A lot of taxpayers emigrate from Canada every year, some to the south of the border and others beyond. In Canada, generally, the owners of the residential property are exempt from the taxes on capital gains if they use it as a principal residence. At emigration, a taxpayer can shelter the capital gains on the principal residence up to that point, or may extend it in a few cases.
This post is for general informational purposes only. The readers must exercise caution while making any decision. You should consult your professional income tax accountant in Canada, and the one in your new country of residence.
We have published another post specifically on the Principal residence exemption, we encourage the readers to read it in order to understand Principal residence and change of use rules. For the purpose of this article, the focus is on the taxpayers who are moving out of Canada.
Principal Residence Exemption at Emigration
When you are moving out of Canada, you can take advantage of the principal residence exemption. At the time of emigration, there is a deemed disposition of Principal Residence, if you are converting it to a rental property. You must report this deemed disposition on your emigrant tax return.
If you are moving temporarily out of Canada, you are still a factual resident of Canada. Deemed disposition happens only when you become a resident of Canada. Factual residents of Canada are treated as residents of Canada. Many taxpayers worry so much about the principal residence exemption that they keep on reporting as factual residents of Canada.
Deemed disposition means that your residence is not actually sold or disposed of but is considered to be sold for tax purposes. Your residence is considered to be sold at Fair market value as of the date of emigration and immediately re-acquired. The capital gains are reported and sheltered up to that date. The fair market value on that day becomes a new cost basis for the property.
Can I still keep my principal residence in Canada even if I move to another country?
This is a question about which we receive a lot of inquiries. The answer is a yes and no!
Yes, if you meet the Section 54 definition of Principal residence! However, this is only possible if your spouse lives in it afterwards so that ordinarily inhabited requirement of the law is met. In case, if your spouse also moves with you, you cannot claim principal residence exemption. A non-resident’s principal residence exemption is limited up to the years when she was a resident of Canada.
If you are converting the property to an income-producing property or your spouse becomes a non-resident of Canada as well, no, you cannot avoid capital gains.
Moving to United States & Principal Residence
There is Section 121 of the Internal Revenue Code of the United States that allows U.S. taxpayers to exclude up to US$250,000 (US$500,000 for married joint filers) of Capital gain on the sale of a principal residence if the taxpayer meets certain conditions.
One common misconception by taxpayers we have seen in recent years is that think IRC Sec 121 is applicable to them when they become U.S. tax residents. To much of their relief, and by extension to the readers of this article, the U.S. Canada Tax treaty provides relief in terms of re-setting the cost basis for Canadian residents emigrating to the U.S.
As per the U.S. Canada Tax Treaty, Article XIII and Para 6, when a taxpayer who was a resident of Canada and moved to the U.S. while owning a principal residence in Canada gets a set-up of basis. As per the treaty, the adjusted cost basis cannot be less than the Fair market value on the date of emigration. In other words, at the date of emigration, the cost basis in the property is reset to fair market value on that date for both U.S. and Canada.
Some taxpayers also keep on filing taxes as Canadian tax residents just to avoid capital gains taxes in Canada by utilizing principal residence. While doing so they are relying on 4-year rules. They may need to take a closer look at their tax costs.
Also remember that Capital gains of real properties are sourced to the country where the property is located, and the other country has the right to tax (and allow foreign tax credit) these gains as well.
The final word is that it is not possible to take advantage of the principal residence exemption to shelter gains if you were a non-resident of Canada. This provision is meant for Canadian taxpayers only. If you are moving to another country, other than the United States, you must check the treaty between Canada and that country. Some countries may not agree to the step-up of basis in the property and that can result in additional taxes in your new host country. You can find this information under “Gains” in the tax treaties.
Nothing can replace the advice of a professional income tax accountant. If you are moving out of Canada, get in touch with us to optimize your taxes at the exit!