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Tax, Uncategorized

Tax Implications on U.S. Property Purchases

A client (Canadian resident) recently asked whether he was required to complete tax form T1135 for a condo purchased in Florida for CAD$125,000 equivalent.

The simple answer – it depends!

Form T1135 is used for foreign income verification and is to be completed if the cost to the taxpayer of specified foreign property was more than $100,000 CAD.

Specified foreign property does not include personal-use property owned by the taxpayer. This is defined as property that is primarily — at least 50% — used for personal enjoyment purposes by the taxpayer or by parties related to the taxpayer. The property could be rented out to third parties during the year, however, if there is no reasonable expectation of profit (e.g. rented out only to recover condominium expenses), it would not be considered a specified foreign property and would be excluded from the reporting requirements of form T1135.

In the above case, the client purchased the unit for vacationing in Florida without the purpose of generating rental income. As such, he is excluded from T1135 reporting as the condo scenario does not meet the definition of a specified foreign property.

There are a number of tax considerations that Canadians interested in purchasing U.S. vacation properties should understand. These include:

  • U.S. tax filing requirements in the event the vacation property is rented for a qualifying period and upon sale of the property;
  • The requirement to withhold and remit to the IRS an amount calculated on either gross proceeds or based on the net gain effective upon sale of the vacation property;
  • U.S. estate tax implications on the fair market value of U.S. assets including any American-based vacation properties owned by a Canadian at the time of his/her death.

Recognizing that challenges to the rules around foreign income verification and personal use are determined by the CRA on a case-by-case basis, it’s best to discuss current or potential U.S. property purchases with a qualified tax advisor.

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