With the spectre of a second-wave pandemic shutdown and fall weather starting to take hold in Canada, snowbirds – who would normally be flocking south over the next three months – are struggling with difficult decisions.
For many, relocating to the southern United States for the 2020-21 season will not be worth the health risk. For those who travel back and forth during the season, the mandatory Canadian quarantine rules may make enjoying your winter property impractical. Whatever the particular circumstances, Canadians who own vacation properties in the U.S. are unlikely to be using their property this year the way have in the past.
There are a number of options for property owners, each with their own tax and legal consequences.
Stay the course. You may decide to ride out the second wave in a warmer climate, choosing to navigate travel restrictions and isolation requirements to spend the winter in your property. The current Canada-U.S. travel ban is in place until Oct. 21, which limits “non-essential” travel at land ports of entry. U.S. citizens and green card holders are exempt from this limitation. There is no way of knowing when the border closing will come to an end any time soon – and it could be extended.
Sell it. You may decide that maintaining your property is not worth the trouble during these uncertain times and try to sell it. Counterintuitively, it appears that in the Florida real estate market listings have fallen, but prices have not necessarily been affected by COVID-19. Keep in mind that selling your property at a gain will trigger a U.S. tax hit. In Florida, for example, the maximum rate for Canadians who are not also U.S. citizens selling a property is 20 per cent. The sale will generally lead to Canadian taxes as well, at a maximum rate of just over 25 per cent. U.S. taxes paid on the gain can generally be credited against the Canadian taxes owing.
On the Canadian side, it may be possible to claim the principal residence exemption, which would eliminate the need to pay taxes in Canada. Think carefully because that exemption can only be used once, so you would not be able to use it for another property, such as your Canadian home. Although closing a Florida real estate transaction can be done without physically being in the state, selling is definitely also complicated by the travel restrictions and potential IRS withholding of 15 per cent of the sale price.
Upgrade it or trade up. You may decide to use this period to do renovations or to trade up to a larger property. If you decide to renovate, keep any documents relating to the expenses as that could reduce an eventual gain on the sale at a later date. U.S. real estate professionals will often pitch what is called a “like-kind exchange,” which is effectively trading a property for another property. These can sometimes be achieved without triggering gain in the U.S. But even if you could qualify in the U.S., this exemption is not available in Canada. So, unless you are claiming the principal residence exemption in Canada to cover the gain, doing a like-kind exchange in the U.S. will not result in savings for Canadian taxpayers.
Rent it out. You may decide to mitigate the expense of maintaining a property that you can’t use by renting it out, either on a short-term basis, through a service such as Airbnb, or for the entire season or longer. This option, though possibly the most economically prudent, is the most fraught with tax consequences. In both Canada and the U.S., you would then have an income property and be required to file a tax return declaring income from your rental activities. The tax rules that apply to rental properties are not the same in Canada and the U.S. and need to be navigated carefully in order to not fall into certain traps.
Canada has rules that apply to a “change in use,” which would apply if a property you own changes from being for personal use to one producing income. That change triggers the gain in Canada. In this case, you may be able to choose to defer paying tax on the gain until you actually sell the property. Additionally, the change from personal-use to income-producing will likely require this asset to be disclosed annually with your Canadian tax return on a form known as the “Foreign Income Verification Statement.” You’d also have to deal with potential tenant lawsuits for slip-and-fall type accidents, so transferring the title of your property to a corporation, trust or limited partnership should be considered to protect your assets.
There are no easy answers when it comes to deciding what to do with your sunbelt property at a time of uncertainty and disruption. Which makes it more important than ever to make a decision with all of the proper health, financial and tax considerations.
David A. Altro and Bradley Thompson are partners at Altro Law specializing in cross border tax, corporate and estate planning.
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