Reporting Canadian Capital Gains in US

[davfountain]

Hello,

I find this forum very informative. I do have a few questions and would be thankful for any and all replies.

In 2011, my girlfriend (now wife since Feb 2012) has been filing 1040 as a US resident. She has been with me in the US since Dec 2010. In November of 2011, she sold her primary residence in Canada and paid Capital Gains to Canada. She would like to leave the money in her Canadian Bank Account until the exchange rate suits her better (or until urgent matters arise). She has already transfered a small amount to the US (30,000.00).

Questions:
Does she have to report her total Capital Gains in the US or just the amount that she transferred into US funds?

Does she have to report her Canadian Bank Account on her US tax return?

If she has to report her total capital gains in the US, Can she use the same Adjusted Cost Basis that she used in paying her Capital Gain for Canada? If not, how is it done in the US?

Thanks for any guidance.

dav

[davfountain]

Correction: She has been with me in the US since december of 2009, not 2010.

[nelsona]

Filing a 1040 means reporting world income; where the money is kept means NOTHING.

The biogger quaestion is why did she have any cap gains to report on the sake of her former residence in canada. She had one year to sell it before any tax was due, and she did this.

She neneds to report all income from anywhere. period.

She ALSO needs to rpeort the existence of various foreign accounts on FBAR, 8891, 3520 and so on, depending on the type and holdings in the account.

[davfountain]

[quote]The biogger quaestion is why did she have any cap gains to report on the sake of her former residence in canada. She had one year to sell it before any tax was due, and she did this. [/quote]

One year from when? She moved here in December 2009. She really did not "report" the sale. From what I understand, when you sell a house as a non-resident in Canada, 25% of the net gain gets held back, to make sure the Tax is paid.
This has been done and she has paid the Tax. I apologize, if my being new to all of this has caused confusion.

Thank you for setting me straight on Filing the 1040 and Bank Account. It is what I suspected, so I need to get my stuff together, quick.

[nelsona]

I did not see the very important change of dat to your story.

Your wife however should have had better advice at the tiem of the sale, since (a) she would have only been subject to 25% witholding tax on the PROFIT after she left Canada, and (b) would not have had very much taxable profit to declare, if she had been advised to file 1 or 2 forms just prior to, or at the time of sale. Leaving 25% of the sale price with CRA was an unnecessary burden.

So, now she must now a file Cdn non-resident tax return, and get most if not all of that money back. The formula for determining her cap gains is years she lived in the house plus one, divided by the years she owned the house.. so if she owned the house 5 years, she is only on the hook for 1/5th of the profit, 10 years, 1/10th, etc.

That is why she had one year after leaving to sell completely tax free.


For US, she does not have to report the sale, as long as she lived in the house 2 years, and did not rent it out (I'm assuming she did not rent it out for the Cdn tax scenario either, although there still would be no tax in canada). She had THREE years to sell for US tax purposes for it to be tax-free.

[davfountain]

Thank you for the reply. I kind of thought you must have missed the correction. Now, we are getting somewhere. Just to clarify, are you saying that she does not have to report the Capital Gains in the US on the 1040?

I guess I thought she would have to report the Cap Gains and then also apply a Foreign Tax Credit...but not reporting the gain sounds way easier.


I understand that she needs to report the Canadian bank account, no doubt there,

and, it is Friday afternoon where I am. Cheers

dav

[mcmoxley]

The US exempts from taxation the capital gains that result from the sale of a principal residence, just as Canada does.

[nelsona]

To elaborate, While the treaty limits taxation of former Cdn residents' principal residence to the growth after depature from Canada, regular IRS rules allow for exemption from taxation for anyones' former home as long as they lived in it for 2 of the last five years (that is why I mention the need for her to have lived in the house 2 years priopr to moving to US).

So, like I said earlier, if she lived in the house for 2 years, she is tax-free in US, ASSUMING she did not rent it out otherwise.

But really her more pressing issue is to get all that Cdn tax money back that should NEVER have been sent to CRA in the first place!

[davfountain]

I just read at the IRS website that even though it was her principal residence and can exclude up to $250,000 of the net gain because of that. She still has to report it. Her net gain was $400,000. Minus the 250,000 exclusion. Evidently, she will be taxed 15% on $150,000.

http://www.irs.gov/faqs/faq/0,,id=199598,00.html

Not the best news I have read, today.

But I believe she can still file for a Foreign Tax Credit that will knock it down a bit more.

Thanks to you kind folks that replied.

dav

[nelsona]

Did you not read what I have said at least TWICE:

The US/canada treaty -- which overrides IRS regulations -- only allows the IRS to tax the gain on the former principal residence of Cdns moving to US on the cost basis of no lees than the FMV when she moved to US.

I somehow doubt that her gain was more than $00K since she moved.

Moreover, I'm pretty sure that if she files jointly with you, the exemption is $500K (not 100% sure, but that would wipe out any gain).

[nelsona]

And she opwes minimal tax in canada.

You twio really need to get a pro to look at this. This has been mishandled from day one.

[nelsona]

For the record, the Treaty article is XIII (6):

6. Where an individual (other than a citizen of the United States) who was a resident of Canada became a resident of the United States, in determining his liability to United States taxation in respect of any gain from the alienation of a principal residence in Canada owned by him at the time he ceased to be a resident of Canada, the adjusted basis of such property shall be no less than its fair market value at that time.

[davfountain]

Thanks ,

If you think it's difficult trying to explain something to an idiot...try being the idiot. Hurts my brain. I am sure we will get a professional to help us stay out of trouble with this. Until then, Here some more fun:

Looking at the letter that Canada Revenue sent. They said that the Adjusted Cost Base figure is the purchase price of the home. She sold the house for $839K. Then they subtracted the Adjusted Cost Base of $438K. For a gain of $401K. They say that the Pricipal Residence Exemption Calculation comes to $361K. They subtracted that as well, making her Net Gain about 40K, which they taxed at 25%

Looks like you are telling me is that the US figures the Adjusted Basis differently from Canada for people that have already paid the tax in Canada per the Tax Treaty. Correct?

Or are you telling me that Canada should have figured the Adjusted Cost Base on Fair Market Value in the first place, not the purchase price of the home?

[nelsona]

"Looks like you are telling me is that the US figures the Adjusted Basis differently from Canada for people that have already paid the tax in Canada per the Tax Treaty. Correct? "

Not quite. US figures the cost basis differntly, but it has nothing to do with whether or not tax was paid in canada or not. He r cost basis is the FMV when she left canada. But as I said, it is quite possible that she wes no tax at all based on living in the house 2 of the last 5 years before sale (that gets her 250K exempt, and MAYBE 250K more for filing joint.

It looks like her Cdn tax is correct if she lived in the house for 8 years and owned it for 10, ie: 9/10th of the total gains.

[davfountain]

Thank you sir, for your help and much patience.