10 thoughts on “CDN with @dualcitizenship spends $3000 per year to make retirement planning more difficult”

1. Looks to me like that couple has really screwed themselves. Unless I’m missing something, they have managed to arrange things so that two thirds of their net worth (the condo) is subject to capital gains tax by both governments. So the Canadian and US governments will enjoy that nice capital gain but they won’t. When they retire (if they are even able) at least the government pensions will only be taxable in Canada, but they will no longer have earned income, will not qualify for the FEIE, and will have to rely solely on foreign tax credits to zero out the US taxes on all the rest. What a mess. They need to fire their advisors and get someone who knows what they are doing.

   Also, I wonder if that 3000 bucks a year spent on the US tax returns includes PFIC reporting for those Canadian mutual funds. If not, she is subject to a whole bunch of IRS fines for failing to file those forms. One of the commenters suggested she spend 3 grand to renounce. Good advice. Once again, another example of why those who try to comply are far worse off than those who don’t.

2. ….And … What about this husband and wife just written up in the Toronto Star. They bought a very modest home (look at the picture) in Toronto for $27,000 in 1967 and just sold it (to downsize to a condo) for $2.3 million.

   Let’s say that the couple discover after the sale that one or both are U.S. Tax Citizens and they ask a Canadian Tax Professional/Retirement Planner for advice about: paying their fair share to the IRS, sorting out their capital gains and other unanticipated problems with the IRS, and figuring out how to prepare for the rest of their retirement as a U.S. Tax Citizen living in Canada.

   How should the Tax Professional advise? How should a Retirement Planner advise?

   https://www.thestar.com/business/2017/02/10/don-mills-home-sells-for-115-million-over-asking.html

3. @maz57,
   I don’t see why you couldn’t offset your American tax with the tax paid in Canada.
   The most time consuming part of my tax return each year is calculating my foreign income totals for ETFs.
   Tax on a primary residence in the US is pretty generous and the capital gains rates for lower income people are very good (0%). Obviously I don’t believe they should be taxed by the US if they live in Canada.

4. Articles like these qualify for the “fake news” category. They bring in experts from the financial industry. But where are the interviews with Petros or Tricia of the Isaac Brock Society, or with Stephen Kish of ADCS? It is an example of the frequent replacement of journalism with infomercials.

   Of course at no point does it discuss anything resembling Petros Principles–or how we as Canadians may defend ourselves from the tax invasion of Canada.

   http://isaacbrocksociety.ca/2016/08/05/petros-principle-12-who-is-criminal/

5. My advice: spend $3000 and let the wife renounce. Then the couple doesn’t have to spend $3000 a year on US tax compliance. When I renounced I was close to retirement age. Looking at all the US tax traps (PFICs, capital gains on residence, exit tax, etc.) made my head spin. What if these people came into an inheritance down the road? A windfall could put them into the exit tax category.

   Looking back, my motivation for renouncing wasn’t primarily about money. The invasion of privacy and degradation involved in remaining a US citizen was the main problem. Imagine having one’s Canadian bank records sent to the IRS and having to file forms with Financial Crimes Enforcement Unit every year. Renounce and rejoice!

6. Since she isn’t covered and is in compliance already, she should renounce before they sell the condo. It isn’t clear if the condo has been used ONLY for rental income. Without re-thinking change-of-purpose rules, couldn’t they at least look into living in the condo long enough to make it a principal residence before they sell it?

7. @Neill. I think I understand what you are saying. Even though the cap gain on a rental property isn’t earned income it would still be income for US tax purposes and therefore should be able to be offset by any Canadian tax paid using Form 1116. Do I have that part right?

   Also I believe by “generous” you are referring to the fact that the IRS exempts the first 250k ($US, of course) of the gain on a principal residence, but in this case it looks to me like neither country would consider the condo to be their principal residence. So that means that they not only miss out on the Canadian exemption for all of the gain on a principal residence, they will also miss the US 250k exemption as well. In other words, only the actual Canadian tax paid can shield them from US tax owed (via claiming a foreign tax credit on their US return). They would have been smarter to let their 23 year old son live in the condo for free which would have at least qualified it for the Canadian exemption.

   Why they chose to rent out the condo, pay a lot of rent to live somewhere else, and therefore lose the nice Canadian exemption on a principal residence baffles me. That makes no sense even without the US tax complication. For most Canadians, their principal residence is an integral part of their retirement planning. Not only have they been paying tax on the rental income for all these years, they will have to pay c.g. tax when they sell it. I must be missing something.

8. @Patricia Moon. I think the way it works is that if a place has been both a rental and a principal residence, you can only claim the exemption for the period it was used as a principal residence. In other words, the gain (and thus the exemption) is apportioned according to use. Assuming they have been declaring and paying tax on the rental income, it would not be possible to move in for a year or two then sell and try to exempt the whole gain because the CRA already has a record of it being a rental.

   But you are right; she would do well to get out now before she becomes a covered expat.

9. @maz57,
   Your right on 1116. I missed that they rented out the condo. You can always move into it some years before you sell to get it again.

10. Thanks maz57.

    I knew I should have looked – from CRA

    http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c2-eng.html#N10A4E

    2.54 If a taxpayer has completely changed the use of a property (for which an election under subsection 45(2) is not in force) from income-producing to a principal residence, he or she is deemed by paragraph 45(1)(a) to have disposed of the property (both land and building), and immediately thereafter reacquired it, at fair market value. This deemed disposition can result in a taxable capital gain. The taxpayer may instead defer recognition of the gain to a later year by electing under subsection 45(3) that the above-mentioned deemed disposition and reacquisition under paragraph 45(1)(a) does not apply. This election is made by means of a letter to that effect signed by the taxpayer and filed with the income tax return for the year in which the property is ultimately disposed of (or earlier if a formal demand for the election is issued by the CRA). For e-filers, see the Paper documentation page on the CRA website. Also, subsection 220(3.2), in conjunction with section 600 of the Regulations, provides the authority for the CRA to accept a late-filed subsection 45(3) election. Such a late-filed election may be accepted under certain circumstances. For further particulars on the acceptance of late-filed elections, see the current version of Information Circular IC07-1 .4

    Example 5

    Mr. X bought a house in 2003 and rented it to a third party until mid-2009. Mr. X and his family then lived in the house until it was sold in 2011. Mr. X has been resident in Canada at all times. When he filed his 2011 income tax return, Mr. X designated the house as his principal residence for the 2009 to 2011 tax years inclusive, by virtue of his having ordinarily inhabited it during those years. He also designated the house as his principal residence for the 2005 to 2008 years inclusive (that is, the maximum 4 years) by virtue of a subsection 45(3) election, which he filed with his 2011 income tax return (he was able to make this designation because (i) no other property had been designated by him or a member of his family unit for those years, and (ii) he did not claim any CCA when reporting the net income from the property before the change in use). However, his gain otherwise determined on the disposition of the house in 2011 could not be fully eliminated by the principal residence exemption formula because he could not designate the house as his principal residence for the 2003 and 2004 years.