The US-Canada border is one of the friendliest in the world. As a result, many people move back and forth across the border. I am one of those people. I grew up in Canada, went to university and worked in the US, moved back to Canada for a few years, and now live back in the US.
It’s important for people considering moving across the border to understand the difference between the two countries' tax systems and other factors impacting cost of living. Although the principles in each country are similar, the implementation is quite different.
I’ve been writing a series of posts on the topic, including
- Various topics, tax agencies, impact of moving, filing status, and income tax rates
- Deductions and credits
- Payroll tax
- Health care and other insurance
- Capital gains
- Small business tax
- The year of the move
In this post I’ll talk about the tax implications of owning and selling your assets in Canada (either in reality or as deemed by the CRA).
Selling your personal residence
If you sell your house before you move, or if you move from the US to Canada, you don’t need to worry about this.
If you are selling your personal residence after moving from Canada, there are a couple of gotchas to watch out for.
Non-resident withholding: If non-residents sell certain assets in Canada, the buyer is required to withhold a portion of the purchase price until the CRA issues a Certificate of Compliance. This certificate basically says the non-resident seller has complied with tax requirements and the buyer can give the rest of the money to the seller.
Each seller (i.e. both spouses) needs to file forms T2062E, T2091(IND), T2091(IND)-WS, and T1159 within 10 days of the sale at the latest to request the certificate. You can request it as you know there is going to be a sale. I’d recommend filing as soon as possible because the certificate can take a while to get. I think it took about two months to get mine, and I understand it can take a lot longer.
This one got me. I didn’t know about the withholding requirement, so 25% of the purchase price of my house was held by the buyer’s attorney for two months.
After the end of the year you have to file a Section 116 tax return to report the non-resident disposition.
There are lots of hoops to jump through if you sell your personal residence after become a non-resident.
Reduced personal residence deduction: Like the US, the gain earned on selling your personal residence in Canada is tax-free with certain restrictions and limits. However, the house is no longer your personal residence after you move, and the personal residence deduction only applies to the time it was your personal residence.
You may take a while to find a buyer, or you may rent it out before selling.
The CRA does provide some grace. The formula that calculates the personal residence portion uses full years and adds a year. This means that you have the year you move plus an extra year before you start having to pay tax on a portion of the gain.
For example, if you buy a house in 2010, move before the end of 2015, and sell the house by the end of 2016, you won’t pay any capital gains tax.
Form T2091(IND) is the form used to calculate any taxable capital gains on a personal residence.
Without thinking about this rule, we entered a lease to own arrangement that ended towards the end of the year after we moved. We barely escaped capital gains tax.
Deemed disposition
Canada only taxes residents, while the US taxes all residents plus all US citizens wherever they live in the world.
The only way for US citizens to escape US tax is to move out and renounce citizenship. US citizens who move to Canada (or any other country) have to file a tax return in both countries. The IRS provides a credit for the tax paid to the country of residence (which is hopefully at least what would be owed to the US, otherwise, Uncle Sam will bill for the difference)
Those who leave Canada can drop their Canadian residency and voila, no more Canadian tax. However, there’s a catch. Canada won’t let anyone escape gains they haven’t paid tax on yet. The CRA treats most assets as if they are sold at market value on the moving day (“deemed disposition”), and tax is owed on any gains.
For example, you paid $1 each for shares in a private company, and they are worth $5 when you move. You have to pay capital gains tax on the $4 gain, even though it’s not a real gain. This can be a shocker if you don’t plan for it, so I recommend carefully reviewing your situation with a tax advisor experienced in this area.
Moving cross-border involves a lot of preparation, work, and stress. It’s easy to forget about the tax implications until the tax deadlines in the year after you move, but you’ll save yourself a lot of headache and probably a lot of money if you plan ahead.
Disclaimer: I am a CPA in both Canada (Chartered Professional Accountant) and the US (Certified Public Accountant), but I am not a tax expert and this post is not meant to be professional advice. My goal is not to write a definitive guide. Rather, my goal is to give you a starting point for your own further research and/or discussions with your tax advisor.