American citizen gifting real estate to Canadian spouse: Tax implications in Canada

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BlackberryBubly
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American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by BlackberryBubly » Sun May 24, 2020 10:41 pm

Asking for a friend

When an American citizen (who's not a Canadian citizen or tax resident) who owns a real estate property in Canada tries to gift his spouse who is a Canadian citizen and tax resident in Canada, would this generate a capital gain for the American spouse (i.e. need to pay tax to the Canadian revenue agency)?

Thanks

nelsona
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by nelsona » Mon May 25, 2020 7:49 am

Tell your friend that this may incur GIFT tax in US, since the spouse is not a USC, so is not entitled to a full spousal exemption. He would not have any Cdn cap gains tax to pay at time of transfer. However, the cost basis of the property would stay the same, so the spouse would be on the hook for the previous cap gains when they sell the property.

Any particular reason they are doing this?
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BlackberryBubly
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by BlackberryBubly » Mon May 25, 2020 9:46 am

Thanks for the reply!

They are doing this mainly because when the Canadian spouse sells in the future she should be able to apply principle residence exemption since she’ll be a tax resident at the time they sell. But if the American spouse attempts to sell the property in Canada as a non resident a 25% tax would be applied to capital gain.

nelsona
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by nelsona » Mon May 25, 2020 9:52 am

So, as I said, she will still need to pay cap gains on the portion of the time the property was owned by the other spouse.
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BlackberryBubly
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by BlackberryBubly » Mon May 25, 2020 10:26 am

Thanks for the clarification! I'll pass this down.

BlackberryBubly
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by BlackberryBubly » Mon May 25, 2020 10:30 am

Also, they are thinking about declaring deemed disposition at the point of emigration. The fair market value will be the new adjusted cost base. When the American spouse transfers the real estate property to the Canadian wife, the adjusted cost base will be the stepped-up cost (fair market value at emigration).

Does the above logic make sense?

nelsona
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by nelsona » Mon May 25, 2020 11:19 am

Ok. So they will pay the tax art departure. There is no way to avoid the CDn tax on the time when the American owned it. The deemed disposition would be an election, not mandatory.
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BlackberryBubly
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by BlackberryBubly » Mon May 25, 2020 11:42 am

I see. So to help facilitate my understanding, here's an example:

Let's say the deemed disposition is done and the adjusted cost base is now 500K (Husband was a tax resident and had the property under primary residence prior to deemed disposition). Husband transfer to wife 2 years after this deemed disposition (now as non-resident as he leaves Canada to work in the US) and wife sells the real estate 3 years after the property transfer at 700K.

Assuming wife's income tax at the time of sales is around 30%

The math would be (700K-500K) * 50% * 30% * 2/(2+3) = 12K. The wife pays this amount to the CRA. [50% is the taxable amount on capital gain for a Canadian resident and 2 years out of the 5 years since deemed disposition the property was owned under a non-resident ]

Is my understanding correct?

nelsona
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by nelsona » Tue May 26, 2020 8:59 pm

Could be.
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nelsona
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Re: American citizen gifting real estate to Canadian spouse: Tax implications in Canada

Post by nelsona » Tue May 26, 2020 9:00 pm

Your a good friend. Have your friend contact an accountant.
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