U.S. Person Buying a Home in Canada

Written by Dean Moro BComm, CIM®, Associate Financial Advisor and Carson Hamill CIM®, CRPC®, Associate Financial Advisor

When a U.S. person purchases a home in Canada, they could be exposed to a future U.S. tax liability. In some cases, this can be significant. With effective planning, this potential liability can be reduced significantly.

The Potential Tax Liability

In Canada, when an individual sells their principal residence, the gain on the sale is exempt from the capital gains tax in most cases. The requirement is that the taxpayer is eligible to designate the property as their principal residence when they file their Canadian tax return.

A U.S. person, on the other hand, will be subject to U.S. tax rules when it comes to the sale of a principal residence. For U.S. tax purposes, the first $250,000 USD gain on the sale of a principal residence is exempt from the capital gains tax. For a married couple, the exemption will be double the amount, so $500,000 USD, but only if both taxpayers are U.S. individuals.

In situations where the gain will exceed $250,000 USD for the U.S. citizen, they can consider gifting a portion of their interest in the home to the non-U.S. citizen spouse using the annual gift tax exclusion limit, which is currently $164,000 USD for 2022 and $175,000 for gifts in 2023. If the value of gift exceeds the gift exclusion amount, there is an requirement for the U.S. citizen to file a gift tax return and claim a portion of their lifetime estate exemption to reduce the gift tax to $nil.

Using a portion of the individual’s lifetime estate exemption means the U.S. citizen’s estate exemption upon passing would be reduced by the amounts previously claimed. For some individuals, that is not a concern though as currently the estate exemption is $12.06 million USD for deaths in 2022, but scheduled to return to $5 million starting in 2026 (indexed). Also be aware that a gift letter and a U.S. gift tax return will incur additional accounting and legal fees.

There may also be a gain on the mortgage amount that was required to purchase the property, resulting from changes in the exchange rate from when the mortgage was put in place to when it was paid out. The good news is this gain may be offset with foreign tax credits. Consult a cross-border tax professional to learn more.

What Are Your Options?

When purchasing a home where one spouse is a non-U.S. citizen and the other a U.S. person, consider adjusting the ownership stake to reduce the potential tax liability. Typically, when a couple purchases a home, they become 50/50 joint owners of the property, and they both get registered on title with Land Titles. Simply put, they will be set up as joint tenants with right of survivorship (JTWROS). When one of the co-owners dies, then the surviving co-owner automatically inherits the asset.

At one time, being a guarantor, and thus not on title of the property, was an option with Canadian lenders that was available with more frequency. Unfortunately, this is an option only available in rare circumstances today. It is generally a requirement that anyone guaranteeing a mortgage be registered on title as well. In the case of a non-U.S. citizen and a U.S. person purchasing a property together, consider purchasing the home as tenants in common and adjusting the ownership structure so the U.S. person has a minimal ownership stake one percent ownership for instance. Arranging ownership in this way can mitigate the potential U.S. tax liability the U.S. person could be exposed to when the home is sold and a capital gain is realized. However, tenants in common ownership does not avoid provincial probate when one of the owners passes away.

It's important to consult with a mortgage professional with experience working with non-Canadian citizens and new to Canada professionals. There are mortgage programs available for borrowers in these situations who may have little established Canadian credit. Consult an experienced mortgage broker for more information.

Estate Planning Considerations

It is important to consider how this arrangement could affect any relationship breakdown equalization settlements. Hopefully such a breakdown never happens, but if this ownership split is significantly more beneficial for the non-U.S. citizen spouse from a marital law perspective, they may prefer to acquire the property jointly for now and then consider the option to gift a portion of the property later if they anticipate a gain on their portion in excess of $250,000 USD when they sell the property.

When both purchasers are U.S. persons, and one of the homeowners passes away, the surviving spouse is eligible for the full $500,000 USD exclusion if they sell the home within two years of the date of the spouse’s death, and if other ownership and use requirements have been met. If it has been more than two years after the spouse’s death, the surviving spouse can exclude only $250,000 USD of capital gains.

For a U.S. citizen or a green card holder, if the fair market value of that individual’s worldwide estate is below the U.S. federal estate tax exemption amount of $12.06 million USD (2022), their U.S. estate tax is zero, regardless of whether they live in the United States, is an American living in Canada or lives elsewhere in the world. The federal estate exemption will increase to $12.92 million USD in 2023. In the event their estate value exceeds this amount, the estate administrator must file a U.S. estate tax return to declare these assets and pay any U.S. estate tax owing.

Next Steps:

If you’re planning on moving to Canada and need assistance with moving your investments, estate planning, and portfolio management, please call or email us at Snowbirds Wealth Management as we specialize in cross-border financial planning and wealth management.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the U.S., they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

To schedule an introductory call, please click here.

Statistics and factual data and other information are from sources RJLU believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJLU is to be under no liability whatsoever in respect thereof.

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