Tax tips for clients who own U.S. property

Canadians are taking advantage of low U.S. house prices to buy vacation homes. Still, you should warn clients that owning property located beyond Canadian borders doesn’t mean it’s outside CRA’s grasp.

“Many Canadians who own U.S. vacation homes are unaware that certain events may trigger taxes,” says Jamie Golombek, CIBC’s managing director of Tax & Estate Planning. “If you earn rental income on the property, sell or gift the property, or own the property upon death, taxes may need to be paid in both the U.S. and Canada.”

He offers these tips for clients in a new report.

1. Although income and capital gains may be taxed in both the U.S. and Canada, you can generally claim a foreign tax credit to reduce Canadian tax.
2. When selling your U.S. vacation home, consider claiming the principal residence exemption to reduce or eliminate your taxable capital gain in Canada. Since it can only be used on one property during any given time period, you will have to decide which of your properties would benefit the most from this exemption.
3. Gifting a U.S. vacation property is generally not recommended, since it could result in a significant tax bill in both the U.S. and Canada. Differences in the Canadian and U.S. tax systems may result in double taxation, with no foreign tax credit relief, if you gift your U.S. vacation property.

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4. Consider whether to implement strategies to reduce or eliminate U.S. estate tax that may apply if you own your U.S. vacation home upon death. Some common strategies include holding the property in a trust, taking out non-recourse debt, joint ownership as tenants in common, or using life insurance to cover the tax liability.

Golombek notes many vacation home owners look to rent their property when they’re not occupying it. While that rental income may be taxed in both Canada and the U.S., you can generally claim a foreign tax credit on your Canadian return to reduce the tax that will be payable in Canada.

“If you’re a Canadian resident with a U.S. vacation home, taxation can become quite complex, with both Canadian and U.S. taxes to consider,” says Golombek. “With good planning, however, you can minimize the impact of taxes on your dream U.S. vacation home so that you and your family can enjoy it for years to come.”