US Citizens in Canada Tax Implications of Owning a Canadian Home
Canada is home to a large number of US citizens, and due to the unique aspect of the US tax system, these individuals will continue to be subject to US taxation rules, even if their only tie to the country is their nationality. This article will go over the specific matters that US citizen Canadian residents need to be aware of as it relates to owning a home in Canada.
Buying your home
The Canadian tax system has two important programs for first time home buyers to access capital in a tax efficient manner, the Home Buyers Plan (HBP) and the First Home Savings Account (FHSA).
For the HBP, taxpayers can borrow up to $35,000 from their RRSP as a tax-free withdrawal, as long as they repay it back into their RRSP over 15 years. However, US citizens need to be aware that the IRS may not recognize HBP as a tax-free loan program, and therefore, the withdrawal from the HBP may be taxable for US federal purposes. Individuals wishing to participate in the HBP should consult with their cross-border specialist to determine the treatment of this for US tax purposes. Should it be considered taxable, individuals should consult their accountant with determining the taxable portion of the RRSP withdrawal for US tax purposes for their specific situation.
For the new FHSA, first time home buyers can make tax deductible contributions for Canadian tax purposes to save for a home in Canada, and make tax-free qualifying withdrawals to fund the purchase of a home. Any income earned within the account accrues tax-free for Canadian tax purposes, making in an excellent account for Canadians to utilize.
However, US citizens should note that as of the date of this article, the IRS has not published guidance on the treatment of the FHSA for US tax purposes. Absent such guidance, US citizens should be advised that the income within the account will not have any tax advantaged status in the US, and thus, contributions may not be deductible on their US tax return, nor will the income within the account be excludable from US taxable income. In addition, individuals will need to consult with their cross-border specialist to understand whether holding the FHSA may trigger any filings regarding foreign trusts.
During your years of home ownership
For Canadian tax purposes, mortgage interest on a primary residence is not tax deductible. However, for US tax purposes, taxpayers may be able to claim mortgage interest on their home, including property abroad, as an itemized deduction on the first $750,000 USD of mortgage debt on the property ($375,000 for married filing separate) for mortgages taken out between December 15, 2017 and December 31, 2025. For mortgages taken out prior to December 15, 2017 or taken out after January 1, 2026, the interest limitation is based on $1,000,000 USD for mortgage debt ($500,000 for married filing separate).
The mortgage interest would have to be converted to USD, and generally, US persons only claim itemized deductions if cumulatively with their other itemized deductions, the amount exceeds the standard deduction.
Selling your home
For Canadian tax residents, the Principal Residence Exemption (PRE) can be used to shelter any gains on the disposition of or the deemed disposition of a property that is “ordinarily inhabited” by a taxpayer. A residence for the PRE purpose may include a taxpayer’s home, cottage, and other personal-use real property. There is no limit to the principal residence exemption, so regardless of whether the capital gain on your home is $50,000 or $5,000,000, all the gains should be free from Canadian taxation if it is designated as a principal residence for all years owned.
Such unlimited capital gains exemptions are not available to U.S. citizens who dispose of their homes in Canada. The maximum USD capital gains exclusion for a primary residence is USD $250,000 for a single person or a married couple filing separate returns and USD $500,000 for a married couple filing jointly.
For the purposes of calculating capital gains for US tax purposes, the purchase and sale price have to be converted to USD using historical rates, for example, the purchase price would be converted to USD based on the spot rate on the date of purchase, and the selling price converted to USD based on the spot rate on the date of sale. Any adjustments to the cost basis, such as capital improvements, would also have to be converted to USD based on the exchange rates on the dates such improvements were paid for. Any outlays and expenses, such as realtor commissions and legal fees, could also reduce the US capital gain.
The US primary residence exclusion on the sale of a home is based on the ownership and use tests which considers the previous 5 years:
- Ownership: The individual(s) must have owned the home for at least 2 out of the last 5 years.
- Use: The individual(s) has/have lived in the house as their primary residence for at least 2 years.
There are partial exemptions available in limited situations, such as moving for employment, if the above two tests are not fully satisfied. Any gain not sheltered by the primary residence exclusion would be subject to long term capital gains tax rates, provided the home was held for at least 1 year, as well as potential Net Investment Income Tax, if applicable.
US citizens with significant capital gains on the sale of their Canadian home may be surprised that the IRS wishes to tax some of the gains, so it is best to be prepared.
Principal Residence Upon Death
For Canadian tax purposes, there is a deemed disposition of assets upon death, which includes your principal residence. If the sole beneficiary of your home is a surviving spouse, the property rolls over at cost, unless the individual elects to roll it over at fair market value. Otherwise, if the beneficiary of the home is not a spouse, the deemed disposition would be at fair market value, however the principal residence exemption could still shelter all the gains.
For US tax purposes, there is no deemed disposition upon death, rather, the estate tax regime applies, where the value of your home at the time of death is considered in the worldwide estate. If the total value of worldwide assets upon death is below the US estate tax exemption threshold in the year of death, then there would be no estate tax applicable on the property. If an individual is subject to US estate tax, and if the beneficiary of the home is a US citizen spouse, there may be an exemption from US estate tax due to the availability of an unlimited marital deduction.
Other Considerations – Foreign Mortgage Exchange Gain
Lastly, if the US person has a Canadian dollar mortgage on the property, there could also be capital gains tax on any foreign exchange rate gain with respect to the lump sum repayment and/or settlement of a Canadian mortgage.
When a US citizen borrows funds denominated in foreign currency, such as the Canadian dollar, and the Canadian dollar depreciates in value against the US dollar from the date the mortgage was incurred until the date the mortgage was satisfied, a foreign exchange gain may arise. The individual would have effectively repaid the mortgage using less US dollars because of the depreciation of the foreign currency. Conversely, if a foreign exchange loss arises due to settling the mortgage, that loss may be disallowed.
Conclusion
As this article summarizes, there are several important considerations for US citizens as it relates to owning a home in Canada. Raymond James has a team of cross-border specialist who work together with our financial advisors to help you understand how these rules may apply to your specific situation and identify solutions to reduce or eliminate the US tax implications. Contact your Raymond James advisor to discuss your situation with one of our tax consultants.