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April 29, 2020

Coming To Amer … Canada: Tax Consequences of Real Property Ownership North of the Border

Pandemic-induced international border and travel restrictions notwithstanding, many Western New Yorkers will soon be venturing across the Northern border to their beloved Canadian cottages to clean off the cobwebs and prepare for another summer in Southern Ontario. While relaxing days on Fort Erie beaches do not necessarily beget conversations related to the tax consequences of Americans owning Canadian real property, it is financially worthwhile to proactively take on this challenge and discuss the potential benefits of thoughtful legal and tax treatment of Canadian real property ownership.

Threshold Tax Considerations

There are varying tax consequences depending on the method by which Canadian real property is transferred. Property may be transferred by “actual sale” or to a third party unrelated to the transferor. Property might also be transferred by “deemed sale.” A deemed sale can occur through a “non-arm length’s transfer”: by gift, divorce or separation, to or from an affiliate entity, or to or from a trust. A deemed sale can also occur on the death of the owner. Depending on the nature of the sale and the parties involved, the transfer might be subject to capital gains tax, estate tax, gift tax, or any combination thereof.

Purchaser and Transferee Tax Consequences

An American purchaser or transferee must also consider the taxes associated with Canadian real property transfers. First, purchasers owe Ontario land transfer taxes calculated from the purchase price, while transferees owe Ontario land transfer taxes calculated from the consideration given to the transferee. Second, a purchaser who is not a Canadian citizen might owe non-resident speculation taxes if the property is located within the Golden Horseshoe, which generally starts from Niagara Falls at the eastern end of the Niagara Peninsula and extends west, wrapping around the western end of Lake Ontario at Hamilton and then turning northeast to Toronto (on the Northwestern shore of Lake Ontario) before finally terminating at Oshawa. Third, a purchaser might also be liable for harmonized sales taxes.

Using US Corporations

Many families have chosen to own their Canadian real property through a US corporation as opposed to individually. There are various legal-, tax-, and transfer-related advantages and disadvantages of taking this route. One advantage might include sheltering property appreciation, or capital gains. Another might be advoiding Canadian-deemed disposition rules when transferring shares of the corporation to family members for estate planning purposes. Disadvantages might include costs involved in the incorporation of a US entity, obtaining an Ontario extra-provincial license, maintaining a service agent in the United States, and other administrative costs and burdens. 

Summary

The tax consequences of transfers of Canadian real property owned by American citizens vary greatly depending on the method of ownership and transfer. Each owner’s unique family dynamics, succession plans, property locations and values, and other factors might affect the methods by which Canadian real property can most effectively be owned and transferred.
 

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