Income tax in Canada is administered by the Canada Revenue Agency (CRA). Their website is here.
The usual disclaimer is that what follows is intended to be general information and not tax advice that you should rely on. If you have a tax problem please consult a tax professional.
Canada, like the UK, does not tax capital gains on a principal private residence. This concession is administered differently in each country. If you are emigrating from the UK to Canada (or from Canada back to the UK or anywhere else for that matter) you can greatly simplify your life by selling your home before you move.
If this is not possible, or for some reason it is undesirable, then this is what you are letting yourself in for.
Moving from the UK to Canada
I need some help with this.
You can visit the Direct Gov website. This suggests that there is no UK capital gain on your own home for up to three years after you leave it. There are more rules here.
Also, there is a discussion on this thread.
On the day you arrive as a new resident all your assets are deemed (the CRA loves this word) to be sold and repurchased at their fair market values. This means your old house back in the UK will be assumed to have a cost of whatever it could have been sold for in the open market on that day. If you subsequently sell it then you will have a Canadian capital gain or loss of the difference between the actual sale proceeds and the deemed cost on the date of your arrival.
Once you are tax resident in Canada you are taxable on your worldwide income. Any capital gain from the day you arrive in Canada to the day you sell the property, and any rental income on the UK property, is taxable in Canada.
This is not an issue if you are in the process of selling your UK home. Your asking price is likely to be at the actual market value so there will be no subsequent capital gain. Keep a copy of the listing agreement with your estate agent showing the date and price of your UK home as evidence of the market value in case the CRA want to see it.
If you keep your UK home for a while there may be a capital gain by the time you come to sell it. It is up to you to prove its market value on the day you arrived in Canada. A valuation by a qualified appraiser is ideal. A letter from an estate agent, signed and dated on headed paper saying that, in their opinion, the property would sell for UKPXXX,XXX should be sufficient. However, I have not tested this.
The capital gain is the sale proceeds less the closing costs (legal fees and estate agent’s commission) less the market value on the date you arrived in Canada. The taxable capital gain is half this amount. If the house was in joint names then each spouse is allocated half of the taxable capital gain. Tax is calculated at your marginal rate. Any UK capital gains tax you pay on the property for the period after you came to Canada can be deducted from the Canadian tax owing.
Living in Canada
In Canada a family unit can only have one principal private residence at any one time, and only the principal private residence is exempt from tax on capital gains. This is usually not an issue as it is fairly obvious which house is the family home.
However, what happens if you rent out the basement, or the entire house, for a period of time? The CRA uses the deemed disposition concept again. In theory, each time you change the status of a home, you have a deemed disposition and must report a capital gain or loss on the part of the home that is not your principal private residence.
In practice, you file an election that deems (that word again) the entire home to be your principal private residence for the entire period. These elections are good for four years and can be extended in certain circumstances.
Subject to the above, if you sell your Canadian home before you emigrate you get to keep all the proceeds.
If you are unable to sell your home before you leave Canada permanently, i.e. become non-resident in Canada for tax purposes, life starts to get more complicated.
If property owned by the non-resident is rented out, the tenants are required to remit 25% of the gross rent directly to CRA, and only the remaining 75% to the non-resident landlord. However, if there is a managing agent for the property in Canada who receives the rent on behalf of the owner, the owner can make an undertaking to file a Canadian income tax return (a section 216 election). In this case the agent is only required to withhold 25% of the net income derived from the rental.
When you come to sell your old Canadian home things get even worse. The Canadian government wants to make sure it collects all the tax due on any capital gain. It requires a purchaser to determine the tax status of the seller before a sale of real property. This is normally part of the pre-sale questionnaire the buying agent or lawyer will send out.
If the seller is a non-resident the buyer is required to withhold a percentage of the gross sale price and remit this to the CRA. The amount is 25% for capital property and 50% for inventory (a company in the business of buying and selling land). If the purchaser does not do this they will be liable for the tax themselves – so they do. Some buyers will withhold the full 50% just to be on the safe side.
To get this back you must file a Canadian tax return for the year that includes the capital gain and any rental income up to the date of sale. The CRA will refund the amount of the withholding that exceeds the taxes due. In the meantime you are short of a lot of cash.
Fortunately, there is a way to mitigate this. The seller should file an election with the CRA before, or no later than 10 days after, the sale that the withholding is limited to 25% of the capital gain ignoring the closing costs. You will need to provide documentary proof of the amount of the capital gain.
The seller must prepay this withholding tax or provide security. An undertaking by the seller’s lawyer to remit this out of the proceeds of the sale is usually sufficient. With this in hand the CRA will issue a certificate to the purchaser that will release them from the requirement to withhold taxes After the sale you file an income tax return where you calculate the tax due on the capital gain after taking into account closing costs. In its own sweet time the CRA will refund the difference.
The Canada – UK tax treaty limits double taxation so if you have returned to the UK your further liability is limited to any excess of UK capital gains tax payable over the Canadian tax paid. However, be aware that if you move to another tax jurisdiction you may be taxed again on the Canadian capital gain.
Contact Canada Revenue Agency
If you have further questions, and if you are in Canada, you can phone one of CRA's toll free numbers. CRA staff are helpful in answering questions.