It has been over 10 years since Canadians have seen the Canadian dollar as weak compared to it’s U.S. counterpart as it is these days. Hovering around 75 US cents for 1 Canadian dollar (1 USD = ~ 1.33 Canadian), many Canadians are thinking twice about their U.S. vacations or heading down south for a weekend shopping trip.
Although U.S. travel and shopping have become more expensive for Canadians, many took advantage of having a strong Canadian dollar over the past few years, investing in the depressed U.S. real estate market. Whether purchased as a vacation spot to escape the frigid Canadian winters, or as an investment or rental property, many buyers got a great deal as a result of the strong Canadian dollar and depressed U.S. housing market. Over the past 5 years, many of the locations that Canadians targeted, such as those in Hawaii, Florida and California, have seen their real estate markets recover to various degrees. As a result, many Canadians who bought U.S. real estate in the past few years have not only seen their U.S. properties increase in value as a result of the U.S. housing market improving, but are now also seeing large foreign exchange gains (if they were to sell and convert their U.S. funds back into Canadian dollars).
This past year, I have received countless calls from Canadians who have either sold their U.S. properties, or are considering selling them as a result of the strong U.S. dollar.
Let us take a look at why so many Canadians are considering this and what the tax implications are, both in the US and in Canada.
Jim and Darla (Canadians) bought a condo in Hawaii in 2010 for $300,000 USD. At this time, the Canadian dollar was on par with the USD (1 USD= 1 CAD), so their cost was also $300,000 Canadian dollars. Five years later (today), their property is now worth somewhere between $400,000-$450,000 USD based on similar sales in the area this year. To be conservative, let us look at the low end, if they sell their property for $400,000 USD. In today’s Canadian dollars, this translates into roughly $532,000. As a result, they have turned a $300,000 investment into $532,000 or a 77% gain. Looking into it further, you realize that although the property has increased by only $100,000 USD; it has actually increased in by $232,000 in Canadian dollars, given the exchange rates at the time of purchase versus the time of sale.
The basics of the tax implications are as follows:
In the U.S., you will be subject to FIRPTA withholding tax equal to 15% of the gross sale price. There may also be state withholding depending on which state the property is in. In certain circumstances you can reduce the withholding initially; however, you will need to meet one of the exceptions. Otherwise, you will have to file a U.S. tax return to recover all or a portion of this tax. In situations where you can not reduce the withholding tax, you will want to keep in mind that you will need to wait until February/March of the following year to file your tax return. For example, if you sell the property in March 2016, you will need to wait until the 2016 tax forms are finalized which usually occurs in February 2017. As a result, you may have to wait nearly a year or more to have this withholding tax refunded. Regardless of the withholding tax, you will be required to file a U.S. tax return to report the sale of the property.
In Canada, you will also need to report the property sale. The gain reported will factor in the foreign exchange rates at the time of purchase and sale. In the above example, you would have proceeds of $532,000 CAD ($400,000 USD sale price x presumed 1.33 exchange rate) and your cost was $300,000 CAD ($300,000 USD at parity at time of purchase). Of the $232,000, half of the amount ($116,000) will be subject to tax.
The U.S.-tax treaty helps to alleviate any potential double tax by allowing you to get credit on your Canadian tax return for any U.S. tax paid on your U.S. and State tax filings.
Now what? Should I sell or not? It really depends on each individual and their situation. On one hand, you can realize a potentially large gain which may evaporate to some degree if the Canadian dollar strengthens versus the U.S. dollar in the future. With these funds, you could add them to your retirement fund, put them against any current debt or use them for other types of investments (potentially even re-purchase U.S. property if/when the Canadian dollar strengthens). On the other hand, if you keep the U.S. property, you may be maintaining a desired destination for annual travel. If the U.S. housing market continues to strengthen, or if the U.S. dollar continues to strengthen further in comparison to the Canadian dollar, the return on investment may continue to grow.
If you are thinking about selling your U.S. real estate and have questions about the tax or withholding implications, please give me a call at 250-381-2400 or email me at email@example.com