departure disposition
Moderator: Mark T Serbinski CA CPA
departure disposition
Could anybody answer this question: Suppose I become a deemed non-resident (by filing a departure notice) and leave spouse and house in Canada. If later years we sell the house (owned jointly) before my wife leaves Canada, could the sale trigger tax withholding on cap gain as a result of my departure? If it does, how CRA figure the percentage? My confusion is that since my wife still stays in Canada until we sell the house, CRA should not withhold her portion of cap gain. But because we own this house jointly, I have no idea how this can be worked out. Thanks
Cdn real estate is never subject to deemed disposition, since it remains forever taxable in Canada.
You (and your spouse) would only be taxed at the sale of the house, based on the the change of use formula, and split between you and her.
Under your scenario, if you sold the house when she moved, say, 4 years after you, she would pay no cap gains on her half, and you would pay 3 years worth (4 years minus one divided by the total years owned) on your half.
You might want to check this out with a Cdn CPA, perhaps who has dealt with divorce cases, where one spouse retains part ownership of a house in which they once, but no longer live. Your situation is probably comparable.
CRA might take the position that none of the gains are taxable, but I somehow doubt it.
In any event, deemed dispo doesn't come into play.
<i>nelsona non grata... and non pro</i>
You (and your spouse) would only be taxed at the sale of the house, based on the the change of use formula, and split between you and her.
Under your scenario, if you sold the house when she moved, say, 4 years after you, she would pay no cap gains on her half, and you would pay 3 years worth (4 years minus one divided by the total years owned) on your half.
You might want to check this out with a Cdn CPA, perhaps who has dealt with divorce cases, where one spouse retains part ownership of a house in which they once, but no longer live. Your situation is probably comparable.
CRA might take the position that none of the gains are taxable, but I somehow doubt it.
In any event, deemed dispo doesn't come into play.
<i>nelsona non grata... and non pro</i>
Thank you very much for your explanation Nelson. Are you suggesting that CPA may be able to put us under so-called "involuntary separation" type of status? (even if there is no marriage breakdown). In this case, do I have to change the title of the house so that my wife owns it 100%? I think this is a very tricky issue and I may need assistance on it.
Another very basic question I need to clarify: Does CRA tax DNR cap gain on property incurred between the time I become DNR and the time we sell the house, or incurred between the time we bought the house and the time we sell it? In other word, are we taxed on part of the cap gain incurred before I become DNR?
Thanks
Another very basic question I need to clarify: Does CRA tax DNR cap gain on property incurred between the time I become DNR and the time we sell the house, or incurred between the time we bought the house and the time we sell it? In other word, are we taxed on part of the cap gain incurred before I become DNR?
Thanks
As I explained, the most you would be taxed on is either the gain after you became non-res, or the portion of the overall gain based on the formula
((T-R-1)/T)*G, where R is years you were resident, minus 1, divided by total years (T) you owned house. G is the total gain
I believe that each of you would do separate calculations, if you became non-resident at different times.
My analogy to divorce was not not meant to be exact in every way. You would not have to redraw any papers. People who leave canada owning Cdn property do not have to change their papers in any way. Only that when the house was eventually sold, you could not both rely on the 100% principal resident exclusion.
And at least one of you would have to comply with the non-resident provisions (ie. subject to pre-sale reporting, and possible withholding).
Perhaps a better analogy would be that 2 brothers owned this home since 1990 (bought at $100K), and one went to US in 2000 (when house was worth $140K) , but retained 1/2 portion in the house, and the other sold it in 2005, with an overall cap gain of $60K.
Cdn brother would owe nothing on his $30K by principal resident exclusion. US brother would owe US tax on $10K (his half of $160-$140). He would owe Cdn tax on either that $10K, or by formula, his half of (15-10-1)/15 * 60 which is $8K.
As you can see, it is useful to have an evalution of any property when you move from Canada (for future Cdn tax purposes) as well as for US tax purposes.
<i>nelsona non grata... and non pro</i>
((T-R-1)/T)*G, where R is years you were resident, minus 1, divided by total years (T) you owned house. G is the total gain
I believe that each of you would do separate calculations, if you became non-resident at different times.
My analogy to divorce was not not meant to be exact in every way. You would not have to redraw any papers. People who leave canada owning Cdn property do not have to change their papers in any way. Only that when the house was eventually sold, you could not both rely on the 100% principal resident exclusion.
And at least one of you would have to comply with the non-resident provisions (ie. subject to pre-sale reporting, and possible withholding).
Perhaps a better analogy would be that 2 brothers owned this home since 1990 (bought at $100K), and one went to US in 2000 (when house was worth $140K) , but retained 1/2 portion in the house, and the other sold it in 2005, with an overall cap gain of $60K.
Cdn brother would owe nothing on his $30K by principal resident exclusion. US brother would owe US tax on $10K (his half of $160-$140). He would owe Cdn tax on either that $10K, or by formula, his half of (15-10-1)/15 * 60 which is $8K.
As you can see, it is useful to have an evalution of any property when you move from Canada (for future Cdn tax purposes) as well as for US tax purposes.
<i>nelsona non grata... and non pro</i>