US Federal Income Tax – Gains on Sale of your Canadian Home Part 2

January 25, 2016

When an individual ceases to be a resident of Canada, he is deemed to have sold his worldwide assets (with some exceptions) and is subject to Canadian tax on any accrued gains in the year he emigrates from Canada. While Canadian real properties are not subject to this deemed sale, the former home in Canada and its fair market value at the time of the individual’s departure from Canada are still required to be disclosed on CRA Form T1161, List of Properties by an Emigrant of Canada, in the year of departure.

There is no reporting requirement in Canada related to the former home post departure unless it is converted to rental use or if it is sold.

Canadian Rental Income

If the former Canadian principal residence is converted to rental use, income from the rental activity is subject to tax in both Canada and the U.S. A nonresident of Canada can fulfill his Canadian income tax liability on Canadian rental income by either of the following methods:

  • Remit a 25% nonresident withholding tax based on gross rental income to the Canada Revenue Agency; or
  • Elect to pay Canadian tax based on net rental income by filing a timely election Form NR6 with the Canada Revenue Agency before the first rental payment is received for the year and also filing a Form T1159, Income Tax Return for Electing under Section 216 by June 30 of the year following the year the rental income is earned.

The Canadian agent acting on behalf of the nonresident landlord is also responsible for reporting the rental income on Form NR4 to both the Canada Revenue Agency and the nonresident landlord.

As a U.S. resident, any rental income from Canada is also subject to U.S. federal and state tax where applicable. Canadian tax paid can be claimed as foreign tax credit on the U.S. federal income tax return to reduce or eliminate U.S. federal income tax on the income so no double taxation should occur.

Sale of Former Canadian Principal Residence

In a previous blog, we discussed the Canadian and US income tax implications when a Canadian principal residence is sold by a U.S. person living in Canada. When a former Canadian principal residence is sold by a former resident of Canada, additional Canadian reporting requirements may apply.

Capital Gain

Capital gain accrued while the property was used as a principal residence during the period while the individual was a resident of Canada is exempt from Canadian tax. However a portion of the capital gain could be subject to Canadian tax if the sale of the property occurred while the individual is a nonresident of Canada at the time of sale.

Canadian Reporting Requirement

When Canadian real property is sold by a nonresident of Canada, the transaction is required to be disclosed to CRA within 10 days of the closing of the transaction. In addition, a nonresident is subject to a withholding tax of 25% on the gross proceeds from the sale unless a Certificate of Compliance is approved by the CRA and provided to the legal counsel. Where the approved Certificate of Compliance is issued, the withholding tax liability is reduced to 25% of the net gain realized. The nonresident is also required to file a Canadian income tax return for the year in which the property is sold.

A provision under the Canada-United States Income Tax Convention (“Treaty”) provides relief from double tax and allows a U.S. resident (but not a U.S. citizen) to use the fair market value of the former Canadian principal residence at the time the individual moves from Canada to the US as his US cost basis to compute capital gains taxable on his U.S. federal return. This step-up in cost basis may or may not apply for purposes of state taxation.