Canadians who used to fly south regularly may be facing a severely altered vacation landscape this year. Chris Gandhu, a High Net Worth Planner with TD Wealth, speaks to Kim Parlee about what options snowbirds have for their properties this winter.
- As time passes, the impact of the pandemic continues to pose new challenges. Canadian owners of US vacation properties might be wondering what to do. So if you don't want to go or can't go to your properties in Florida or Arizona, what should you do?
Chris Gandhu is a High Net Worth Planner with TD Wealth. He joins me for this edition of Ask MoneyTalk. Chris, great to see you.
I'm going to jump right into the question. And the question is, if we bring it up, I own a property in the United States. Should I sell it, should I rent it, or let it sit?
- Right, so Kim, obviously that's going to be a personal choice that's based on your goals and motivations. We certainly are still seeing clients that are considering being a snowbird and traveling down south. But clearly there is a lot of moving pieces that are changing daily. And traveling down south, renting or selling, each option has its own unique tax and non-tax considerations to look at.
- Well, let's start with one of those situations. Let's say that, OK, I'm not going. I'm going to rent it. What do I need to know about renting a US property?
- Right, so assuming you have never rented before, I suppose a seminal question is are you comfortable with someone being in your personal space? Most of these snowbirds would have left in a rush, so their photographs, personal documents, et cetera are likely still lying around the property. So you want to make sure you're comfortable with that situation.
Of course, since you may not have a chance to actually be there and vet the renters, which means you want to be looking at hiring a property manager who could do all of that leg work for you. And, of course, all of this also comes with its own tax implications. There is US tax and Canadian tax to consider.
On the US side, Kim, if you're earning income in the US, of course, you have to report it to the state and federally. Now, the default regime generally is that the individual renting from you or the property manager is going to act as a withholding agent, withhold 30% of your gross rent and remit that to the IRS on your behalf.
We find that most of our clients, in fact, make an election to treat the income as effectively connected with a business in the US. And there's a couple of advantages to doing that. First of all, you can file your income now on a net basis, not gross basis. So you can take the deductions. And secondly, you get the benefit of the graduated tax rates, which is also a win.
But, of course, because you have income in the US doesn't mean you don't have to report that income in Canada. You are a Canadian tax resident, which means worldwide income, including this US rental income, also needs to be reported in Canada. Luckily, Canada and the US do have a tax treaty. So we shouldn't run into any double tax situation.
So while Canada will give you a credit for the US tax paid, just one additional piece of advice here. Actually this summer amidst the pandemic in June, CRA did announce a new audit initiative that is looking specifically at Canadian taxpayers that own US real property. So if you're renting, just make sure you're up and up on both your US and Canadian compliance.
- I'm just going to say for everyone who's listening, of course, big. When you're getting ready to make these decisions, have a quick time out and just realize it is a big decision, if you do decide to go that route.
Now what if did you decide, OK, I'm not going to be there. I don't want to rent it or I'm just not comfortable. I want to sell it. What do you need to think about then?
- Right. Again, tax and non-tax considerations-- obviously, it depends on your personal circumstances, if you're going to be using the property or how you foresee that unfolding. We also want to assess what the market is like today, whether it's depressed or if it's still a good time to sell. And foreign exchange is also a relevant consideration.
But moving on from that to tax, if you do decide to sell, I think what you do need to be aware of and not be surprised by is the fact that there is this mandatory withholding. It's called FIRPTA, based on Foreign Interests in Real Property Tax Act, a US piece of legislation, that basically said that when we have a non-resident selling US property, there is a mandatory 10% to 15% withholding that's taken off the top price and remitted to the IRS on behalf of the seller.
Again, there is an exception available if you can show that your actual tax bill will be less than the withholding. In practice, that's difficult to do because by the time a sale is negotiated, you simply don't have enough time to get that waiver from the IRS. And, as with the rental, if you now have income to report in the US, you're also going to have a similar reporting in Canada.
Now, if this property was never rented and it was used as a personal use residence, you actually on the Canadian side do have the choice to use your principal residence exemption against it. But I would again advise caution.
If you're paying US tax, you're likely also going to trigger Canadian tax. So you get that offsetting foreign tax credit. I never want to see a client in a situation where there's tax in one country but no tax in Canada, because that's just not an ideal place to be.
- Chris, it sounds like there is an awful lot to think about. This is not a quick decision. So what would you say would be the most important piece of wisdom in terms of what people should do when they're thinking about this?
- Yeah, I mean, these are personal decisions in a landscape that is evolving very rapidly. And, of course, they have tax implications and I would also say immigration implications, if you do end up traveling and, perhaps because of tighter restrictions, end up getting stuck in the US for an extended time. So I think before you decide what to do, you should take advice from a cross-border tax and immigration advisor.
- Chris, thanks so much.
- Thank you, Kim.