HIGH NET WORTH PLANNER, TD WEALTH
With COVID-19 there is much in flux for a snowbird to consider this year, especially if you winter in the United States. As I write this, border closures for non-essential travel continue, and many of the snowbird states are still seeing a significant number of COVID-19 cases. This will have a major impact on the hundreds of thousands of Canadians that winter in the sunshine belt of the U.S.
With land borders closed for non-essential travel, that means snowbirds may be grounded this year. Canadians could theoretically fly to the U.S., as the U.S is still allowing Canadians to fly into the country, but even though you may be able to get to your destination, there are still many issues that would need to be accounted for. For example, would you be covered under a travel health insurance plan? Would you want to expose yourselves to the increased risk of spending time on an international flight or in a COVID-19 hotspot? And if you do need to return to Canada immediately, are you confident you could get back?
For these reasons, many Canadians may decide to stay put this year. While you could always do nothing, eat the costs and wait things out, you might wonder what other options are available. If that’s the case, here are some considerations if you are thinking of selling or renting your U.S. property.
If you decide to rent it out
Renting the property may be a good option this year. The proceeds could help offset some of your expenses and, potentially, provide some extra income. But since you can’t be nearby, you may have to hire a property manager to look in on your property and help with any repairs or maintenance that needs to be done. Of course, you will need to declare any income you receive to the Internal Revenue Agency (IRS), and that can create some complexities.
Canadian residents who earn rental income from their U.S. property will have to remit a withholding tax of 30% of the gross rental income to the IRS. Your tenant will have to withhold this amount and remit on your behalf. Otherwise, non-residents of the U.S. can also choose to be taxed as if their rental income was part of a business in the U.S. That means that you could deduct your expenses related to the rental, which may be a better option.
Bear in mind that a Canadian taxpayer must report rental income in the state where the property is located as well as in Canada. Since we have a Canada–U.S. Tax Treaty, the U.S. tax paid will be creditable against the Canadian tax. However, be aware that deductions permissible in the U.S. may not necessarily be permissible in Canada; our rules and their rules on deductible expenses are different. And it’s not a good idea to try and hide anything under the rug. Just recently, the Canada Revenue Agency (CRA) openly declared that it will be auditing Canadians who own U.S. properties.1
If you decide to sell it
We don’t know when snowbird life will take flight again. If you were already thinking of selling that U.S. property, now might be a good time – especially if you feel like you may not get much use or enjoyment from it in the coming years. Areas hardest hit by COVID-19 could suffer reduced property values amid lower demand for tourism, so your investment might be down, but so too might your capital gains tax obligation. And while meeting with a realtor or real estate lawyer in the U.S. could present logistical challenges, it’s not impossible with digital technology.
As a Canadian, if you sell your U.S. property, you are most likely subject to an IRS withholding tax on the selling price. If the property sells for between $300,000 and $1 million, and the property was originally purchased with the intention of being used as the buyer’s residence, not for renting, it may only be subject to a 10% withholding tax. The withholding tax will be offset against the capital gain tax on the sale.
You would have to report the gain or loss on the sale to the IRS, as well as to the CRA. But you may be interested to note that your U.S. property could qualify for the Principal Residence Tax Exemption which may save you some money in capital gains taxes.
Note that state income tax may apply on the sale depending on where the property is located. And, if you pack up your belongings and ship them up to Canada, you may face customs and import taxes.
Whether you decide to rent or sell, both require some expertise in U.S. tax law, which a cross-border tax professional could help with. And there is always the choice to wait things out. Besides your carrying costs, you may wish to pay a local property manager to keep an eye on the place until it is viable to visit again.
Chris Gandhu provides advanced financial, tax, estate and business succession planning for business owners and high-net-worth families at TD Wealth. Chris has particular expertise in cross-border estate planning, helping Canadians with U.S. connections deal with estate, trust and tax planning issues.
- Financial Post. “Snowbirds beware: The CRA is hunting for bulk U.S. real estate data to keep tabs on transactions by Canadians”. July 10, 2020. ↩