Canada, unlike the United States, taxes entities on the basis of their ‘resident’ status during a tax year rather than basing it on their citizenship. However, in the case of a Canada-situs property it could be taxable even if the taxpayer is a non-resident during the year, with the situation growing in complexity if it involves a deceased non-resident real property owner.
AG Tax has prepared a brief summary on the applicable tax rulings in the event of a non-resident property owner and taxpayer’s death with the help of a recent query made by an Italian resident to the Canada Revenue Agency (CRA) who holds a property in Canada, jointly with his non-resident spouse.
Background of the Query by a Non-Resident Taxpayer
In June 20, 2013, a non-resident individual put forward a question to the CRA to determine if his Canadian property, jointly owned by him and his spouse (both non-residents in Canada and citizens of Italy), will qualify for a spousal rollover instead of deemed disposition upon death. Furthermore, if ‘the property was deemed to have been disposed of, would it qualify for principal residence exemption with respect to his ownership in the Canadian home taking into account that his adult son currently resides in it.
Tax Rulings as per Canadian Income Tax Act (ITA) Pertaining to the Case
ITA §70(5) Deemed Disposition of Real Property upon Death of the Owner
In Canada, deemed disposition is define as such when an individual, upon death, is considered to have disposed of all his/her capital property at the FMV prevailed at time of death. If this deemed disposition results in a capital gain it needs to be reported in the final income tax return filed by the representative of the deceased.
ITA §70(6) Spousal or Common-in-Law Partner Rollover of Ownership upon Death of the Owner
The deemed disposition of property may not apply if the ownership of the property is transferred to a spouse/common-law partner or to a qualifying spouse trust provided both owners (deceased and spouse/common-law partner) are Canadian residents at the time of the deceased’s death; in which case any capital gain/loss would be deferred until the property is disposed of by the spouse or common-law partner or the spousal trust (the rollover rule). This should be done within 36 months of the death, unless extended by the Minister when reasonable circumstances are presented by the spouse or their representative.
ITA §40(2)(b) Principal Residence Exemption
If the real property is a principal residence, the capital gain(s) realized on disposition of the asset could qualify for a ‘principal residence exemption’ if the following conditions are met:
– The taxpayer is the legal owner of the residence.
– The residence should be occupied by a current or former spouse/domestic partner or dependent child of whom the owner (taxpayer) or his/her spouse/domestic partner should be the legitimate parent.
– The exemption applies only for those tax years in which the taxpayer was a Canadian resident including the acquisition time and the time period during which the dependent occupied the house. (Read: Non-Residents and Canadian Principal Residence Exemption for more info.)
The CRA clarified that the Canada-situs property of the non-resident does not qualify for the ‘spousal rollover rule’ because they were not ‘residents’ of Canada, nor did they occupy the house during the time of death.
The real property, even though ‘occupied by a legitimate child of the owner’ does not qualify for principal residency exemption as the owner is non-resident at the time of disposition and as such fails to qualify as a ‘principal residence’ for exemption as it only qualifies during the years that the owner is a resident of Canada.
Having said that, under Article 13(1) of the Canada-Italy Tax Treaty, deemed disposition of an interest in a home in Canada, owned by a resident of Italy would be considered as “alienation of immovable property” for tax purposes and thereby subject to Canadian Taxation under ITA §116(1) Disposition by Non-Resident Person of Certain Property.
It is important to understand that dealing with taxes can be quite complex, especially in the case of non-residents who could face dual taxation in their own country and the country in which the property is located. In these situations, it is recommended that non-resident taxpayers consult tax professionals for a well-guided tax strategy to minimize their tax burden.
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.