My wife is Canadian citizen and US permanent resident. She moved to the US five years ago.
Before we met, she bought some land in a rural area of BC. We are now in the process of selling that property, and I'm trying to figure out the tax we'll have to pay in Canada.
I'm not very familiar with Canadian tax law (nor is my wife), so I have several questions.
1) Would my wife be considered an "emigrant"? I read over the criteria and I'm a little confused. She did establish a home in another country (the US), but she didn't give up (sell) her residence in Canada. Nor did she "break social ties" there. Maybe I'm just getting tripped up by the legalese. My guess is she is an emigrant.
2) I read over the CRA document "Emigrants & Income Tax". It seems that if the property was worth more than $25,000 when my wife left Canada five years ago, she should have paid capital gains tax at that time. What if the property was worth less than that? Does that just mean she wasn't required to dispose of it and pay taxes when she left, or does that mean she doesn't have to pay capital gains tax on it at all (like when we sell it now)?
3) Assuming the property was worth more than $25,000 at that time, do we now have to pay the CRA the maximum $2,500 fine because we're almost 5 years late on the capital gains tax that was due?
4) What is our best course of action at this point? The fair market value of the land is probably about $28,000 right now. It would have been worth somewhere in the neighborhood of $23,000 - $25,000 in 2005 when she left. But how can we determine in retrospect (or even then, when she was leaving) what the fair market value was without actually putting it on the market?
Questions about selling land in Canada
Moderator: Mark T Serbinski CA CPA
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badlydrawnboy
- Posts: 6
- Joined: Thu Jul 15, 2010 9:52 pm
I forgot to add a lot of relevant information, but didn't see an option to edit. It starts to get very complex when all of it is taken together.
My wife doesn't actually own the land herself. She has three partners in a tenancy in common agreement. So, when she left Canada, should she have attempted to value her portion of the land and paid tax on that - or are there different provisions for land owned in partnership?
Second, while in Canada my wife's income was never high enough to require her to file a tax return. My understanding is that the capital gains tax in Canada is calculated based on the personal income tax rate (at 50% of the profit from the capital sale). If my wife wasn't paying taxes, would she be excused from paying capital gain on the property?
If we did sell it now, how would we calculate the capital gains? My wife doesn't have income in Canada, so how would we determine her tax rate? Would we use her income in the US (with exchange rate)?
Clearly I'm confused!
My wife doesn't actually own the land herself. She has three partners in a tenancy in common agreement. So, when she left Canada, should she have attempted to value her portion of the land and paid tax on that - or are there different provisions for land owned in partnership?
Second, while in Canada my wife's income was never high enough to require her to file a tax return. My understanding is that the capital gains tax in Canada is calculated based on the personal income tax rate (at 50% of the profit from the capital sale). If my wife wasn't paying taxes, would she be excused from paying capital gain on the property?
If we did sell it now, how would we calculate the capital gains? My wife doesn't have income in Canada, so how would we determine her tax rate? Would we use her income in the US (with exchange rate)?
Clearly I'm confused!
She was an emigrant in the year she left Canada. She has been for several years a non-resident, because she lives with you in US: that outweighs anything she may have in Canada.
Land in canada is always taxed in canad first, and then in US, with credit given on your 1040 for the Cdn tax owed.
There was no requirement for her to pay tax when she left Canada on that property, but she should have reported its existence when leaving. That's past now. Forget 'emigrant' procedures at this point. she is now non-resident.
There are certain forms that non-residents need to file before sale. The fact that she has resident partners doesn't change this.
Besides that, she will need to file a non-resident return to report her portion of the gains.
She will also have to report it on her US tax return. Remeber to use the exchange rate when she bought the property to determine the cost basis, and the exchaneg rate now when she sells it to determine the proceeeds. Expect a big US gain because of the currency changes in the past
Land in canada is always taxed in canad first, and then in US, with credit given on your 1040 for the Cdn tax owed.
There was no requirement for her to pay tax when she left Canada on that property, but she should have reported its existence when leaving. That's past now. Forget 'emigrant' procedures at this point. she is now non-resident.
There are certain forms that non-residents need to file before sale. The fact that she has resident partners doesn't change this.
Besides that, she will need to file a non-resident return to report her portion of the gains.
She will also have to report it on her US tax return. Remeber to use the exchange rate when she bought the property to determine the cost basis, and the exchaneg rate now when she sells it to determine the proceeeds. Expect a big US gain because of the currency changes in the past
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
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badlydrawnboy
- Posts: 6
- Joined: Thu Jul 15, 2010 9:52 pm
Thanks so much for your helpful reply.
A few more questions:
1) What is the tax rate applied to the capital gain? I understand that 50% of the profit is taxed as capital gain at the seller's normal marginal tax rate. If she has no other Canadian income to file, would her tax bracket be calculated based on the amount of the capital gain? i.e. let's say just for the sake of example that the profit on the land sale is $25,000. The capital gain would be $12,500. This puts her in the lowest tax bracket (15%). So the tax owed would be $3,750?
2) Does her tax status in the US make a difference in the above calculation? We are "married filing jointly" here. I'm assuming that our income here means nothing in calculating the rate at which we'd pay capital gains on the land sold in Canada.
3) Where do I find the forms nonresidents must file before sale?
Thanks again.
A few more questions:
1) What is the tax rate applied to the capital gain? I understand that 50% of the profit is taxed as capital gain at the seller's normal marginal tax rate. If she has no other Canadian income to file, would her tax bracket be calculated based on the amount of the capital gain? i.e. let's say just for the sake of example that the profit on the land sale is $25,000. The capital gain would be $12,500. This puts her in the lowest tax bracket (15%). So the tax owed would be $3,750?
2) Does her tax status in the US make a difference in the above calculation? We are "married filing jointly" here. I'm assuming that our income here means nothing in calculating the rate at which we'd pay capital gains on the land sold in Canada.
3) Where do I find the forms nonresidents must file before sale?
Thanks again.
Her tax rate will be calculated on her non-resident return, based on that income alone, and the few deductions she may be allowed. she probably won't get the standard deduction (basic personal amount) because of her status, but you'll find out when you file.
The non-resident guide will point you to the forms.
The non-resident guide will point you to the forms.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
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badlydrawnboy
- Posts: 6
- Joined: Thu Jul 15, 2010 9:52 pm
Thanks once again.
Let me just make sure I've got this straight.
We have two options. We can file a proposed disposition at least 30 days before we sell the property, or we can file a notice of disposition no later than 10 days after the sale.
In either case, we submit an amount equal to 25% of the capital gain along with the form.
Then we file a tax return including the capital gain from the sale. If the actual tax owed on the capital gain is less than the 25% we submitted when we filed the disposition, that will be refunded to us.
If this is accurate, my question is whether there's an advantage to filing for the disposition in advance vs. just doing it once the property is sold. I read on one lawyer's website that in some cases if the disposition is applied for in advance, the pre-payment of tax owed may be less than it would be if we waited until after the sale. But I can't find any information about that on the CRA website.
Let me just make sure I've got this straight.
We have two options. We can file a proposed disposition at least 30 days before we sell the property, or we can file a notice of disposition no later than 10 days after the sale.
In either case, we submit an amount equal to 25% of the capital gain along with the form.
Then we file a tax return including the capital gain from the sale. If the actual tax owed on the capital gain is less than the 25% we submitted when we filed the disposition, that will be refunded to us.
If this is accurate, my question is whether there's an advantage to filing for the disposition in advance vs. just doing it once the property is sold. I read on one lawyer's website that in some cases if the disposition is applied for in advance, the pre-payment of tax owed may be less than it would be if we waited until after the sale. But I can't find any information about that on the CRA website.
Rearead the information about such sales:
http://www.cra-arc.gc.ca/tx/nnrsdnts/cm ... u-eng.html
You don't have an option on informing CRA before you sell. You must. If you don't you may be liable for penalty.
Alsom the amount of withholding (which ois to be done by the buyer, by the way) could be as litrtle as zero.
http://www.cra-arc.gc.ca/tx/nnrsdnts/cm ... u-eng.html
You don't have an option on informing CRA before you sell. You must. If you don't you may be liable for penalty.
Alsom the amount of withholding (which ois to be done by the buyer, by the way) could be as litrtle as zero.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
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badlydrawnboy
- Posts: 6
- Joined: Thu Jul 15, 2010 9:52 pm
I re-read that information but I can't find anything that says it's required to notify the CRA before the sale. Here's the relevant passage:
[i]When should I notify the CRA of a disposition or proposed disposition of a property?
The Non-resident vendor must notify the CRA about the disposition (notification is required within 10 days of the date the property was disposed of) or proposed disposition (notification should be provided at least 30 days before the property is actually disposed of) by completing the applicable following notification forms and sending it to us along with the payment to cover the resulting tax payable or acceptable security:[/i]
Unless I'm missing something (entirely possible), that says I can either notify the CRA within 10 days AFTER the property was disposed of or at least 30 days PRIOR to the disposition.
Also, in document 72-17R5 this is stated even more clearly:
[i]Under section 116, non-resident vendors (from now on referred to as vendors) who dispose of certain taxable Canadian property (see item 2 below) have to notify the Canada Revenue Agency (CRA) about the disposition either before they dispose of the property or within ten days after the disposition.[/i]
[url]http://www.yourcfo.ca/pdf/Non-Resident_ ... ficate.pdf[/url]
That's why I'm confused.
Also in subsection 116(3) of the above document, it says:
[i]When the CRA has received either an amount to cover the tax on any gain the vendor may realize upon the disposition of property, or appropriate security for the tax, the CRA will issue a certificate of compliance to the vendor. A copy of the certificate is also sent to the purchaser. If the purchaser does not receive such certificate, the purchaser is required to remit a specified amount to the Receiver General for Canada and is entitled to deduct the amount from the purchase price.[/i]
This suggests that the VENDOR is responsible for sending the tax or security for the tax to the CRA along with the disposition of sale. Once the vendor receives the certificate of compliance from the CRA, the vendor must send it to the purchaser.
It seems that the PURCHASER is only responsible for withholding the tax if he does not receive a certificate of compliance from the vendor.
What am I missing?
[i]When should I notify the CRA of a disposition or proposed disposition of a property?
The Non-resident vendor must notify the CRA about the disposition (notification is required within 10 days of the date the property was disposed of) or proposed disposition (notification should be provided at least 30 days before the property is actually disposed of) by completing the applicable following notification forms and sending it to us along with the payment to cover the resulting tax payable or acceptable security:[/i]
Unless I'm missing something (entirely possible), that says I can either notify the CRA within 10 days AFTER the property was disposed of or at least 30 days PRIOR to the disposition.
Also, in document 72-17R5 this is stated even more clearly:
[i]Under section 116, non-resident vendors (from now on referred to as vendors) who dispose of certain taxable Canadian property (see item 2 below) have to notify the Canada Revenue Agency (CRA) about the disposition either before they dispose of the property or within ten days after the disposition.[/i]
[url]http://www.yourcfo.ca/pdf/Non-Resident_ ... ficate.pdf[/url]
That's why I'm confused.
Also in subsection 116(3) of the above document, it says:
[i]When the CRA has received either an amount to cover the tax on any gain the vendor may realize upon the disposition of property, or appropriate security for the tax, the CRA will issue a certificate of compliance to the vendor. A copy of the certificate is also sent to the purchaser. If the purchaser does not receive such certificate, the purchaser is required to remit a specified amount to the Receiver General for Canada and is entitled to deduct the amount from the purchase price.[/i]
This suggests that the VENDOR is responsible for sending the tax or security for the tax to the CRA along with the disposition of sale. Once the vendor receives the certificate of compliance from the CRA, the vendor must send it to the purchaser.
It seems that the PURCHASER is only responsible for withholding the tax if he does not receive a certificate of compliance from the vendor.
What am I missing?
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badlydrawnboy
- Posts: 6
- Joined: Thu Jul 15, 2010 9:52 pm
Okay, I just talked to the CRA.
I got confused by the wording of the document. But yes, it is best to apply in advance (at least 30 days) to avoid being in arrears if the certificate of compliance doesn't arrive before the closing date.
I forgot to ask whether the purchaser or vendor is responsible for sending in the tax, though. And I'd really like to know under what circumstances that amount could be close to zero!
Thanks for bearing with me on this.
I got confused by the wording of the document. But yes, it is best to apply in advance (at least 30 days) to avoid being in arrears if the certificate of compliance doesn't arrive before the closing date.
I forgot to ask whether the purchaser or vendor is responsible for sending in the tax, though. And I'd really like to know under what circumstances that amount could be close to zero!
Thanks for bearing with me on this.
Can someone please clarify whether or not the notification is required to be filed BEFORE the actual disposition. I've read and re-read the reference provided above (http://www.cra-arc.gc.ca/tx/nnrsdnts/cm ... u-eng.html) and it still appears that notification (with payment) can be made 30 days before OR within 10 days afterwords. The agent I spoke with at CRA indicated that it is sufficient to provide notice within 10 days afterwords (in my situation, my client just informed me yesterday of the closing on October 14th - 7 days from now - so it's impossible to provide notice in time to meet the 30 day minimum requirement). Furthermore, the 25% tax on these transactions can be significant. I can certainly envision situations where a client could not afford to make the 25% payment until the sale is complete and the proceeds are available.
Am I missing something?
Perhaps there's no $25/day penalty for filing up to 10 days afterwords but the tax is due by the closing date (and therefore would be subject to a little interest from the date of closing to the day the T2062 is filed with the payment - this may be the "arrears" situation referred to by badlydrawnboy in their last post). In addition, there could be a fairly large hold-back by the purchaser's lawyer of 25% of the proceeds of disposition until the certificate is received. Obviously both of these situations would make filing 30 days in advance of the sale the preferable option.
Thanks!
Am I missing something?
Perhaps there's no $25/day penalty for filing up to 10 days afterwords but the tax is due by the closing date (and therefore would be subject to a little interest from the date of closing to the day the T2062 is filed with the payment - this may be the "arrears" situation referred to by badlydrawnboy in their last post). In addition, there could be a fairly large hold-back by the purchaser's lawyer of 25% of the proceeds of disposition until the certificate is received. Obviously both of these situations would make filing 30 days in advance of the sale the preferable option.
Thanks!