If like many Canadians you own a recreational property in the US, you may be liable to pay additional tax in both countries, warns a recent report by Jamie Golombek, CIBC's managing director of tax and estate planning.
He writes: “There are certain events that may trigger taxes on a vacation property. If you rent your property to others, you may pay tax on the rental income that you earn. And if you sell or gift the property during your lifetime or if you own real estate upon your death, tax could also be payable. If you are a Canadian resident who owns a US vacation property, taxation becomes more complex because you will have to consider both Canadian and U.S. taxes at each of these stages.”
He explains that a 30 per cent US withholding tax applies to rental income that you earn from such a property, which the tenant is required to withhold and submit to the US tax office on the owner’s behalf.
Golombek adds that in Canada, the owner must pay federal/ provincial tax on worldwide income, including rental income from any overseas property. However, it is usually possible to claim a foreign tax credit on a Canadian tax return for the US income taxes to reduce the Canadian tax paid.
He also observes that capitals gains tax may apply in both countries when the owner comes to sell their US property.
Golombek offers five key tax tips for owning a US vacation property:
1. Although income and capital gains may be taxed in both the U.S. and Canada, you can generally claim a foreign tax credit to reduce Canadian tax.
2. When you dispose of your US vacation home and owned another home during the same time, consider which property should benefit from the principal residence exemption.
3. Gifting a US vacation property is generally not recommended, since it could result in a significant tax bill in both the US and Canada.
4. Consider whether to implement strategies to reduce or eliminate US estate tax that may apply if you own your US vacation home upon death.
5. Consult with Canadian and US tax advisers, preferably prior to purchasing US real estate.
To read the full report, click here.