This article focuses on the tax implications when a Canadian gets rid of a vacation property in the US.
Ridding of a property can be taken in two forms: 1) Selling the vacation property or 2) when the taxpayer passes away while having ownership of the property.
Selling the vacation property:
Once the vacation property is sold, the taxpayer is subject to both Canadian and US tax. However, Canada will allow a US foreign tax credit and as a result, there is no double taxation.
In the US, you are subject to 15% federal long-term capital gains tax. In general, Canadian capital gains tax are higher than the US. Therefore, the taxpayer would ultimately end up paying the higher tax rate (Canadian).
For example, in Ontario the capital gain rate is 23%. When the taxpayer sells their vacation property, he/she would pay 15% to US federal government and the remaining 8% to the Canadian government (Ultimately he/she would pay 23%, but no double taxation).
In addition, it is important for the taxpayer to analyze whether there are any state taxes that are applicable.
When the taxpayer dies while having ownership of the property:
One major difference between US and Canadian tax system is that the US system bases estate taxes on the value of the assets and not just on the capital gain at the time of death.
When the vacation property in US is worth more than $60,000 USD at the time of death, the taxpayer is subject to estate taxes in the US. However, the Canada and US tax treaty provides Canadians with an exemption for estate tax. The amount of exemption is determined by a formula based on the following four factors:
- The value of the property
- The value of the worldwide estate
- The estate tax exemption in place at the time of death and;
- How the property is owned
To summarize, Canadians get a portion of the exemption that is available to a US citizen. That portion is determine by comparing the value of the US property to the worldwide estate that the taxpayer possesses. The filing deadline for US estate tax return is 9 months after date of death of the taxpayer.
To reduce the amount of estate taxes, the ideal situation would be to sell the property prior to death. However, this is not always the case and it is difficult to predetermine that.
Although every situation is different, generally, it is a good idea when the lower net worth spouse has ownership of the vacation property since this will allow them to have a larger exemption under the treaty. Alternatively, the spouses will want to consider planning strategy to have the property be passed onto a spousal trust. This will protect the surviving spouse from future estate taxes.
On the other hand, to demonstrate a worst case scenario, when a husband with ownership passes away, the property is transferred to the surviving spouse, they are subject to a large estate tax bill. Once the tax bill is paid, the spouse passes away and they are again subject to another large estate tax bill. There is a risk of double taxation if there is no planning prior to the transaction of the vacation properties.
US estate taxes is a crucial tax area for Canadians to consider before owning a US vacation property. It can lead to many uncertainties and a surprise tax bill if there is no planning ahead. It is highly recommended that you consult with your tax accountant to prepare a plan and reduce paying estate taxes.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.