For many Canadians, retirement is synonymous with the United States. The warm, sunny weather of Florida, Arizona, and California makes U.S. states some of the most sought after places for Canadians to retire when compared to the freezing provinces of Canada. As per the U.S. National Association of Realtors survey, 29.6% of the foreign home buyers in Florida in the year 2013 were Canadians who have been investing fiercely in U.S. real estate ever since the subprime mortgage crisis led to the U.S. real estate market crash.
However, as Jason Safar, an Ontario-based tax partner with PwC Canada puts it, “Every time you get involved with another jurisdiction, you’re putting another layer of tax compliance on your plate. As soon as you own a property in a foreign jurisdiction you’re operating under two tax systems.” It only makes sense to be aware of these tax consequences before setting off to bask in the southern sun and enjoy a game of golf.
Tax Points To Consider for Retirement in the United States
Resident Ruling
The Internal Revenue Service (IRS) uses the “substantial presence” test, (i.e. a requirement of 31 days in the current tax year plus a 183 days period in the current and past 2 consecutive years in the U.S.) to determine if an individual is a resident for the particular tax year and therefore subject to U.S. taxes on his/her worldwide income.
Although this filing compulsion is preventable through the Internal Revenue Code and Canada-U.S. Tax Treaty’s “closer connection” and “tie-breaker” rules even if someone passes the substantial presence test, Canadians frequently visiting the U.S. are often advised to keep their presence in the U.S. less than 120 days. This is because individuals approaching 120 days run a higher chance of triggering ‘substantial presence’, which would require them to file U.S. tax returns for the year. Under the “closer connection” and “tie-breaker” rulings, the person may be asked to justify his/her resident status through his/her driver’s license, health insurance, bank accounts, or other legitimate ways; but the possibility of a long and costly debate between the CRA and/or IRS to arrive at a conclusion cannot be ruled out.
Tax Filing Requirement
If none of the above rulings, under U.S.-Canada Tax Treaty, prove beneficial in justifying the individual’s resident status, he/she would need to file the U.S income tax return, and report his or her worldwide income. This also raises the probability of additional U.S. filing requirements.
U.S. Capital Gains Tax& FIRPTA Withholding
The situation gets more complex when a Canadian decides to sell off a U.S.-situated property. Under Foreign Investment in Real Property Tax Act (FIRPTA), a foreign person (Canadian) is subject to a 10% withholding tax on the amount realized or to be realized from disposition of a U.S. situs asset. The Capital gains tax rate can range from anywhere from 15% to 20%, and ,including the state and local property taxes which may range anywhere between 2% to 9.5%, an individual could end up incurring tax liabilities not less than 15% to 30% of the gain. However, an individual can apply in advance for an exemption from this withholding requirement by substantiating that the possible tax liability may be less than the 10% tax withheld.
Estate Taxes
A non-resident individual (Canadian) owning U.S. situs property needs to be aware that any U.S. situs property is subject to U.S estate taxes upon his/her death. As a non-U.S. resident, the estate may be subject to an estate tax of up to 40% upon the death of the owner, with an exemption of only $60,000 from taxes.
The Canada-U.S. tax treaty does provide some relief in the form of increased exemption limit, known as the ‘unified credit exemption’ (prorated based on the value of their U.S. situs assets over the value of their entire estate) which allows any decedent Canadian owning U.S. located property to leave his/her U.S. situs estate to his/her spouse/common-law partner in a manner similar to the U.S. marital deduction applicable if the surviving spouse was a U.S. citizen (the exemption amount is effectively doubled).
It is recommended that any Canadians owning U.S property consult with an estate attorney and consider establishing a trust which suits the individual’s requirement of transferring his/her estate to his/her beneficiaries in an efficient manner.
CRA’s Foreign Property Reporting Requirement
The rules are not limited to the U.S.; the CRA also requires Canadian owners to disclose details of “specified foreign property” (real estate, stocks, funds, and other investments) if it is worth equal to or more than $100,000. CRA requires full discloser regarding the ownership, cost, and any income earned of each of the foreign assets held, wherein non-compliance, inaccurate, or incomplete information/disclosure could lead to penalty, interests, and jail time.
The above is just a glimpse of the potential tax implications an individual may face. Once a Canadian owns property in the U.S. he/she may be liable to the U.S. reporting requirements. Additionally, frequent travelers staying for long durations away from Canada could be risking their Canadian health insurance and pension coverage. Therefore, it is extremely important that any Canadian resident/citizen considering settling in another country during retirement, or at any point of time in their life, consult a cross-border tax professional and a lawyer before executing their plans.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
