If you are an American citizen, but resident in Canada who owns a home in Canada, you may be subject to a significant tax hit. Over the past several years, there has been significant media coverage and numerous articles concerning the I.R.S.’ targeting of American citizens worldwide, in its attempt to collect more tax dollars from American citizens. As part of this campaign, the I.R.S. has also essentially forced non-U.S. financial institutions to provide information about their American clients’ financial affairs.
Lost in the shuffle is a provision which has existed for years with respect to the disposition of an individual’s home; in particular his or her principal residence. If an American citizen residing in Canada sells his or her Canadian home for a gain of more than $250,000.00, capital gains tax must be paid on that gain. This tax situation will primarily affect those U.S. citizens who have owned Canadian property for a period of time which results in the property having increased in value in an amount exceeding $250,000.00 (i.e. a profit). Obviously for those individuals living in a home in Calgary(before the recent precipitous drop in oil prices), Toronto, and/or Vancouver, the gains may be realized in a relatively short time frame. If two spouses are both American citizens, they each are entitled to an exemption of $250,000.00. The tax rate applicable to any gains above the $250,000.00 level range from approximately 15%-20%.For the record, there is also an additional tax which affects American homeowners resident in Canada: it relates to their mortgages and the American-Canada exchange rate, both at the time a mortgage is advanced and at the time the homeowner discharges the outstanding mortgage. (This calculation is quite technical and if you think it might apply to you as a potential issue, then speak to your accountant). If at the end the taxpayer gains money on this part of the transaction, the profit will be taxed as ordinary income in the taxpayers’ hands. This specific profit will be subject to income tax even if you happened to sell the property at a loss. To add further insult to injury, a profit on the mortgage cannot be used as a write-off on the capital loss of the sale of the home.In conclusion if you are an American citizen resident in Canada, you should speak to your accountant before you even list your Canadian home for sale. An ounce of medicine is worth a pound of cure!
The Net Investment Income Tax aka The Obama Tax.
Although US citizens in Canada have to file US tax returns, they rarely have to pay US tax on Canadian source income. That’s because they can claim a foreign tax credit on their US return for the higher Canadian tax paid on that income, including Canadian source investment income. In 2013, however, Obama added a new US tax called the Net Investment Income Tax. It is 3.8% of the lesser of – (1) your net investment income for the year, and, (2) the excess of all your income over a threshold amount varying with your filing status. Eg. Single – $200,000; Married filing joint – $250,000; Married filing separately – $125,000. So, if your Modified Adjusted Gross income (similar to our Net Income) is less than these amounts for your filing status you don’t have to pay this tax. But, if your income is over these amounts you are caught, even if your investment income (interest, dividends, Capital gains, rental and royalty income) is all Canadian source and you have paid substantial Canadian tax on it. The foreign tax credit doesn’t eliminate this tax. The significance of this is there are still many
US persons in Canada who have not been filing annual US tax returns. They feel that because all their income is Canadian source they do not owe any US tax. Because of the Obama Tax they may now find themselves with an actual US tax liability and will be facing US penalties and interest for not filing their US returns.
FATCA – Financial Account Tax Compliance Act
This new US law compels financial institutions outside of the US to collect financial information of those deemed to be US persons and submit it to the IRS. If you are wondering why a Canadian bank or investment entity has to comply with a US law it is because the details of the reporting requirements have been negotiated between CRA and the IRS and are now part of our Income Tax Act. There are significant penalties on any institution failing to supply the information. FATCA took effect July 1, 2014 and CRA will report to the IRS in July 2015. Most countries in the world have signed onto FATCA. The ‘quid pro quo’ is that the IRS will supply financial information to the tax authorities of signatory countries on their residents who have investments in the US. Some key points to be aware of:
– A financial institution includes banks, credit unions, brokerage firms, insurance companies and mutual fund companies
– Financial institutions will apply prescribed due diligence procedures in asking customers to certify or clarify their non US tax status. This includes procedures to check existing documents on file for a customer determine which customers are US persons. If there is a question, the financial institution will ask for a self-certification of non US tax status. If a customer refuses to provide documentation to the financial institution the financial institution is required to send account information to the CRA which may share it with the IRS. New customers will be asked to self-certify.
– You are a US person if you are a US citizen (including someone born in the US who has not renounced their US citizenship), a lawful resident of the US including a green card holder, a person simply residing in the US.
– CRA has negotiated that the following information will not be disclosed to the IRS under FATCA: RRSPs, RRIFs, RESPs, TSFAs, Registered Disability Savings Plans, Registered Pension Plans, Deferred Profit Sharing Plans, essentially items that are non- taxable in Canada, but still are reportable by a US person on a US tax return.
– There is no mechanism in place for a person to check what information, if any, has been reported to CRA & onto the IRS.
Bottom line: FATCA will be of concern to US persons in residing in Canada who have never filed or behind in filing a US individual tax return. Unfortunately, you can still run but it will now be harder to hide…from the IRS.