Page 6 - Lets Talk Winter 2015 | Lipton Chartered Accountants
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spouse, the interest in the deceased’s spouse’s
property will pass to his/her heirs and only
this share of the property will be subject to
estate tax.
Gift Tax Implications
Generally, gifting a US vacation property is
not recommended due to potential US gift
tax and Canadian taxation related to the
transfer. Gifting US property to a Canadian
spouse will be subject to US gift tax if it is
valued over $145,000 in 2014 ($147,000 in
2015). Any excess over this amount is taxed
at graduated rates from 18% to 40% of the
fair market value of the gift. Similarly, a gift
of US property to a Canadian individual
other than a spouse is subject to gift tax on
the value of the gift above $14,000 in 2014
(same in 2015) each year.
In addition, if you gift to a person who is
the IRS has not clarified whether it would The US imposes an immediate 30% withholding
more than one generation younger, you tax on the gross amount of any rent paid by a
look through a partnership structure to
may also be liable for US federal generation- assess estate tax on the partners personally. US tenant to a Canadian owner. However, this
skipping transfer tax. Another consideration in using a Canadian withholding can be reduced by filing an election
partnership to own a US vacation property with the IRS to treat rental income as income
US gift tax can result in double taxation as is whether a valid partnership can exist if from a US business to avoid withholding tax.
follows: If US real estate is gifted from a parent the sole purpose of the partnership is to
to a child, in Canada, the parent would report However, you must file an annual US tax
a capital gain on the increase in value, which hold personal-use real estate. However, if
return to report income and related expenses
the primary purpose for the property being
would be subject to Canadian tax. However, and will pay US tax at graduated rates on
any US gift tax paid (and generation-skipping purchased is to earn rental income, this may the net rental income (state and city taxes
transfer tax, if applicable) cannot be used as a be an ownership option to consider. may also apply). Eligible expenses include
credit to offset Canadian income tax payable Canadian Trust mortgage interest, maintenance costs,
on the transfer. Ownership of a US vacation property by a insurance, property taxes, fees to a property
Other Ownership Options Canadian trust will avoid US estate tax and management company, and depreciation.
Generally, the US taxes paid in respect of the
Corporations is often recommended to Canadians as a
preferred ownership vehicle. The trust will
Prior to 2005, Canadians commonly set up need to be created and then should purchase rental income earned can be credited against
“single purpose corporations” to own US the taxes owed on the same rental income
vacation property in order to avoid US estate the US property directly. A disadvantage to reported in Canada so that double taxation
this ownership structure is that the creator
tax (as a corporation never dies). However, is avoided on rental income.
of the trust is generally required to give
subsequent to 2005, the Canada Revenue
SELLING YOUR VACATION PROPERTY
Agency will assess a taxable benefit on the up ownership of the US property to the
beneficiaries of the trust.
shareholder of a corporation for personal When you sell your US vacation property,
use of the property, which makes corporate RENTING YOUR VACATION PROPERTY you will face tax issues on both sides of the
ownership unattractive. As a result, corporate border. Both the US and Canada will tax
ownership of a US property is generally not Generally, Canadians must declare the rental the gain on the sale of the property, which
recommended. income earned from US real estate on both is based on the excess of the sale proceeds
a US income tax return as well as their
(net of selling expenses) over the cost of the
Partnerships Canadian income tax return. (An exemption property. The cost of the property would
It is unclear as to whether ownership of
from US reporting of rental income exists if include any capital improvements made since
you use your property as a personal residence
a US vacation property by a Canadian purchase so it is highly recommended to
partnership could result in US estate tax as and rent it for fewer than 15 days.) retain all receipts to support these amounts.
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Accounting & Assurance Tax Business Advisory
6
property will pass to his/her heirs and only
this share of the property will be subject to
estate tax.
Gift Tax Implications
Generally, gifting a US vacation property is
not recommended due to potential US gift
tax and Canadian taxation related to the
transfer. Gifting US property to a Canadian
spouse will be subject to US gift tax if it is
valued over $145,000 in 2014 ($147,000 in
2015). Any excess over this amount is taxed
at graduated rates from 18% to 40% of the
fair market value of the gift. Similarly, a gift
of US property to a Canadian individual
other than a spouse is subject to gift tax on
the value of the gift above $14,000 in 2014
(same in 2015) each year.
In addition, if you gift to a person who is
the IRS has not clarified whether it would The US imposes an immediate 30% withholding
more than one generation younger, you tax on the gross amount of any rent paid by a
look through a partnership structure to
may also be liable for US federal generation- assess estate tax on the partners personally. US tenant to a Canadian owner. However, this
skipping transfer tax. Another consideration in using a Canadian withholding can be reduced by filing an election
partnership to own a US vacation property with the IRS to treat rental income as income
US gift tax can result in double taxation as is whether a valid partnership can exist if from a US business to avoid withholding tax.
follows: If US real estate is gifted from a parent the sole purpose of the partnership is to
to a child, in Canada, the parent would report However, you must file an annual US tax
a capital gain on the increase in value, which hold personal-use real estate. However, if
return to report income and related expenses
the primary purpose for the property being
would be subject to Canadian tax. However, and will pay US tax at graduated rates on
any US gift tax paid (and generation-skipping purchased is to earn rental income, this may the net rental income (state and city taxes
transfer tax, if applicable) cannot be used as a be an ownership option to consider. may also apply). Eligible expenses include
credit to offset Canadian income tax payable Canadian Trust mortgage interest, maintenance costs,
on the transfer. Ownership of a US vacation property by a insurance, property taxes, fees to a property
Other Ownership Options Canadian trust will avoid US estate tax and management company, and depreciation.
Generally, the US taxes paid in respect of the
Corporations is often recommended to Canadians as a
preferred ownership vehicle. The trust will
Prior to 2005, Canadians commonly set up need to be created and then should purchase rental income earned can be credited against
“single purpose corporations” to own US the taxes owed on the same rental income
vacation property in order to avoid US estate the US property directly. A disadvantage to reported in Canada so that double taxation
this ownership structure is that the creator
tax (as a corporation never dies). However, is avoided on rental income.
of the trust is generally required to give
subsequent to 2005, the Canada Revenue
SELLING YOUR VACATION PROPERTY
Agency will assess a taxable benefit on the up ownership of the US property to the
beneficiaries of the trust.
shareholder of a corporation for personal When you sell your US vacation property,
use of the property, which makes corporate RENTING YOUR VACATION PROPERTY you will face tax issues on both sides of the
ownership unattractive. As a result, corporate border. Both the US and Canada will tax
ownership of a US property is generally not Generally, Canadians must declare the rental the gain on the sale of the property, which
recommended. income earned from US real estate on both is based on the excess of the sale proceeds
a US income tax return as well as their
(net of selling expenses) over the cost of the
Partnerships Canadian income tax return. (An exemption property. The cost of the property would
It is unclear as to whether ownership of
from US reporting of rental income exists if include any capital improvements made since
you use your property as a personal residence
a US vacation property by a Canadian purchase so it is highly recommended to
partnership could result in US estate tax as and rent it for fewer than 15 days.) retain all receipts to support these amounts.
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Accounting & Assurance Tax Business Advisory
6
