Cross border Tax
the US Vacation Property
With real estate prices
soaring in the US and the Canadian dollar falling in value against the greenback,
Canadians who invested in a vacation property in the US may be tempted to sell
their US cottage and purchase a Canadian cottage instead.
important to understand the tax consequences on both sides of the border before
an example to illustrate: Sarah and George purchased a home in
Phoenix in 2011 for $190,000US ($191,000CAN), including costs. Today, the home
is worth $290,000US (about $358,000CAN). This represents an accrued gain of
$167,000CAN (a $100,000 US gain in the States). The value of the couple’s home
in Canada, meanwhile, has increased only $20,000 over the same time
period. What are the tax consequences if the couple sells the US property and
uses the proceeds to purchase a cottage closer to home?
of the US property will create a taxable capital gain to be reported on a US
return ($100,000 US). In Canada, the capital gain could be minimized by
designating the US property as the couple’s principal residence for all but one
year from 2011 to 2015. However, the elimination of the capital gains tax on
the Canadian return comes at a price. If the gain is taxable in Canada, the US
taxes paid could be claimed as a foreign tax credit.
the gain is tax-free in Canada, the foreign tax credit cannot be claimed. At
the same time, claiming the US property as a principal residence means the gain
on their Canadian home becomes taxable.
the US tax cannot be eliminated, the only way to ensure that the same gain is
not taxed in both jurisdictions is to make sure that at least $100,000US of the
capital gain is taxed in Canada in the year of sale. That’s about $123,000CAN,
depending on the exchange rate at the time of the sale.
$167,000CAN gain, 26% of the gain could be exempted and the couple could still
claim the foreign tax credit. By choosing to designate the US property as their
principal residence for one year, 33% ([1+1]/6) of the gain would be exempt in
Canada, limiting the foreign tax credit claim.
choosing not to designate the US property as their principal residence, 1/6 of
the gain would be exempt, allowing the full foreign tax credit.
course, in this or any other case, the actual amount of taxes payable in the US
and Canada would have to be determined to ensure that choosing not to claim the
principal residence exemption for any of the years owned results in the lowest
overall taxes payable.
type of transaction, therefore, should be reviewed well in advance by a Tax
Services Specialist to get the best tax results over time for the sale or
deemed disposition of both residences.
Foreign Income Verification Reporting – Form T1135
Form T1135 Foreign Income Verification Statement is designed as an “information only” form tied with the personal tax return. While it is not actually part of the tax return, the due dates coincide with the due dates of tax returns, thereby tying it to the T1 return. When filing their tax return, the taxpayer identifies the need for filing the T1135 by their answer to the question “Did you own or hold foreign property at any time in 2014 with a total cost of more than CAN$100,000?” on page 2 of the T1.
Parts 1, 3, 5, and 6
In general, any individual, partnership, corporation, or trust which holds a foreign asset, is a beneficiary of a foreign holding or has a right to acquire a foreign holding is required to file the information return if the aggregate cost of the asset or holding exceeds $100,000. Reporting requirements for Parts 1, 3, 5, and 6 consist of the following information requirements:
• The country where the asset is held
• The maximum cost during the year of the holding
• The cost at the end of the year and,
• The amount of any income earned or lost on the holdings
“T” Slip Exclusion No Longer Available
In 2013, taxpayers had the option of using the “T” slip exclusion option. This consisted of the ability to not report individual holdings if there was a Canadian T5 or T3 slip issued for the income earned on the investment. This option is not available for 2014.
Part 2 – Shares of non-resident corporations (other than foreign affiliates)
This is one of the most difficult areas of form T1135 to complete; simply because accurate records of the information are difficult to obtain. This section no longer includes shares that are managed by a Canadian Registered Securities Dealer or Canadian Mutual Fund. These assets are now included in Part 7.
Include in this section any foreign share holdings that the taxpayer purchased on their own, either on-line or on a foreign stock exchange. Report both the cost and any income earned on the investment.
2014 tax season: 12 tips to get the biggest refund
1. Claim medical expenses
This is my personal favorite, only because everyone has a question about their medical expenses. People miss claiming common expenses like Blue Cross, and fees paid to medical practitioners like speech-language pathologists, occupational therapists and acupuncturists. Ambulance fees are expensive and claimable; so is the cost of tutoring services for the learning disabled. You can also claim the lesser of $5,000 and 20 per cent of the costs of a van adapted to transport the wheelchair bound and moving expenses incurred to a more suitable dwelling to a maximum of $2,000. When in doubt, check it out.
2. Moving expenses
If you have moved at least 40 kilometers closer to a new work location, you can claim the costs of selling your home, including real estate commissions and penalties for paying off a mortgage. Even the costs of a vacant old residence, to a maximum of $5,000 is allowed. The costs of moving to the new location and temporary living accommodations for up to 15 days can be claimed too. But, as this is often a five-figure number, expect to be audited.
3. Maximize babysitting deductions
Claiming the child-care deduction can be complicated. Should it be the higher or lower earner who claims it? It depends, actually. Usually it’s the lower earner, but if there is a separation during the year, or the lower earner is going to school, or hospitalized, it’s possible the higher earner may make the claim. The maximum dollar amounts claimable have not changed this year, still $4,000, $7,000 or $10,000, which depend on the child’s age and health. Claim the lesser of what was actually spent, your earned income (sorry, EI benefits won’t qualify) and the weekly and monthly dollar limits specific to higher earners and students. Keep receipts handy, too, in case of audit.
4. Don’t miss employment deductions
If you get a T4 slip and are required to pay out-of-pocket expenses as part of your employment contract, a deduction may be possible on your tax return. Here’s the catch: you must be required to pay your own expenses under your contract of employment and the employer must certify this on Form T2200 Declaration of Conditions of Employment. Lots of taxpayers forget to claim back the GST/HST paid on tax deductible amounts using the GST/HST 370 Form. Expenses can include accounting and legal fees, motor vehicle expenses, travel costs, parking, supplies used up directly in your work, office rent or certain home office expenses as well as amounts paid to an assistant, which could be a family member.
5. Your principal residence is tax exempt
The increase in value of a property designated as a principal residence is tax exempt. It’s easy to qualify your properties if you own more than one —just live in each for a couple of days each year. You can have more than one residence that qualifies, but only one can be designated as your principal residence for any given year. The choice of which is made on t2091 when you dispose of a residence. But if you’ve been flipping residences for profit, you could be assessed as being in the business of buying and selling homes. Be ready to defend this by showing your intention in acquiring the properties and the circumstances around the reasons for the dispositions.
6. Disabled? Use your RRSP Home Buyer’s Plan
The Home Buyers’ Plan is an RRSP feature that allows first time home buyers to withdraw up to $25,000 from their RRSP tax-free, for the purpose of buying or building a home. Note that you qualify as a first time home owner if you move to accommodate a disabled person. The withdrawals may be a single amount or the taxpayer may make a series of withdrawals throughout the year as long as the total does not exceed the $25,000 maximum.
7. Minimize tax on severance
If you’ve lost your job, your severance package can help but it can also put you into a high tax bracket because it’s usually paid in a lump sum. One way to reduce your taxes is to maximize your RRSP contribution room. Another is to write off your legal fees if you fought a wrongful dismissal. In some disputes, you qualify for lump sum averaging to reduce taxes. Better yet, ask the HR department to annualize the bonus to average down taxes payable for the period. Best to see your tax advisor first, to ensure you keep as much as possible, after-tax.
8. Control credit crunches: write off interest
Is your investment portfolio still in the red zone? You can still write off the interest on your full investment loan, even if your portfolio has diminished in value, providing there was a reasonable expectation of income from property: interest and dividends for example. Also, be sure to take advantage of capital losses to reduce capital gains of the current year. Unabsorbed losses may be carried back or forward to offset capital gains in the carry-over year. Don’t cash in RRSPs if you can help it—this will cause a tax problem next year.
9. Optimize pension income splitting
If you received a pension from your company plan or started periodic withdrawals from your RRSP or RRIF this year, you may elect to transfer up to 50 per cent of your pension benefits to your spouse. This can be very lucrative. Those receiving periodic pension benefits from employer-sponsored plans can take advantage of pension income splitting at any age; if periodic income comes from RRSPs, RRIFs or other annuities, you’ll have to wait to age 65 to income split.
10. Reduce tax installment payments
Take control of the first dollar you earn—keep more by paying only the correct amount of tax throughout the year. If you pay income taxes by making quarterly payments, review your payment requirements. If your income has dropped since you last filed a tax return, you can reduce your payments. Simply write a letter to let CRA know you will estimate installments payable on current year. This is a much better way to manage your cash flow and stay invested during market turmoil.
11. Claim the new tax credits for children’s activities
There are new amounts to be claimed on the tax return for enrolling your children in the arts or sports activities. You can claim public transit charges for them to get there too. Because the Children’s Arts Amount is new, you’ll need to remind yourself to dig out the receipts.
12. Adult artists and writers can claim deductions, too.
Employed artists and musicians can claim expenses for composing dramas, musicals or literary works, performing and creating works of art. Expenses can include things like ballet shows, art supplies, computer supplies and home office costs. The maximum claim is 20 per cent of net income or $1,000. Musicians can also make claims for the maintenance, rental, insurance and capital cost allowance for musical instruments.
Inheritances – Taxable or Not?
When is the inheritance
from your U.S. based parents taxable and in which country?
When you inherit property
from a decendent, you generally inherit it at the fair market value on the date
of death, which means that you only pay tax on the appreciation of the property
after it is actually sold. A common statement made by many people is that
inheritances are taxed in the U.S. but not in Canada and this is not entirely
Cynthia is a Canadian
citizen and resident. Cynthia’s grandmother, who is a U.S. citizen and
resident, is very ill and expected to pass away shortly. Cynthia is a named
beneficiary of her grandmother’s estate but she is also a direct beneficiary of
her grandmother’s IRA (Individual Retirement Account).
Cynthia’s mother, a dual
citizen of Canada and the U.S., is the named beneficiary on Cynthia’s
grandmother’s condo in Arizona; it has a current value of $235,000.
be taxed on the receipt of her grandmother’s IRA? Can anything be done to
change this and is this something that should be changed?
Cynthia’s mother be taxed on the receipt of the U.S. condo?
Cynthia’s grandmother’s estate be taxable if she died today?
Gambling in the U.S.? Know Your Tax Obligations
Many people have the misconception that gambling winnings are only taxable in the U.S. if you are a U.S citizen or resident, and that is simply not true.
Gambling/lottery winnings from the U.S. are fully taxable to anyone and must be reported on a U.S. tax return. There is no requirement to file a U.S. tax return unless withholding taxes have not been taken on the income or too much has been taken. If the required withholdings are taken, one does not have to file a return; however, if a tax refund is desired because the withholding tax is too high, one must file in order to claim it. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, casinos, cash winnings and also the fair market value of prizes such as cars and trips.
Recovering Taxes on Gambling Winnings. A 25% withholding tax is applicable on winnings over a certain dollar amount and the only way to recover the tax is to file a tax return to claim the refund. This process is different for a U.S. non-resident and a U.S. citizen/resident.
U.S. Residents. The only way to recover the tax is to deduct gambling losses for the year against the winnings for that year but you can only deduct enough losses to cover the winnings, nothing more. A U.S. citizen/resident can only deduct the losses as part of their “itemized deductions” but the problem is that most people in this situation do not itemize their deductions. Instead they take the “standard deduction” amount on the tax return, because it results in a higher deduction. This means that the taxes withheld on the gambling winnings cannot be recovered in most cases.
U.S. Non-residents. Canadians gambling in the U.S. would deduct gambling losses on form 1040NR; however, these are not deducted as an itemized deduction but on a separate section of the return specifically for gambling activity.
The personal exemption cannot be deducted against gambling/lottery winnings by non-residents.
It is important to keep an accurate diary or similar record of your gambling winnings and losses in case the IRS asks for proof of your losses to support your claim. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.
U.S. Citizens Living in Canada. If a U.S. citizen is also a Canadian resident and he or she wins a Canadian lottery, the winnings are not taxable in Canada but are fully taxable in the U.S.; therefore, it is always good tax planning to ensure that the Canadian spouse is the one who declares the lottery win if there is a U.S.-citizen spouse in the family.Real Life: Canadian (non-U.S. citizen) hitting it big in the U.S.
Johnny is a Canadian resident, (non-U.S. citizen) who likes to frequent the casinos in Las Vegas. While in Vegas he was a lucky man and won $10,000 playing blackjack. In accordance with the U.S. tax laws, the casino withheld $2,500 and issued a W-2G slip to Johnny for use in filing his tax return. Johnny’s losses for the year total $8,000, which means that he can only claim the $8,000 of losses against his $10,000 of winnings, giving him a withholding tax recovery of $2,000. (In this case, he ends up having to pay $500 in tax on his winnings for the year, $2,500 - $2,000.)
Canadians and the IRS: What You Need to Know About Uncle Sam
Angela D. Preteau
If you are amongst the millions of people living in Canada who are trying to understand what the U.S. tax filing rules are, what they mean and how they could affect you, you need to read Canadians and the IRS. Author Angela Preteau tells why.
Canada-U.S. tax filings are a real issue for both Canadian residents with investments or property in the south and for U.S. citizens who live in Canada. The sensational media coverage about U.S. and Canadian government crackdowns on international tax cheats has caused anxiety, bordering on hysteria for some, especially with regard to the big penalties for missing U.S. filing requirements.
Numerous people have come to see me in utter panic about these “new U.S. filing requirements.” Many have lived in Canada for 30 or 40 plus years and have never filed in the U.S.; some didn’t even realize they were U.S. citizens. The questions I am repeatedly asked are:
1. Do I have to file U.S. Taxes?
2. Will I owe taxes in the U.S.?
3. Is the IRS going to take my life savings?
What I can tell you is…please, relax. Frankly, much of this is unnecessary panic and anguish.
With this book at your side, I am going to take you through the rights and obligations of Canadians and what they need to know about Uncle Sam. And, you’ll find the information easy to digest and understand, so that you can stay on the right side of tax laws.
You’ll learn how to keep more of your hard-earned money if you are a Canadian with income or assets in the U.S. or a U.S. citizen living in Canada:
Chapter 1: Tax Filing Requirements
Chapter 2: Reporting Income and Assets
Chapter 3: Reporting Foreign Holdings
Chapter 4: Snowbirds and Uncle Sam
Chapter 5: Non-residents Owning U.S. Real Estate
Chapter 6: Investing in the U.S. and U.S. Source Income
Chapter 7: Married to a U.S. Citizen and Moving Between Countries
Chapter 8: Going to School or Working Temporarily in the U.S.
Chapter 9: U.S. Inheritances
Chapter 10: Doing Business in the U.S.
Chapter 11: I’m Canadian but Could I Be an American Too
Chapter 12: U.S. Gift and Estate Tax for a Non-resident
I wrote this book to help you answer all of these questions and because I hope to help you make more informed decisions if any of the situations discussed in this book apply to you…I hope you enjoy it.
Angela D. Preteau, B.Comm. (Hons.), CA, CPA , works with Frostiak & Leslie Chartered Accountants in Manitoba and provides audit, accounting, and tax advisory services to clients with specialty in the area of U.S. – Canada taxation. She is the author of Cross Border Taxation, a certificate course for professionals published by Knowledge Bureau. Angela is based in Manitoba and lives on the Canadian side of the border.