If you’re dreaming this winter of retiring to your own tropical island, get ready for sun, surf, sand … and foreign property ownership tax rules.
Buzzkill, maybe, but while you may escape the cold, you can’t escape the system.
Understanding the details can mean the difference between achieving your retirement dream successfully or shivering through cold, harsh, tax-related realities, says Jason Safar, an Oakville, Ont.-based tax partner with PwC Canada.
“Every country has its own tax system, and we all acknowledge that the tax system is a series of arbitrary rules. It’s just a system for government to fund obligations,” he says. “You’re probably going to want to know the rules.”
The issues you need to be aware of can affect property taxes, what you need to report to the Canada Revenue Agency, buying and selling foreign businesses, leaving inheritances and even your health care.
The first step if you own property in a foreign country is to figure out what country you actually live in. Even this can be complicated when it comes to tax filing, says Michael Welters, tax group leader at Vancouver law firm Bull Housser LLP.
“You become a resident of Canada under one of two different tests,” he says. The first is the 183-day rule – if you live in Canada for at least half of the year, you’re usually considered a Canadian resident.
This can be different if you live in a country that has a tax treaty with Canada that applies a different rule for when you are resident. Canada has tax treaties with most countries in the world, Mr. Welters says, and this can complicate the question.
For example, if you’re a Canadian with a home in Florida or Arizona and you go back and forth a lot, the U.S. tax rules might apply to you much sooner than 180 days. “Once you’re averaging more than 120 days in the United States you start to trigger U.S. tax filing obligations,” Mr. Safar says.
When the tax authorities can’t figure out where you actually live, they look to what Mr. Welters says are “tie breaker” rules. “They ask: ‘Which country do you have the most ties to? Where is your driver’s licence, health insurance, your bank accounts?’”
If it’s still not clear the question can go to the courts, and to a huddle between the CRA and the foreign country’s tax agency – the treaties expect them to talk with each other to work these matters out, Mr. Welters says.
Residency can affect your Canadian health insurance. In Ontario, for example, if you are deemed to be no longer resident, you have to reapply for health insurance and wait three months before you’re covered again.
Property taxes and reporting your foreign properties to the CRA can be even more complicated, Mr. Safar says.
“Every time you get involved with another jurisdiction, you’re putting another layer of tax compliance on your plate. As soon as you own a property in a foreign jurisdiction you’re operating under two tax systems,” he says.
Under the foreign country’s laws, you will be responsible for local property taxes. There are also reporting requirements in Canada, though, and there may be additional obligations in the foreign country, depending on how you use the property as well as what you own.
The CRA expects you to fill out a form indicating whether you own “specified foreign property” worth $100,000 or more. This includes not only your condo in Florida or your French villa, but also foreign investments, including stocks and bonds held in foreign brokerages and shares in private companies you have in another country.
“Once you start getting into the investment side of things, the foreign reporting really becomes an issue,” Mr. Safar warns. “Reporting has become a lot more detailed in the last few years and the CRA has become a lot more diligent in applying penalties for failing to file.”
In most cases, Canadians who own property abroad can draw a clear line between personal use and revenue-producing property, Mr. Safar says. If you rent out the property regularly, “You’re starting to cross the line between personal use property and an investment,” and different taxation will apply, possibly in both Canada and the country where your property is located.
The rules can be different depending on whether you’re renting the property as a money-making business or just trying to defray the cost of carrying the place by taking in rent from time to time, he says.
It gets even more complicated when you try to sell or transfer property or holdings, says Michael Bondy, a partner at the accounting firm Collins Barrow in London, Ont.
“When you sell that Florida property, you have to file a U.S. tax return, report the income, pay tax in the U.S.,” he says. This applies whether or not you’re a U.S. citizen.
“Then you have to report the income in Canada.” In Canada, this income is subject to capital gains tax, and to complicate things further, “the gain may be different in Canada than the U.S. because of the exchange rate.”
All is not lost, Mr. Bondy says, because if you paid U.S. tax when selling your property, you can claim a foreign tax credit for the amount. The same rules apply for Americans who sell their cottages in Canada – the trouble is that in both cases the governments hold back a percentage of the sale price until you get a certificate that clears the sale. “In the U.S. they’re so busy that you can’t get a clearance certificate so fast,” Mr. Bondy says.
It’s complicated as well in other sun-drenched destinations such as Mexico, he adds.
Does this mean you should abandon all hope of a sunny retirement? Apparently, Canadians look outside and think otherwise.
“In the last few years up to 30 per cent of purchases in Florida were by Canadians,” Mr. Bondy says.