CCA on US Rental Property

SM · Post by SM » Sat Mar 28, 2015 2:08 pm

US citizen entire life, moved from Michigan to Canada to work in 2013. Had rental property in Michigan at time of immigration. ACB bumped-up to MV on arrival date to Canada. Worldwide income required in Canada so must report rental income. Tax on US side is $2000 (after depreciation). Tax on Canadian side is $10,000 without CCA (depreciation). Have enough CCA to reduce tax to zero on Canadian side. I understand that's it's smart to use CCA to reduce income on Canadian side to equal income on US side. That way when sell property, recapture is the same on both sides for foreign tax credit purposes.

However, this situation is unique. Individual will be departing Canada and moving back to US in 2015 or 2016. Normally deemed to dispose real estate OUTSIDE (not inside) Canada on departure. However, he will not be deemed to dispose anything because of the "short-term" residency rules - resident of Canada for less than 5 years.

What's stopping me from using CCA to decrease the remaining $2000 to zero on the Canadian side? He will never have to pay any recapture on this property to Canada unless he sells it before moving back to US or stays in Canada for more than 5 years and then departs correct? Or am I missing something and recapture must be paid on departure anyway?

I guess at the end of the day it doesn't help too much, because still have to pay tax on $2K in US. However, Canadian tax rates are generally higher than US rates, so would save a few hundred bucks on the differential.

nelsona · Post by **nelsona** » Sat Mar 28, 2015 4:16 pm

You should depreciate in Canada. no question.

SM · Post by SM » Sat Mar 28, 2015 11:48 pm

Ok thought so, thanks. Is my thinking correct that there will be no recapture to report in Canada if departure is next year (within 5 years of immigration - so considered a short-term resident of Canada)?

nelsona · Post by **nelsona** » Sun Mar 29, 2015 9:25 am

Correct. Investments held when becoming Cdn resident are not subject to deemed disposition on departure, if you leave within 5 years.

nelsona · Post by **nelsona** » Sun Mar 29, 2015 9:29 am

CCA would only be recaptured in the property was subject to deemed disposition, which in this case it would NOT be.

Of course if this property had been in Canada, while it would not have been subject to either deemed acquisition nor deemed disposition, there would eventually be recapture when you actually disposed of the property, or elected to subject it to deemed disposition when leaving Canada.

SM · Post by SM » Sun Mar 29, 2015 3:26 pm

Ok makes sense, thanks so much!

lanman2000 · Post by **lanman2000** » Thu Apr 02, 2015 1:38 pm

[quote="nelsona"]You should depreciate in Canada. no question.[/quote]

Agreed. Just be aware that when you do sell the property you need to recapture the depreciation in both the us and Canada returns. This is when you will get hammered with double taxation because on the us side the depreciation is recaptured by increasing the capital gain but on the Canada side the recapture gets released into the statement of real estate rentals. You will not be able to claim a foreign tax credit on the Canadian return for the us taxes paid on the recapture portion of the capital gain because the statement of real estate rentals income is not "capital gain".

Maybe nelsona has some ideas on how to work around this? This is costing me a ton of money this year because I sold my us rental.

nelsona · Post by **nelsona** » Thu Apr 02, 2015 1:50 pm

I agree that using CCA works best when discussing a Cdn rental, as US will always accept all the Cdn tax as a credit, regardless of how CRA categorizes it.

However, I do not think that CRA will deny the US tax, since (a) the income being reported is undeniably US-sourced, and (b) the tax, in whatever form it was levied in US, can be written off against tis income, regardless how CRA classifies this income.

case in point: While US may determine that certain income is a dividend, and CRA may view it as ordinary income, CRA will allow the US tax to be written off against the Cdn tax.

Same here: one is reporting US "income" and US tax. +

lanman2000 · Post by **lanman2000** » Thu Apr 02, 2015 2:13 pm

I agree with you whole heartedly nelsona. I should absolutely be able to get foreign tax credits for us paid regardless of the way cra treats the income because otherwise the double taxation hit is nasty.

nelsona · Post by **nelsona** » Thu Apr 02, 2015 3:04 pm

And you would get the credit.

hottea · Post by **hottea** » Wed Apr 29, 2015 10:41 am

nelsona, have you ever successfully used US recapture tax to write off against Canadian recapture income tax?

nelsona · Post by **nelsona** » Wed Apr 29, 2015 11:17 am

it is done ALL the time, without issue. canada does not categorize foreign income into various categories.

nelsona · Post by **nelsona** » Wed Apr 29, 2015 11:18 am

I think lanman got some weird cpa with bad advice.

lanman2000 · Post by **lanman2000** » Wed Apr 29, 2015 1:26 pm

[quote="nelsona"]I think lanman got some weird cpa with bad advice.[/quote]

The CPA is the one that owns this forum. I was able to explain myself fully and used some of what you said too to push for it to be changed and he did it. He did mention however that the premise may not be agreed to by CRA. I think the main reason for his concern was the fact that in terms of schedule E on the US side it shows a loss (the recapture is not accounted for here but rather as part of the capital gain) whereas on the statement of real estate rentals on the Canadian side there is all the "income" from the recapture.

I'll update this thread if CRA adjusts it. I'm hopeful they will accept it.

nelsona · Post by **nelsona** » Wed Apr 29, 2015 1:27 pm

Mark has some strange notions sometimes.... overthinking, in my opinion.