Excess Canada FTC from Foreign Principal Residence Sale

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canadiandeserter
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Excess Canada FTC from Foreign Principal Residence Sale

Post by canadiandeserter »

Canada exempts 100% of a principal residence's capital gain while the United States exempts up to $250,000/$500,000 of a principal residence's capital gain. If a Canadian tax resident sells a US principal residence, the capital gain would be sourced to and taxed by the United States.

Since Canada does not tax this gain, can the foreign tax credit for US taxes be applied to other capital gains (e.g. stocks), with the excess used as a section 20(12) deduction?
nelsona
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

So, I'm assuming you left US "recently" and are no longer living in the US house?

On using the principal residence exemption (PRE) on a US house, this is not a problem if you can prove inhabited, BUT You can only use the PRE for period(s) of time that you are resident in Canada (plus one year), so the time you owned it while living in US cannot be counted towards PRE. The solution to that is below.

No, you cannot use the US taxes on the US property as a foreign tax credit, since there is no CDn tax on that property. Your other cap gains are Cdn sourced, so cannot be used against those either. Unfortunately, foreign real property is excluded from being used as 20(11) or 20(12) deduction.

As you know, when you moved, your US house would have re-zeroed in terms of cap gains for Canada, so you may just want to claim the sale as a regular cap gains (it would only be the post arrival , then the US tax would be available to you, and you would not use up your PRE for the period in question.

Note that a US citizen, living in Canada, cannot use the US tax that arises from the sale of their CDN home as a foreign tax credit either.

One of the disconnects that US citizens must be wary of when it comes to homes.

Congrats on making such a profit on your home however!

Just beware of obeying FIRPTA rules if selling as a non-resident of US!
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canadiandeserter
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by canadiandeserter »

Thanks nelsona for the detailed explanation! I totally forgot other capital gains would become Canadian sourced after becoming Canadian resident.

Actually have not left the US nor sold the home yet. Just planning ahead to figure out which to do first to maximize any tax savings.

Based on what I understand from your analysis, the final tax consequence would be the same whether the home is sold right before or right after emigrating from the US? But selling after becoming non-resident would entail FIRPTA withholding and loss of interest from giving the IRS an interest-free loan.

You mention foreign real property is excluded from being used as a 20(12) deduction. I read through 20(12) and the non-business income tax definition in 126(7) and could not find any reference to foreign real property. Is this exclusion described in a different section of the ITA?
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

CRA seems to use the restrictions in 20(11) and apply them also to 20(12).
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

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canadiandeserter
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by canadiandeserter »

Thanks nelsona for the references!

From my amateur reading, neither bulletin seems to explicitly exclude real property from the 20(12) deduction. For example, IT-506 paragraph 3(b) allows a deduction for a foreign property that is not real property, but does not explicitly say a deduction is disallowed for foreign real property.
nelsona
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

I wouldn't agree with your interpretation of 3(b). it means tax on foreign real property is not permitted. When it uses AND between the clauses, that is the entire definition.

However, I would agree that while the IT lumps what is permissible under 20(11) and 20(12) deductions, the ITA specifically forbids it only on 20(11). It does not state it for 20(12).

I would claim and be prepared to accept their decision later. The line will get reviewed.
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canadiandeserter
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by canadiandeserter »

I agree with you that 3(b) excludes foreign real property from treatment in 3(c) and 3(d), but I do not think 3(b) necessarily excludes foreign real property from treatment not described in 3(c) and 3(d), such as a 20(12) deduction without reference to 20(11).

Would a request for technical interpretation or ruling from the CRA be useful in clarifying this situation, to determine if it is worth the effort of dealing with FIRPTA withholding to avail this deduction?

Does Canada separate foreign tax credits into general and passive categories like the US? Or could a foreign tax credit from US real property be used against deferred employment income that is also US-sourced?
nelsona
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

As I said, the IT seems to lump them, but the ITA does not. IT's do not have the same value as the ITA.

I would not go for an interpretation which could be costly and time consuming.

Just file, and when it is reviewed you can make you case.
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

You won;t instantly be non-resident, so you may be able to sell a few weeks after leaving US.
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

Btw, most Cdn tax software has pretty accurate 20(11) & 20(12) handling. Try it out and see if it accepts it when you claim foreign real property income.
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canadiandeserter
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by canadiandeserter »

Thanks nelsona for the advice!

One last question: Say the US home is sold in 2021 and FIRPTA withholding is withheld from the sale proceeds. The capital gains tax would be "due" on April 15 of 2022. Would the 20(12) deduction for Canada be claimed on the 2021 or 2022 tax return? In either case, I assume the deduction would only be the actual tax owed on the gains and not the FIRPTA withholding on the total proceeds?
nelsona
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by nelsona »

It is the accrued tax that is eligible for credit/deduction. The FIRPTA is merely withholding, like from a paycheque. Means nothing in terms of tax liability.
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canadiandeserter
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Re: Excess Canada FTC from Foreign Principal Residence Sale

Post by canadiandeserter »

Thank you for the clarification. So in this example, in which tax year can the 20(12) deduction be claimed in Canada? Is the tax accrued on the date of sale (FIRPTA withholding) or the date the US tax return is due?
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