Canadian homeowners need to be aware of the taxation rules and regulations that may apply upon when selling a second home. A Canadian resident may have to pay the IRS when owning a property in the US or be prepared for a capital gains tax for a vacation home in Canada. Get an idea of the tax obligations for Canadian residents and property owners looking to sell a vacation home.
Preparing in advance may reduce certain tax obligations. As Canadian and American tax law frequently changes, it is best to consult with a professional for the latest advice on selling and paying taxes on a vacation property. Learn more about the tax obligations when a Canadian homeowner chooses to move forward with selling a home.
Are You a Canadian Homeowner with Vacation Property in Canada?
When buying and selling property, any property sold that is not designated as an owner's primary residence will incur a capital gains tax. There is no way to get around this issue, except where an owner decides to alternate the primary residence designation and have the vacation property become the primary residence. In this way, the gains of that home can be sheltered from capital gains taxation. A homeowner should talk to a tax accountant before making the change and understand the nuances involved in this strategy for their Northwest Calgary home.
Are You a Canadian Homeowner with Vacation Property in the U.S.?
A Canadian homeowner who purchased property in the U.S. may have a number of considerations when it comes time to sell a vacation property. In order to pay the U.S. tax on the sale of a vacation property, a homeowner will need to obtain an "ITIN" number, in most cases. Those eligible to work in the U.S. would be able to get a social security number. A Canadian homeowner owning an income from a vacation property would already be using an ITIN or social security number to pay U.S. taxes. The sale of a U.S. vacation home obligates a Canadian seller to file a Form 1040NR (individual) or other applicable forms to receive a refund.
Some foreign sellers need to be aware of adjusting for an obligatory withholding, under the Real Property Tax Act. Sellers need to take 10 percent of the gross sales and pay it over to the IRS. At times, a complete or partial exemption may be granted, such as the exemptions found in the US/Canada income tax treaty. Under the treaty, much depends on the purpose of owning the vacation property.
Canadian residents are subject to a Canadian income tax on any income earned worldwide. When a vacation home is sold, the resident will need to report a capital gain or loss and any recapture of depreciation during the year of the sale. Many owners take advantage of the preferential capital gain rate but the vacation home must be a "capital property." When a vacation home is owned for a relatively short period, this may come into question. All calculation for Canadian capital gains and recapture are done in Canadian dollars, using the exchange rate that would apply on the given transaction date. A comparative weak or strong Canadian dollar may alter the Canadian tax on the foreign currency gain.
Goods and Service Tax And What It Means For Buyers and Sellers
Vacation home buyers may be concerned about the Goods and Service Tax (GST) and what it means for them and the property they are trying to buy because it can potentially add 15% onto the cost of the home, which can be detrimental when working with a strict budget. However, many buyers will be able to breathe a sigh of relief as GTS only applies under specific circumstances:
- The home must be a commercial property.
- The property must be used commercially for at least 50% of the year.
- The property must be actively being rented for the 50% of the year.
If the owner chooses to lease it out to vacationers, they will be exempt from paying GTS until the six month mark. When selling a vacation home and the seller knows the buyer will be required to pay GST for the home, the seller should make it clear as soon as possible so they can prepare appropriately.
Know What You Need to Do
Canadian owners of vacation properties in Canada and the United States need to be aware of the potentially complex requirements that may come with the sale of a vacation home. The above information is intended to Canadian individuals holding property but other legal ownership structures are available and may change the taxation requirements in Canada and the United States. It is important for a seller to discuss any taxation obligations with an experienced tax accountant and get prepared to fulfill any requirements.