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Sale of a Canadian Primary Residence by an American Citizen Living in Canada

Cardinal Point Tax Services recently received an inquiry from a U.S. citizen named “Charles” who is married to a Canadian citizen named “Sarah”. Both are permanent residents of Canada and maintained joint ownership of their Toronto home. After living in the home for 11 years, the couple sold the residence and realized a profit of $500,000 Canadian dollars.

Their primary goals were to use the proceeds to purchase a less expensive condo in Toronto and to supplement the costs of snowbirding in Palm Springs, California. Per CRA rules, Charles and Sarah file their Canadian tax returns annually. Per IRS rules, Charles has been filing his U.S. tax returns annually with a married filing separate tax status. Cardinal Point Tax Services informed the couple that capital gains treatment differed between Canada and the U.S. with regards to the sale of their residence. Further, the Canadian and U.S. tax rules independently affected Charles and Sarah due to their citizenship status and residency.

The joint ownership of their home allows the $500,000 capital gain to be divided equally between Charles and Sarah. As a U.S. citizen, Charles is required to report his worldwide income in accordance with U.S. tax laws. Therefore, his share of $250,000 in profit is considered capital gain income for U.S. tax purposes. However, his entire gain is exempt due to the homeowner exclusion. In addition, Sarah is exempt from U.S. taxation because her gain of $250,000 is not attributable to a U.S. source.

An individual who files under U.S. law as married filing separate is allowed to exclude up to $250,000 U.S. dollars of capital gain income from the sale of their home. This exclusion is available even when a residence is located outside of the U.S. A further requirement for the exclusion is that it is occupied for two of the last five years as a principal residence. U.S. foreign exchange tax rules applicable to the purchase and sale price of a foreign property could entail recognition of a portion of a capital gain as taxable U.S. income on a Schedule D.

The gain on selling a principle residence under Canadian tax law is not taxable if it has been the person’s principal residence for the entire time it has been owned. Importantly, there is no limit on the amount of gain that can be excluded which differs from U.S. tax rules. In aforementioned couple’s case, there is no need to report the sale of their home on their Canadian tax return.

This content is for general information purposes only and is not legal or tax advice. Materials on this website should not be used as a substitute for consultation with professional advisers. There is no "one size fits all" cross-border financial planning strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management. Please contact Cardinal Point Wealth Management at http://cardinalpointwealth.com/contact-us/ to review your unique situation.

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Comment   |  5 years, 6 months ago from Irvine, CA