The holidays are over, the deep freeze is on and Reading Week and March Break are on the distant horizon. These are the times when many Canadians dream of heading to sunnier climes to escape the chill of winter, many of them looking to buy a vacation home.Over the last few years, increasing numbers of Canadian Snowbirds have taken advantage of a strong dollar and affordable housing in Florida, Arizona and other popular areas.But Canadians who spend time on both sides of the border should be aware of new border crossing rules announced last year by the federal government – plus a strengthening U.S. dollar.“Now, with the American economy and employment gaining strength, home sales should gather some momentum,” Sal Guatieri, senior economist, BMO Capital Markets, said in a recent report. “We expect prices to rise over time alongside growing family incomes.“We also expect the U.S. greenback to rise moderately further against the Canadian dollar, boosting capital gains appreciation for Canadians who purchase U.S. property.”So, as you’re sipping margaritas on the beach, remember that the Tax Man wants a little taste.A recent report by Jamie Golombek, managing director of tax and estate planning at CIBC, warns Canadians that owning foreign property doesn’t mean it’s beyond the reach of Canadian tax authorities.“Many Canadians who own U.S. vacation homes are unaware that certain events may trigger taxes,” says Golombek. “If you earn rental income on the property, sell or gift the property, or own the property upon death, taxes may need to be paid in both the U.S. and Canada.”Golombek offers the following tax tips for Canadians who own a U.S. vacation home:
- Although income and capital gains may be taxed in both the U.S. and Canada, you can generally claim a foreign tax credit to reduce Canadian tax.
- When selling your U.S. vacation home, consider claiming the principal residence exemption to reduce or eliminate your taxable capital gain in Canada.
- Gifting a U.S. vacation property is generally not recommended, since it could result in a significant tax bill in both the U.S. and Canada.
- Consider whether to implement strategies to reduce or eliminate U.S. estate tax that may apply if you own your U.S. vacation home upon death. Common strategies include holding the property in a trust, taking out non-recourse debt, joint ownership as tenants in common, or using life insurance to cover the tax liability.
- Consult with Canadian and U.S. tax advisors – preferably prior to purchasing U.S. real estate.
- “If you’re a Canadian resident with a U.S. vacation home, taxation can become quite complex, with both Canadian and U.S. taxes to consider,” says Golombek. “With good planning, however, you can minimize the impact of taxes on your dream U.S. vacation home so that you and your family can enjoy it for years to come.”
If you’re still determined to buy that little piece of paradise, BMO offers the following tips:
- Consider how many months of the year you’ll be living there so that your purchase reflects your lifestyle. As of June 30, 2014, if you exceed 183 days in the U.S. in a year, you become subject to U.S. tax laws.
- Since you are responsible for property maintenance, consider how easily you can access your property (and at what costs) from your Canadian home throughout the purchasing process and after acquisition.
- Research the differences in mortgage financing and how interest is charged in the U.S., and understand the impact of penalties and withholding taxes if and when you decide to sell your home in the U.S.
- Understand the terms of the property: Is it labeled a short-sale or on foreclosure? The status of the property can have a variety of implications.
- Is your purchase for investment or lifestyle purposes? This will affect where you buy and how you hold the property. If your purchase is for income purposes, renting your property means added responsibility. Research the possibilities of increased utility usage, property management needs and the vacancy rate in the area.
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