THE INTERNATIONAL TAX ADVISOR
by: Douglas J. Kingston, CPA/MBA • Mailing Address:
TREATY ISSUES FOR CANADIAN INVESTORS IN
It is important
for Canadian investors in the
As described in previous articles, U.S. tax rules applicable to foreign investors in U.S. real estate are often less favorable than those applicable to U.S. citizens and residents. However, Canadian investors are entitled to special tax benefits under the Canada-U.S. tax treaty.
In general, a tax treaty is a written agreement between two countries providing uniform bilateral tax rules intended to avoid double taxation of their cross-border citizens and/or residents. Tax treaty provisions override each signatory country’s own tax laws and may be invoked by the taxpayer if the treaty rule provides a lesser tax than domestic law of the taxing country.
This article focuses on some of the more common
The Canada-U.S. tax treaty no longer provides overriding provisions applicable to real estate rental income, thus both country’s domestic tax laws apply unmodified.
Under Canadian domestic tax law,
The current Canada-U.S. tax
treaty generally does not provide
Gain on Disposition (continued)
Under its domestic tax law, Canada excludes 50% of capital gains but requires ordinary income recapture of capital cost allowances claimed in excess of the original cost less proceeds of disposition. The taxable amount is determined taking into account gains or losses resulting from currency fluctuations.
A Canadian resident who emigrates and becomes a
nonresident of Canada is deemed to have sold his or her U.S. real estate and
is thus subject to Canadian tax under its so-called “departure tax” rules. A
proposed amendment to the treaty (announced September 2000, but still not
ratified) would provide such an individual the option of treating the
property as deemed-sold for
Since its fourth amendment in
1995, the Canada-U.S. treaty has provided Canadian investors in
Under U.S. domestic tax law,
nonresidents who are not U.S. citizens are entitled to an estate tax
exemption of only $US60,000 (whereas a U.S. citizen is entitled to an
exemption of $US2 million increasing to $US3.5 million for 2009). However, the treaty provides an enhanced
exemption for residents of Canada by allowing them a pro-rata portion of the
exemption otherwise reserved for U.S. citizens. The pro-rata portion is based on the value
of the deceased Canadian's
Canada does not have an estate tax per se. Instead, a decedent’s final annual income tax return must include accrued capital gains as well as income earned up to the date of death. Under its domestic tax law, Canada does not allow a foreign tax credit for foreign taxes not considered income taxes (U.S. estate taxes are not). However under the treaty, Canada allows U.S. estate taxes as a credit against the deceased's Canadian tax attributable to his or her U.S. source income.
How Does the Tax Treaty
Affect You? Review Your
Canadian investors in
Douglas J. Kingston is an Arizona certified public accountant (CPA) specializing in international tax planning and compliance for U.S., Canadian, European, Latin American and Asian business and individual clients and may be reached by: