US Property / CCA Planning

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PlatinumNeon
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US Property / CCA Planning

Post by PlatinumNeon » Wed Apr 24, 2019 12:22 am

Situation:

US citizen, filing for the first time in Canada. Had to convert the existing residence to a rental property.
US taxes were filed, incl. the depreciation.

I want to understand the choices for claiming CCAs in Canada and what happens if I decide to return to the States 2-3 years down the line
and convert the rental to the personal residence?

Is it better to claim the CCAs? How would CRA know I sold the property? I understand there's a concept of deemed disposition but aren't there some short term exemptions for that?

nelsona
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Re: US Property / CCA Planning

Post by nelsona » Wed Apr 24, 2019 9:46 am

The sole reason to claim CCA would be to rationalize your US tax and your Cdn tax on that renatl income. There is no point paying Cdn tax when no US tax would be due because of depreciation,
There are several provisions that would avoid you having to pay tax at all, or avoid having to pay tax in one country without not in the other in the same year.
1. If you owned the property before coming to Canada and stayed in Canada for less than 5 years, that property is NOT subject to deemed disposition when leaving.

2. The treaty allows US citizens to elect to "dispose" of US property anytime Canada requires a deemed disposition/acquisition, so you could trigger US "sale" both when you arrive and/or when you leave, allowing you to mesh your taxes in both countries.

3. You could also, if you keep the US property for 10 years after leaving Canada, apply to have deemed disposition tax forgiven.
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nelsona
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Re: US Property / CCA Planning

Post by nelsona » Wed Apr 24, 2019 9:48 am

So I see no reason why you would not CCA the property to the extent needed to "match" your Cdn tax to your US tax.
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PlatinumNeon
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Re: US Property / CCA Planning

Post by PlatinumNeon » Wed Apr 24, 2019 11:04 am

Thank you for your answers -

what are the mechanics for #3? You apply for it when leaving Canada and promise you won't sell the property for 10 years?

nelsona
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Re: US Property / CCA Planning

Post by nelsona » Wed Apr 24, 2019 12:42 pm

No. Put up security against the tax "owed" (or pay it) and then after the 10 year mark, ask for forgiveness, and adjust the return.

by the sounds of your posts, I would think #1 would be your likely outcome. I don't see you staying in Canada too long.
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PlatinumNeon
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Re: US Property / CCA Planning

Post by PlatinumNeon » Thu Apr 25, 2019 9:20 am

OK, so the rule is actually, if you are resident of less than 60 months (5 years - which do not need to be consecutive) within a 10 year period , the deemed disposition is exempt. yay!

Having said that, when I asked the software to apply CCAs vs. not applying them, there was no difference to the amount owed to CRA - how is this possible?

nelsona
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Re: US Property / CCA Planning

Post by nelsona » Thu Apr 25, 2019 10:00 am

I don't handle software problems, but you can certainly look what CCA was calculated, if it is zero, then there will be no effect. CCA cannot reduce your net rental income below zero.
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nelsona
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Re: US Property / CCA Planning

Post by nelsona » Thu Apr 25, 2019 12:42 pm

Btw, when did you arrive in Canada? Unless you arrived very early in 2018, I would not think that Cdn tax would be much of an issue for 2018, since you only report income after arrival.
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PlatinumNeon
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Re: US Property / CCA Planning

Post by PlatinumNeon » Thu Apr 25, 2019 1:19 pm

Unfortunately, very early January....

Bumble
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Re: US Property / CCA Planning

Post by Bumble » Sat Apr 27, 2019 2:55 pm

nelsona wrote:
> [...]
> 2. The treaty allows US citizens to elect to "dispose" of US
> property anytime Canada requires a deemed disposition/acquisition, so you
> could trigger US "sale" both when you arrive and/or when you
> leave, allowing you to mesh your taxes in both countries.
> [...]

This is extremely interesting. My wife and I are U.S. citizens and own a house in California, which we plan to rent out after our move to Canada this summer. The house has accumulated over $500,000 of capital gains since purchase. We could sell the property in order to capture the $500k capital gains tax exemption that the IRS allows, but are planning to keep it as a rental property for the time being - just in case we want to move back in the future for any reason and we might not be able to afford another one later, given the crazy real estate market here.

Since we'll become tax residents of Canada later this year (2019), we will trigger a deemed acquisition of this property upon settlement in Canada for our Canadian tax return. @nelsona, based on the above, does it mean we can also trigger a U.S. sale of this U.S. property on our 2019 US tax return, and thus, able to capture the $500,000 capital gains tax exemption even we're not selling it?

If so, do you mind pointing me to the source of this information so I can provide it to our tax accountant, in case they are not aware of it, please?

Many thanks in advance!

Gilgamesh
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Re: US Property / CCA Planning

Post by Gilgamesh » Sat Apr 27, 2019 5:17 pm

Bumble I think it is treaty provision XIII(7)

https://www.irs.gov/pub/irs-trty/canada.pdf

Gilgamesh
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Re: US Property / CCA Planning

Post by Gilgamesh » Sat Apr 27, 2019 5:18 pm

7. Where at any time an individual is treated for the purposes of taxation by a Contracting State as having alienated a property and is taxed in that State by reason thereof and the domestic law of the other Contracting State at such time defers (but does not forgive) taxation, that individual may elect in his annual return of income for the year of such alienation to be liable to tax in the other Contracting State in that year as if he had, immediately before that time, sold and repurchased such property for an amount equal to its fair market value at that time.

nelsona
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Re: US Property / CCA Planning

Post by nelsona » Sat Apr 27, 2019 6:13 pm

There is an important clause there that might not allow Bumble to do what he is wanting: " and is taxed in that State". Deemed acquisition does not result in taxation in Canada, so strictly speaking it does not apply. It only applies at the deemed disposition end of your time in Canada.

I don't know where Gilgamesh got his version of that paragraph, but here is the official one. (which contains nothing about deferral). Might be an old one.

XIII
7. Where at any time an individual is treated for the purposes of taxation by a Contracting State as having alienated a property and is taxed in that State by reason thereof, the individual may elect to be treated for the purposes of taxation in the other Contracting State, in the year that includes that time and all subsequent years, as if the individual had, immediately before that time, sold and repurchased the property for an amount equal to its fair market value at that time.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

Bumble
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Re: US Property / CCA Planning

Post by Bumble » Sat Apr 27, 2019 8:38 pm

Thanks, @nelsona and @Gilgamesh. I think Gilgamesh's quote could have come from the original 1980 income tax treaty, but nelsona's quote could have come from the 2007's modified version of the treaty. I find an elaboration of this paragraph here:
https://hodgen.com/canadian-treaty-reli ... -taxation/

It looks like I won't be able to take a deemed disposition of my U.S. property in my U.S. tax return when I settle in Canada (where I must take a deemed acquisition in my Canadian tax return.)

However, I also have a Canadian property that I plan to move back to upon my return to Canada later this year. I have been receiving rents and filing Section 216 income tax return on this property (CRA Form T1159). Since I'll become a tax resident of Canada again, I will need to take a deemed disposition of this property immediately prior to settling in Canada. It seems that the treaty allows (but not requires) me to also take a deemed disposition of this property in my U.S. tax return, if I find this to be advantageous. Am I correct?

Thanks so much again!

nelsona
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Re: US Property / CCA Planning

Post by nelsona » Sun Apr 28, 2019 10:08 am

You do not necessarily have to take deemed dispo on arrival in Canada, unless you change use of your property. But, that would be a case which would trigger the election for IRS.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

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