Tax Planning Tips For Canadian Residents Buying Property In US

By: Kris Koonar

In view relevant of the provisions, which include the US Canada-US tax treaty of 1995, Canadian residents (not those who fit US resident criteria) buying property in the US must do their tax planning accordingly.

US income tax, estate tax and various other laws treat foreign nationals on different footings depending on whether they have a US resident or non-resident status. US laws lay down certain criteria to ascertain resident/non-resident status.

A citizen of Canada is subjected to two tests to determine his/her residence status for tax purposes.

One- if he holds a US green card he is treated as a lawful permanent US resident. His presence /absence in the US is not considered. And

Two- If he had a substantial presence in the US he is treated as a US resident. This means being present in the US for 183 days in the preceding three years in the following manner.

. If he has been present in the US for at least thirty days during the current calendar year

. If the sum of the number of his US days in the current financial year, 1/3rd of US days in the first preceding year and one sixth of US days in the second preceding year equals or exceeds 183 days.

Factors like inability to leave the US due to ill health or being present as part of a govt. delegation and certain other exceptions are taken into account while calculating the total of 183 days mentioned above. Even when substantial presence is established, meeting certain other additional criteria may still attach a non-resident status to a Canadian citizen.

A US resident alien is treated more or less similarly as a US citizen for tax purposes. He has to file tax returns and pay taxes on income received from all sources in the US and/or anywhere in the world. The resident status entitles him to all the deductions, personal exemptions and other benefits available to US citizens while computing taxable income.

A non-resident on the other hand, subject to certain exceptions, usually has to pay tax on income he receives from US sources only. In addition, his non-resident status and limited tax exposure make much less of exemptions and deductions available to him as compared to his resident counterpart.

When a Canadian resident buys a condo in Florida or other real property located anywhere in the US and rents it out, there is a withholding tax of 30% applicable on the rent. This means that the tenant is liable to withhold 30% of the rent and pay it to the IRS. By filing a US tax return and paying tax on the net rental income, the 30% gross withholding tax can be avoided.

There may be significant expenses such as maintenance; property management expenses, mortgage interest, property taxes etc. that can reduce the taxable amount considerably, and the resulting tax at marginal rates can be substantially lower. Once the net rental system is elected, it usually cannot be revoked. The Canadian property owner needs to provide the tenant with form IRS 4224 to avoid deduction of 30% withholding tax.

When a Canadian resident sells any property that he owns within the US, the Foreign Investment in Real Property Tax Act-1980(FIRPTA) mandates a 10% withholding tax on the gross sale price. However, it is possible to offset this tax against US income tax payable on any capital gain on the sale. A refund can be claimed if the withholding tax is above the tax liability.

This provision is subject to two exceptions.

a) When the property is sold for less than $300000 and the purchaser intends to use it for his principle residence for at least 50% of the time for the next two years he pays the full price to the seller instead of withholding 10% to remit to the IRS.

b) When the seller obtains a withholding certificate from the IRS stating that US tax liability is expected to be less than ten percent of the sale price. The amount of tax to be withheld, if any, would be mentioned on the certificate.

When a Canadian resident breathes his last owning property in the US, federal estate tax is imposed, which can range from 18 to 45% in 2007. Under article XXIX B of the Canada-US tax treaty, unified credit can be applied to reduce or eliminate estate taxes.

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