Sale of U. S. property triggers N. Y., IRS taxes
Q: “I’m planning to put my cottage property in New York up for sale this year. It’s on 30 acres and I’ve owned it for 30 years. As a Canadian, will I be taxed on the sale by the U. S., Canadian and Quebec governments? I live in an apartment here and have
A U. S. cottage sale and revisions to a notarial will were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.
A: You will have to report the sale to both federal jurisdictions, Quebec and the state of New York. The principal- residence exemption could spare you some capital- gains taxes in Canada, since a cottage can be declared as principal residence, even if it’s in another country. But the size of the property might complicate things, since tax departments usually restrict the property allowance for the principal- residence exemption to one- half hectare ( about one acre), and your cottage property is 30. On the U. S. side, you’ll need to file ( as a non- resident alien of the U. S.) to both the Internal Revenue Service and the state of New York. “Income taxes would be paid on the capital gain computed in U. S. dollars that arose on the sale,” said Nick Moraitis, a partner at accounting firm Fuller Landau. For Canada, the gain has to be computed in Canadian dollars. “The reader will have to determine the original cost in the U. S. 30 years ago, converted into the exchange rate 30 years ago, and compare that to the Canadian- dollar equivalent today. Major renovations and improvements made over the years can be added to the cost, provided supporting documents exist.” In a case like this, Moraitis said, the IRS and New York will get their taxes first. The seller will get a credit for U. S. taxes paid, which can be applied to their Canadian and Quebec dues, if any.
Transferring the money back to Canada shouldn’t be a problem, provided the taxes are paid, Moraitis said, “but if the cash stays in a U. S. bank account before being repatriated — technically, even for one day — the reader may have to complete and file Canadian tax form T1135, reporting total investments outside Canada in excess of $ 100,000. Serious penalties apply if this is omitted.”
A: You can write a holograph codicil or write a codicil in the presence of two witnesses to modify your notarial will, “but I do not recommend it,” notary François Bernier of Mackenzie Investments said. “If you make a codicil independently ... you will lose the benefit of having a notarial will, forcing your executor to probate the codicil, leaving your estate with much higher costs. Also, by writing the codicil yourself, you run the risk of using the wrong wording, creating more potential problems for your liquidator.”
The Montreal Gazette invites reader questions on tax, investment and personal- finance matters. If you have a query you’d like addressed, please send it to Paul Delean, Montreal Gazette Business Section, Suite 200, 1010 Ste.- Catherine St. W., Montreal, QC, H3B 5L1, or by email to pdelean@ montrealgazette. com.