I am looking to move to the U.S. and am not sure if I will sell my home before I leave Canada. Could you please outline the tax ramifications if I were to sell it before departing Canada versus selling while a tax resident of the U.S.?
You have requested that we provide you with some comments related to the tax implications of the upcoming disposition of your Canadian residence. This analysis has been completed based on the following assumptions:
- The property is a residence located in Canada
- The property was purchased while you were a tax resident of Canada
- You have been a tax resident of Canada during the entire period of ownership of the residence
- The property has always been a personal use property and has never been used as an income producing property
- There is no other property for which the principal residence exemption has been used during the period of ownership
- You will become a non-resident of Canada at some time during 2018, and the sale of the residence may potentially take place while you are a non-resident of Canada.
Property Sold as a Resident of Canada
If the property is sold while you are still a tax resident of Canada, you will report the disposition and will claim the principal residence exemption in the exact same manner as if you were a Canadian tax resident for the entire year. In other words, you will disclose the disposition on Schedule 3 of your 2018 Canadian income tax return, and will also complete Form T2091, Designation of a Property as a Principal Residence by an Individual. The property will qualify for the full exemption, and no special reporting is required.
Property Sold as a Non-resident of Canada
Capital Gains Exemption
If the property is sold while you are a non-resident of Canada, some additional analysis is required. Based on the assumptions above, the property is eligible for the principal residence exemption for any year that you own it as a Canadian resident, even if you are a Canadian resident for a portion of the year. In other words, if you were to become a non-resident of Canada in 2018, you are still able to claim the exemption for the entire 2018 tax year. In addition, the principal residence exemption formula contains a “plus one” in the numerator (only applicable if the property was purchased while you were a tax resident of Canada). As such, based on our assumptions, it would be possible for you to sell the property in 2019 as a non-resident of Canada and have the ability to exempt the entire gain from Canadian taxation.
If the property is sold as a non-resident of Canada, some additional compliance is required, even if there is no taxable capital gain.
By default, the purchaser of the property is required to remit 25% of the gross proceeds from the sale to CRA, unless a clearance certificate is obtained from CRA. They must do this even if they know that the property was sold at a loss, or if the entire gain is exempt from taxation. In order to avoid this, you must file Form T2062, commonly referred to as a clearance certificate, to request that only the potential taxable gain be subject to the 25% withholding tax. Assuming that there will be no taxable gain based on the principal residence exemption, the clearance certificate would be to request that no Canadian withholding tax be remitted. If the form is properly filed, CRA will send the approved form to the purchaser of the property, and you will be able to receive your entire proceeds without having any Canadian tax withheld. We will not go into detail on the specifics of filing the clearance certificate at this time, but are happy to assist you in the future in the event that it is required.
Assuming that the property is sold in 2018, a Canadian non-resident tax return will need to be filed by April 30, 2019 to report the disposition of the residence, even if there is no tax payable. Schedule 3 and Form T2091 will need to be completed.
Property Sold as a Non-Resident of the U.S.
There will be no U.S. tax implications if the sale of the Canadian property occurs prior to U.S. tax residency.
Property sold as a Resident of the U.S.
Based on the assumptions that we have listed, the property will meet the criteria of having been your principal residence for at least 2 of the last 5 years. The U.S. does not have any requirement that the property be owned as a U.S. resident for 2 of the last five years, just that the property be the principal residence. There are other criteria that need to be met, but it is highly likely that these would be met so they do not require analysis.
For U.S. income tax purposes, there is a limit to the amount of gain that can be excluded. However, there is an article in the Convention between the United States and Canada (the Treaty) that provides for a bump-up in the cost basis of the principal residence when an individual becomes a non-resident of Canada and a resident of the U.S. This makes it highly likely that your capital gain on the disposition of your residence would be minimal for U.S. tax purposes. It is highly likely that the entire capital gain, if one exists at all, will qualify for the principal residence exemption from a U.S. tax perspective.
It is not necessary to report the sale of a principal residence on a U.S. resident income tax return if the property is sold at a loss, or if the entire amount is exempt from taxation.
One often overlooked U.S. income tax rule is that of the currency exchange gain that can result when a U.S. resident pays off a foreign mortgage. If you pay off a Canadian mortgage while you are a U.S. tax resident, depending on exchange rates, it could be possible that you have a foreign currency gain. We would require more information to determine if this is applicable to you. If it was applicable to you, it would be in your best interest to pay off the mortgage prior to U.S. residency, if possible.