Canadians moving to the US often face a challenging decision regarding their primary residence. According to the Canadian Real Estate Association, home prices have increased by roughly 35% over the past five years, with regions like Vancouver and Ontario experiencing even larger increases.
Canadians moving to the US for work opportunities or to be closer to family may hesitate to sell an asset that has appreciated significantly. So, how should one approach this decision? Let’s break it down into various opportunities and challenges.
Selling Prior to the Move: A Clean Tax Outcome
Selling your home before changing residency can provide a streamlined Canadian departure tax return. You can leverage the principal residence exemption to avoid capital gains taxes in the future as a non-resident. Since the sale occurs before the change in residency, no U.S. tax implications are triggered, assuming the individual is not a U.S. citizen. U.S. citizens must consider their eligibility for the home sale exclusion and the maximum gains they can exclude (US$250,000 for single filers or US$500,000 for those filing jointly).
This approach helps clarify the change in tax residency, which can be complex. Selling the Canadian home often serves as a triggering event signaling a shift in tax residency. According to the Canada-US Tax Treaty, Article IV, paragraph 1, a series of tiebreakers determine whether a taxpayer is a resident of Canada or the U.S. The first tiebreaker is the availability of a permanent home. Selling the Canadian home clearly indicates that the individual no longer has a home in Canada. It’s important to note that renting the Canadian home would have the same effect on residency status, as a rented home is not considered available to the individual.
For those who do not want to manage a rental property while living abroad or have no plans to return to Canada, selling the home before the move may be advantageous.
Renting and Eventually Selling the Home as a Non-Resident: Challenges and Opportunities
Renting your home as a non-resident of Canada presents both practical and tax challenges. Rental income from a Canadian property is taxed in Canada first. As a non-resident, you must remit 25% of the gross rental income to the CRA monthly. However, you can elect under Section 216 of the Income Tax Act to pay tax on the net rental income and obtain a refund for the excess taxes paid. The taxes paid in Canada on rental income can be used as foreign tax credits to reduce or potentially eliminate US tax owing on the same income.
When eventually selling the property, generally a 25% non-resident withholding tax applies to the gross sale proceeds. The seller or seller’s agent must advise CRA of this upcoming transaction by filing for a Certificate of Compliance, form (T2062 or T2062A). The withholding tax is held in trust by the seller’s real estate lawyer. Moreover, the withholding tax is higher for property located in the Quebec jurisdiction (37.876%).
This can create cash flow issues if the net proceeds do not cover the outstanding mortgage. The principal residence exemption can be applied to the time the home was your primary residence, but it cannot be claimed for years after becoming a non-resident, even if the home is not rented. The ultimate Canadian tax liability related to the sale of the home may exceed 25% depending on your gain. A Canadian non-resident tax return must be filed with CRA to report the realized gain/loss, which may be different from the gain stipulated on Form T2062/T2062A due to the ability to deduct additional real estate expenses such as closing costs. The taxes will be owed on the net gain and the new inclusion rate effective June 30th, 2024 may apply.
A U.S. tax resident must report the sale of the Canadian property on their federal and state tax return. Based on Article XIII, paragraph 6 of the Canada-U.S. Tax Treaty, the cost basis for U.S. tax purposes will equal its fair market value at the time of establishing U.S. tax residency. This only applies to non-U.S. citizens and is only available to the principal residence. It is therefore important to obtain an appraisal of the property when leaving Canada to document it’s fair market value at the time of residency change.For those looking to diversify investments and continue participating in the Canadian real estate market, renting the home long-term can be a financially fruitful decision despite the tax challenges. Besides potential real estate appreciation, rental income can provide a great additional revenue source.
Cross-Border Planning: How to Approach This Decision
Effective cross-border planning is crucial for Canadians moving to the US. At i2 Wealth, we recommend approaching this decision through an analysis of a client’s financial current position, their goals and constraints. Quantitative analysis, such as long-term cash flow projections over 5, 10, or 15+ years, can help clients make informed decisions.
Working with a cross-border financial planner can be highly beneficial. We leverage Canadian and US financial planning software’s to provide comprehensive solutions tailored to your needs. Our expertise in cross-border tax and financial planning helps clients navigate complex decisions and achieve their financial goals.
With our guidance, we ensure that you make the right choices for your unique situation and reach your full potential.