Q: We have been snowbirds for years but recently retired from the farm, moved to town and bought a place in the United States. We spend roughly half the year there, renting it out for the other half of the year. Is there anything we should know about residency?
A: Your question raises a host of issues, mostly in the area of taxation. You need to be careful and obtain good tax and financial planning advice.
I am not the best person to advise in this area; talk to a designated accountant or lawyer with tax expertise. However, I can provide general advice. The issues arise because you have bought a home and spend a lot of time in the U.S. These factors must be carefully considered and assessed.
Read Also
Rural emergency room closures continue to be vexing problem
Staffing issues are at the root of disruptions and closures in hospital emergency departments, both in rural and urban Canadian locations.
I am going to deal with this question in two successive columns. The first will deal with issues arising in Canada. Next week’s column will deal with the same facts but will centre on what will happen in the U.S.
Because you reside in Canada, you must legally report all income on your Canadian income tax return. This entails all income earned from all sources and from any place in the world, including income earned from renting out your house in the U.S. You then have to pay income tax in Canada on your total income.
Under Canadian tax law you are entitled to deduct any appropriate expenses from that rental income, provided the expenses were incurred to produce that rental income and are allowable deductions under the Income Tax Act of Canada.
Consult with the Canada Revenue Agency (CRA) or better yet, a competent accountant or lawyer who is a tax specialist. Foreign rental income has to be reported on a separate form, on which you have to tell the federal government that you own a foreign revenue property. You only have to do this if your home is worth more than a certain value, which is presently $100,000. However, that amount can change from time to time, so check.
Also, if you are forced to pay U.S. tax on that rental income, you may be able to deduct all or some of that tax through use of a foreign tax credit deduction on your Canadian tax return.
I assume that some day you will sell your home in the U.S. If this is not your principal residence (and it probably is not) then it will attract capital gains tax in Canada. You will have to report the sale to the CRA and pay capital gains tax on the difference between the adjusted cost of acquiring the property (adjusted cost base) and the sale price.
It may be that the U.S. taxing authorities will compel you to pay U.S. income tax at the time of the sale. If so, you will likely be able to claim a foreign tax credit to set off that amount against Canadian taxes.
Mark Twain said the only things certain in life are death and taxes. This is true in your situation, too. If both of you die and the last survivor still owns your U.S. home, Canadian tax law treats it as if you sold the home at fair market value on the date of your death. Capital gains tax will arise at that time, which calls for significant tax planning.
Rick Danyliuk is a practising lawyer in Saskatoon with McDougall Gauley LLP. He also has experience in teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
