Cross-border couples often enjoy the best of both worlds: travelling between the U.S. and Canada, experiencing two distinct cultures and exploring the natural beauty unique to each country. Indeed, Canada and the U.S. are different in many ways. For married homeowners in Canada, one important difference is how the U.S. and Canadian tax systems treat selling a home.
Let’s take a look at Laurie-Anne and Jack’s story. Laurie-Anne is a Canadian citizen, married to Jack, a U.S. citizen. They had owned and resided together in their home in Montréal for ten years before selling it this year. In a robust market, they sold their house for $380,000 more than they had paid for it.
After the sale, Laurie-Anne and Jack were concerned about tax on their capital gain, so they sought our advice. What they learned is that even though they are splitting the proceeds equally, the tax burden will not be the same for each of them.
As a Canadian citizen, Laurie-Anne will not have to pay tax on the capital gain; Canadian tax law does not require taxation on the sale of a home when it has been the principal residence for the entire duration of ownership. In fact, the couple will not even have to report the sale on their tax return in Canada.
Jack files his U.S. tax returns as “married filing separately.” U.S. regulations require that Jack declare all income—worldwide—including his share of the capital gain on the sale of the couple’s home in Montréal. There is an exclusion that benefits Jack: if he has owned or lived in the home long enough to qualify, he is allowed to exclude up to US$250,000 of capital gains from the sale of the house in Canada.
The same house, sold by the same couple, will be regarded entirely differently depending on which side of the border your paperwork is filed. Knowing your rights and obligations—and how they differ between the U.S. and Canada—can help you hold on to your “gains” as you prepare for your next big investment.
Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years. He is active as an author, speaker and educator on international tax and financial planning matters. www.cardinalpointwealth.com