Greetings! I am a dual citizen who has lived in the US for the past 11 years. I must relocate back to Canada when my employment ends within the next three months or so.
I am presently attempting to complete a short sale of my primary residence in Florida. If and when the bank agrees to the short sale, I expect it to generate cancellation of debt income of about $100K. (The house that I bought for $189K in 2005 is now listed for sale at $79K, and has attracted exactly one offer ... for $45K.) The COD income must be declared on my US tax return, but I will be able to exclude it from my gross income under the Mortgage Forgiveness Debt Relief Act.
Do I need to worry about any ramifications with regards to Canadian taxation? There is virtually no chance that the short sale will be completed before I must move to Canada, so the COD income will be generated while I am a Canadian resident. I haven't been able to find any information regarding the Canadian tax treatment of cancelled debt. Does it need to be factored in to my Canadian tax return?
Thanks in advance!
Cancellation of debt
Moderator: Mark T Serbinski CA CPA
-
CrunchyFrog
- Posts: 1
- Joined: Tue Feb 15, 2011 12:23 pm
- Location: Fort Lauderdale, FL
CrunchyFrog,
You really had me stumped for a while.
The debt-forgiveness provisions in section 80 of the Income Tax Act would not apply, as the debt is of personal, non-commercial nature. The test for determining personal, non-commercial nature is interest deductibility. Interest expense on a principal residence is not deductible in Canada.
Furthermore, the cancellation of debt would not be caught by section 79 of the ITA, as the planned short sale will be done in agreement with the creditor. In other words, the home is not being reacquired by the bank as a consequence of you failing to make the scheduled debt repayments.
It appears to me that the transaction will be a regular disposition, with proceeds equal to US$45K (or whatever it ends up being) and cost being deemed to be the fair market value of the property on the day you re-establish Canadian residency (US$45K).
All the best,
You really had me stumped for a while.
The debt-forgiveness provisions in section 80 of the Income Tax Act would not apply, as the debt is of personal, non-commercial nature. The test for determining personal, non-commercial nature is interest deductibility. Interest expense on a principal residence is not deductible in Canada.
Furthermore, the cancellation of debt would not be caught by section 79 of the ITA, as the planned short sale will be done in agreement with the creditor. In other words, the home is not being reacquired by the bank as a consequence of you failing to make the scheduled debt repayments.
It appears to me that the transaction will be a regular disposition, with proceeds equal to US$45K (or whatever it ends up being) and cost being deemed to be the fair market value of the property on the day you re-establish Canadian residency (US$45K).
All the best,