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Capital Gains Tax On Sale Of Principal Residence In Canada



John Richardson, capital gains tax, principal residence

The price of Toronto real estate continues its upward trajectory. This morning I met with yet another (who could have known) Canadian resident who wishes to renounce U.S. citizenship. This person is completely compliant with his U.S. tax obligations. He is renouncing for a very common reason.

The reason for renouncing U.S. citizenship is to protect the tax free capital gain, which results from the sale of his Canadian principal residence in Canada.

The sale of a Canadian principal resident is subject to U.S. capital gains tax!

As a U.K. citizen and resident Boris Johnson recently learned, “The sale or a principal residence may be exempt from capital gains tax under Canadian or U.K. tax law but the sale of a principal residence is subject to capital gains tax under U.S. law!” (Boris Johnson recently renounced U.S. citizenship. His renunciation may or may not have been related to his appointment as British Foreign Minister.)

To put it another way, he is renouncing U.S. citizenship to protect his retirement asset. Interestingly, very few Canadians who are also U.S. citizens, have realized that the sale of their Canadian principal residence is subject to U.S. capital gains tax. It is likely that a very large number of dual citizens resident in Canada, have sold their principal residence and NOT paid U.S. tax on that sale. They never knew about this U.S. tax requirement. (Although Internal Revenue Code S. 121 excludes (subject to certain conditions) the first $250,000 in capital gain from taxation ($500,000 if married filed jointly), the reality is that Canadians living in cities like Toronto and Vancouver, who have owned their homes for many years, will have gains that far exceed the exclusion. That’s the reality of housing prices in larger urban areas. As a result, those Canadians, may be subject to taxation on large amounts of capital gains.)

Canadian tax returns prior to October 3, 2016

Prior to October 3, 2016 there was no requirement that the sale of the principal residence be reported on a Canadian tax return. Because the sale of the principal residence was NOT reported on the Canadian tax return, many U.S. tax preparers (who would base the U.S. return on the Canadian return) would NOT have known about the sale of the principal residence. As a result, they may NOT have reported the sale on the U.S. return.

Canadian tax returns after October 3, 2016*

The sale of the Canadian principal residence is NOW required to be reported on the Canadian return. This will increase awareness of the sale. The increase in the awareness of the sale will certainly lead to more reporting of the sale of the principal residence on the U.S. return.

A change in Canadian tax regulations leads to a change in how people complete U.S. tax returns …

Those Canada/U.S. dual citizens who are NOT covered expatriates (their net worth is below 2 million USD among other things) should consider renouncing U.S. citizenship in order to protect the tax free capital gain – and their retirement asset – from U.S. taxation.

*Here is the text of the information from the Canada Revenue Agency:

Reporting the sale of your principal residence for individuals (other than trusts).

On October 3, 2016, the Government announced an administrative change to Canada Revenue Agency’s reporting requirements for the sale of a principal residence.

When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.

Starting with the 2016 tax year, generally due by late April 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption.

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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3 thoughts on “Capital Gains Tax On Sale Of Principal Residence In Canada

  1. hank says:

    Asuming the U.S. citizen meets the ownership and use requirements, why wouldn’t Internal Revenue Code Section 121 apply to exclude $250,000 ($500k if MFJ) of the gain from U.S. tax?

  2. @Hank

    Of course the S. 121 exclusion applies. The problem is if the gain exceeds the $250,000 tax will be payable. There are many people in Canada who have owned their homes for very long periods of time with huge appreciation – that’s the problem.

  3. Ed Dwyer says:

    Of course we know that you know this. But the targets of your article would appear to be the uninitiated in these finer points. To me your total omission of this important fact in the article is an apparent effort to further your America bad, Canada good agenda. Indeed, it is your failure to make ANY reference to this big Section 121 exclusion provision that is unconscionable because for many (most) it may make the “go” decision on expatriation a “no go” decision–but only if they are provided the relevant facts. If, indeed, your purpose is to instruct, then the reader is certainly entitled to be told of its existence. And even in your response to Hank’s above comment, you still minimize its significance by failing to comment that for a married couple jointly owning that property as their primary residence, the gain exclusion is actually TWICE the amount you note, i.e., US$500,000. This should greatly ameliorate, if not totally neutralize, the cross-border tax disparity you note.

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