A case study: When the first residence exemption is just not enough
Take London and Ava. London grew up in St. Louis before taking an executive position at a Canadian technology company in Vancouver. There he met Ava, a Canadian elementary school teacher. After they got married, they bought what they hoped could be their home: a single-family home in Toronto for $850,000 CAD.
Over the following 20 years, they renovated the kitchen, finished the basement, watched their two children grow up and built a life within the neighborhood. When they retired, the home was price $2 million. Selling the home felt like the ultimate chapter of a successful life in Canada.
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Their Canadian neighbors congratulated them on a very tax-free sale, as Canada’s primary residence exemption covered your entire gain. Then London received a call from its cross-border tax advisor.
“As a U.S. citizen,” the consultant explained, “the IRS still wants to know about the sale.”
Depending on the worth of the house and the way the property was owned to start with, London could owe U.S. taxes on a gain that Canada wouldn’t tax in any respect. It is one of the crucial common and neglected cross-border tax issues facing Americans constructing their lives in Canada.
Canada says tax free, the IRS doesn’t at all times agree
Canada’s principal residence exemption is amongst essentially the most generous tax relief available to homeowners. In most cases, Canadians can sell their primary residence without paying capital gains tax, no matter how much the property has increased in value.
The United States operates under a very different system. Unlike almost every other country, the United States taxes its residents no matter where they live. Living in Canada doesn’t extinguish your U.S. tax obligations, and that features selling your Canadian home.
Under current U.S. rules, individuals can exclude as much as $250,000 of gain from the sale of a primary residence, while married couples filing jointly could also be eligible for a $500,000 exclusion if each spouses meet the ownership and residency requirements.
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That sounds generous unless you concentrate on the appreciation that many Canadian homeowners have experienced over the past 20 years. In cities like Toronto and Vancouver, profits well above these thresholds aren’t any longer unusual.
For Americans living in Canada, a house that they thought could be completely tax-free can turn into considered one of the biggest taxable assets they own.
The way you register your own home is vital
One of the best planning opportunities often occurs before the acquisition contract is signed.
Like most newly married couples, London and Ava bought their house together without much considered how the title was registered. From a Canadian perspective, this decision was commonplace. However, from a cross-border tax perspective, a special ownership structure might need resulted in a greater consequence.
For mixed-nationality couples where one spouse is a U.S. citizen and the opposite is just not, holding the property jointly as tenants with a bigger share of ownership allocated to the non-U.S. spouse can significantly reduce the danger of future U.S. capital gains.
Sell assets? Read our guide to capital gains
Every family’s circumstances are different and the suitable ownership structure relies on quite a lot of tax, legal and estate planning considerations. For this reason, these decisions must be evaluated before purchasing a house and never years later when the change in ownership could have legal, tax or property consequences.
Of course, taxes are only a part of the equation. Property decisions also impact provincial probate law, estate administration, creditor protection and family law laws. The best solution balances all of those considerations quite than simply specializing in taxes.
Buying is not at all times the hard part
Before Americans take into consideration taxes, they need to first make clear whether or not they are even allowed to buy home ownership.
