If you spend time outside of Canada in the U.S., you may need to file a U.S. tax return.
As in Canada, the U.S. requires that you pay tax on your worldwide income which could subject you to situations whereby you may be double taxed.
The U.S. has federal income taxes as well as state taxes and in some cases there are also county taxes.
There are several ways to determine if you need to file a U.S. tax return—if you have a green card whether or not you live in the U.S.; if you have an expired green card whether or not you live in the U.S.; if you meet the substantial presence test.
The test is required if you are in the U.S. for at least 183 days in the current calendar year, at least 121 days in the previous calendar year and at least 60 days in the previous year to that.
Falling under that category means that you will be required to file a U.S. tax return.
If you no longer want to file U.S. taxes, you need to renounce your U.S. citizenship, but before you can do that, you need to become U.S. tax compliant which means that you need to file taxes for at least the previous five years and you may be subject to American exit tax if your net worth is more than $2 million and you have more than $156,000 in taxable income.
So let’s look at what happens if you purchase property in the U.S.
If you are a US citizen and purchase a property that is considered your principle residence, then when you sell it, there is a $200,000 exemption on the gain on sale.
However, if you die while in possession of that property, there is no exemption and it becomes fully taxable.
Taxes on capital gains are between 15 and 20 per cent, and if you hold the property for more than a year, it will be taxed as capital when you sell it.
You can reduce the amount of the gain if you have financed the property.
However, you need to have non-recourse financing which is limited to the property that secures the debt.
If you have secured the debt with a personal guarantee, then it is no longer deductible.
If, as a non-resident alien (Canadian Citizen), you decide to own a U.S. property as an investment property and rent it out, you will be taxed on your gross rental income at a rate of 30 per cent.
When you sell the property, the tax on the capital gain can be anywhere between 15 to 43.4 per cent.
There is withholding tax that applies to your gross rental income at 30 per cent, or you can elect to be taxed as a U.S. trade or business to slightly reduce the taxes owing. There is also a 10 per cent withholding tax on the amount realized on the sale.
In addition to U.S. income taxes, there are also taxes on gifts called the U.S. Transfer Tax.
If you transfer an asset when living it will be subject to gift tax. The federal gift tax rate is 40 per cent and the each state may or may not have gift taxes.
If you transfer an asset at death, you will be subject to U.S. estate tax with the federal rate also being 40 per cent.
If you transfer the asset to your surviving spouse, it will transfer exempt of tax, but then the surviving spouse would need to sell or transfer it to a child or grandchild and would need to pay the tax at that time.
If you are a Canadian citizen, your Canadian net worth needs to be less than $5.2 million to avoid U.S. estate tax.
If not, you pay the greater of $60,000 or the result of a formula based on your percentage of U.S. assets over your worldwide assets.
If you transfer your asset to a grandchild, you can be subject to generation skipping transfer tax, which is also at the federal rate of 40 per cent. Effectively, this transfers the estate tax on the assets transferred to the next generation.
As the U.S. taxation system is complex and confusing, the way to avoid it is to not purchase any U.S. property, or if you have, to sell it before your demise.
In any case, seek out someone very experienced in U.S. tax planning to help you avoid paying too much tax or being doubled taxed.
