renew canadian mortgage tax consequences?

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kcvi
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renew canadian mortgage tax consequences?

Post by kcvi » Wed Apr 08, 2015 12:07 am

Hi,

I jointly own a house in Canada with my fiance. just want to ask if I renew or refinance my Canadian mortgage, are there US tax consequences because the exchange rate has jumped from 1.04 to 1.25?

Thanks,
K

nelsona
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Post by nelsona » Wed Apr 08, 2015 7:19 am

no this is not a taxable event
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kcvi
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Post by kcvi » Wed Apr 08, 2015 8:41 am

Thanks for your quick reply Nelson.
if I sell my house, can the “phantom gainâ€￾ from my mortgage be reduced by things like real estate agent commission?

rafa02
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Post by rafa02 » Wed Apr 08, 2015 1:47 pm

I do not believe renewing would present any tax consequences, but refinancing...possibly, depending on if it would be considered as paying off one mortgage and obtaining a new mortgage.

If you are paying off a mortgage(selling your house), there is a possibility of significant tax consequences. If you pay off your mortgage with Cdn $'s at 80 cents US and you first took out the mortgage when the Cdn $ was at par, you have a sizable gain, as you are paying off the mortgage with fewer US$'s (phantom gain is a good description in my opinion for people living and remaining in Canada.)

Very unfair in many situations, and in addition, as I understand things, if the situation was reversed, and you had a loss...too bad, you cannot claim a loss.

nelsona
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Post by nelsona » Wed Apr 08, 2015 2:14 pm

paying off your mortgage is NOT a taxable event. SELLING your property is the taxable.

Neither CRA nor IRS consider refinancing or paying off mortgage a taxable event, regardless of what country or currency this occurs in.

Can selling your Cdn property trigger gains in US, that are differnt than those arising in canada? Certainly, based on currency fluctuations between the time you buy and sell. But not simply based on the value of the mortgage.

And, or course, if it is your residence, there is only tax consequence if the gain is more than $250K per owner.
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rafa02
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Post by rafa02 » Wed Apr 08, 2015 2:28 pm

nelsona, there are several blogs/articles on the internet discussing this situation, and I have been told that there is (not sure if it has been resolved) a court case dealing with this issue.

One article that may be of interest. The pertinent part is approximately half way down the article.

http://www.globeinvestor.com/servlet/Ar ... CARRICKIRS

kcvi
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Post by kcvi » Wed Apr 08, 2015 2:52 pm

Thanks rafa02 and nelsona.

a little bit more background, I am a Canadian citizen currently in US on TN visa and need to file as resident alien for the US return. I obtained my Canadian mortgage and house 1 year before coming to US and the exchange rate was about $ to $.

Would my background make any difference to your answers regarding the phantom gain when selling the house?

Thanks

nelsona
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Post by nelsona » Wed Apr 08, 2015 3:00 pm

rafa,that post (not very well written) got me to Section 988 of the tax code.

Indeed, In periods when the US dollar RISES vs the foreign currency, it is possible to have a taxable gain, simply by discharging a mortgae.

here is a better article.
http://www.taxadvisorypartnership.com/b ... rate-gain/
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nelsona
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Post by nelsona » Wed Apr 08, 2015 3:01 pm

Thanks for your input....
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kcvi
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Post by kcvi » Wed Apr 08, 2015 5:35 pm

so is there anyway to offset this large gain? does my departure date matter at all?

rafa02
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Post by rafa02 » Wed Apr 08, 2015 6:56 pm

Sorry kcvi, I do not know if the departure date would matter, perhaps nelsona may have some insight. Another issue with this is the type of income and the tax rate. I have seen differing opinions on whether this gain is a currency gain or a capital gain which if held over one year would have a lower tax rate.

It seems to me that the gain would be similar to other foreign stock/secuities and a gain (or loss) could be realized soley from currency fulcuations...but still a capital gain, whereas a currency gain would arise if I were to convert and deposit US$'s into a Cdn savings account and at some point later, convert back to US$'s. This seems logical to me, but I do not know how the IRS interprets it.

nelsona
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Post by nelsona » Wed Apr 08, 2015 7:21 pm

Its not a gain, its income. The cap gain on home is forgiven. This is a separate issue. and applies no matter where you live, because the mortgage is in foreign currency.
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rafa02
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Post by rafa02 » Wed Apr 08, 2015 7:33 pm

OK, but capital appreciation on a stock is also income. A mortgage is a financial instrument, and with exchange rates fluctuating could be positive or negative. At least that seems more reasonable to me, but certainly would not surprise me that the taxpayer would not get a beneficial interpretation.

Frankd1
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Post by Frankd1 » Wed Apr 08, 2015 10:25 pm

Interesting.

Here is a scenario to see if I am understanding this correctly:

A US Citizen who is a PR of Canada is married to a Canadian Citizen. They purchase their first home in Canada in March of 2010. They take out a mortgage for $245,000CAD. The US dollar is slightly higher than the Canadian dollar with an exchange rate of 1.02.
The $245,000 CAD mort translates to $240,200 USD

- 5 years later in March 2015 their mortgage matures and the couple now has an amount of $199,000cad owing
- they also now have a secured debt in the form of a home equity line of credit for $47,000cad as well as unsecured debt in the form of credit cards for $9,000cad.

- they have no intention of selling their home but instead of renewing for $199,000c, they refinance for $255,000cad in order to clear out their remaining previous mortgage as well as their secured and unsecured debts. (199k + 47k + 9k = 255k)
- the mortgage company pays out the previous mortgage, the mortgage company sends a check to the bank to clear out the secured debt and the mortgage company also sends checks to the credit card companies to clear out the unsecured debt.

- the US dollar is considerably higher than the Canadian dollar in March 2015 vs March 2010. The exchange rate in March 2015 is 1.26
This means the $255,000 cad mortgage translates to $202,400 usd.

Is this a taxable event?

If so, is the amount that is considered taxable income $37,800 usd? (240,200-202,400)

nelsona
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Post by nelsona » Thu Apr 09, 2015 7:33 am

Frank,
we just explained, and the url I gave you as an example, thet shows it is taxable.

We'll let you figure out the actual gain, by taking into account the cpaital you paid down.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

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