becomes subject to Canadian CGT rates, which are generally higher than in the US.

You would be subject actually to two taxes in this situation, US non-resident alien capital gains tax, which I think at the moment is 0% up to the first $32,000 of capital gain, so given the current housing market you would likely be subject to 0% tax. Over that amount the US uses a complex table of working out what the tax is.

If you pay any US CGT, you claim that as a foreign tax credit in Canada, so effectively you pay the Canadian CGT, which is 50% of the income tax rate, so on a reasonable gain you will usually be in one of the higher tax brackets, depending on what Province you live in you'll pay something like 15-21.5% on the gain.

[dkpatel]

Thank you for this discussion, excellent as we are in the same situation (CADian, moving back to CAD from US, but have home in US).

What determines, and how to declare, that you are still US Resident. For example, if we move to Toronto, and rent a house for a year until we sell the home in US, is there still a means to declare US Residency - how about if we stay at parents' home for a while?

As for renting the home in the US, I think it then is considered an investment property, and so we are subject to CGT. But, if we leave it empty (refi to low cost int-only mortgage etc) and wait for markets to "rebound", I think we have two years to sell it before we are subject to CGT, assuming we declare residency in Canada, but raises the same question above.

Thanks.
DKP