JonboyE

That is correct. The gain that is taxable in Canada is half the difference between the value of the house when she moved to Canada, converted to CAD at the rate ruling on that day, and the proceeds of sales after deducting closing costs, converted to CAD at the rate ruling on the day the sale closes.

Novocastrian

Thanks. I was pretty certain. The OP in the first post said "supposing we had $20k profit", or similar. Made me wonder if s/he knew what to ask...

smivers

Which sucks for me, because if I sell it now then I get taxed on half of the $50k "capital gain", even though I get back what I paid for it when I bought it...

Gotta love property prices and exchange rates... Maybe won't sell it anytime soon then...

Novocastrian

The thing is, it may well be that the OP is in the same position but doesn't realize it.

Edit: Aren't you being overly negative though? You've made a CG on the exchange rate of $50K and will pay less than $12.5K in tax (probably much less), that still leaves about a $40K windfall. What's the bitch?

Aviator

You going to wait until it goes down, so you pay less tax? If the GBP increased in value and you house increase in value your tax liability increases, as does your gain.

smivers

You have a good point. Really what I would like is for the GBP to crash relative to the dollar for about two weeks, sell it then, and then actually transfer the money when it's back to 2 dollars to the pound...

Actually I'm not planning to sell currently because I was going to wait until my current tenant moves out, and try to sell it then. She's been in for over two years though, and seems quite settled, and it looks after itself financially, so I figure it isn't doing any harm.

The amount of tax to pay will sort itself out in the wash...

MarkG

Correct me if I'm wrong, but if, say, they bought it for 200,000 pounds when that was worth $300,000, then sold it for 200,000 pounds when that was worth $350,000, they've made nothing once they repay the bank to clear the mortgage, and are taxed $12.5k on that nothing.

JAJ

Even more reason to sell the property and clear the mortgage at the time you move to Canada, not hang on to a heavily mortgaged property in another country.

Although note that the capital gain in Canada is based on a deemed purchase at the time of becoming tax resident, not when it was originally acquired. Usually this works in the new resident's favor - but not always.

Novocastrian

That's sophistry to put it kindly. In your scenario they made a windfall profit of $50K, perhaps more if they had any equity in the house. Up to 12.5K of that is tax if they are tax resident in Canada, the country in which they'll spend or invest the remaining profit.

MarkG

No, it's maths. My theoretical seller made nothing, if they had to give all the money from the house sale to the bank to clear the mortgage. Yet they'd be charged tax as though they had $50k more in the bank at the end of it.

OK, if they had paid off some of the mortgage, they'd get to keep whatever they had paid off, but that's not a capital gain in the UK. If it was an interest only mortgage, they'd literally have made nothing, but still be taxed in Canada as though they had made tens of thousands of dollars.

It would actually be worse, if the house price had fallen by the time they emigrated and recovered afterwards, so they'd make a larger taxable profit even though they didn't see a single penny of real profit in their bank account. They could even make a loss on the sale in the UK, yet be charged tax on their supposed 'windfall profit' in Canadian dollars.

As JAJ mentioned, the Canadian treatment of capital gains is fine in a world where exchange rates are fairly stable and prices keep going up, but they could be disastrous in a world where prices and exchange rates change rapidly in both directions over a few years.

Novocastrian

I see what you're getting at but this is all no secret: they took a risk hoping that their house would increase in value in UK terms and it didn't: as many folk are very pleased with the stronger pound as are displeased. Such as those bringing over equity. Swings & roundabouts innit?

smivers

Yes, swings and roundabouts indeed. I say the following not as a complaint, but just for an interesting case study for all involved. My genuine attitude is one of C'est la vie...

I agree with what you say, except that it isn't necessarily a choice to take that risk... In my case it was life getting in the way. I bought at 165k Gbp in Jan 2008, starting dating my now wife in Feb 2009 and got married and moved to Canada in Jun 2010, getting PR in Oct 2010. My house was valued at 155k GBP in Oct 2010, and the exchange rate was about 1.60 CAD to the pound. It had been on the market for six months, and there were no buyers interested at that time, as mortgages were hard to come by for first time buyers. Now I probably could sell it, but I'd be doing well to get back what I paid for it, so ignoring fees for a minute, I break even from when I bought it but make 10k GBP "profit" from when I moved to Canada.

This is where it sucks - the 10k profit at today's exchange rate is $18.5k, but taking into account the difference in the exchange rates from now to three and a half years ago, Canada sees my profit as closer to $50k, and will tax me on half of that at something like a third, which basically eats up any money I might make from the Oct 2010 value after estate agent fees, solicitor fees and commercial exchange rate being lower than the one the bank of Canada states...

Yes, I've paid off some of the mortgage in that time, and have been doing well through renting it out, but it still kind of feels like daylight robbery...

Actually, thinking about it, I should probably look into getting the house into my wife's name too, so that we can split the tax liability. Otherwise I'm going to bump up into a higher tax bracket when it does sell and it will cost even more tax. Argh!

Paul_Shepherd

Hi all,

Whilst on the subject of capital gains tax....I have a simple question, if you bought the house then spent a considerable amount of money renovating it, which would obviously increase its market value, would that be classed as capital gains when it was time sell?

Thanks

Paul

JAJ

[quote corrected, where highlighted]

As I understand it (open to correction), if a former U.K. resident disposes of property within 5 years of leaving, any U.K. capital gain is held in abeyance and becomes taxable in the tax year in which residence is resumed, if residence is resumed within 5 years. If residence isn't resumed, then there is no charge.

http://www.hmrc.gov.uk/manuals/cgmanual/CG26100.htm
http://www.hmrc.gov.uk/international/rdr3.pdf

Although anyone potentially affected by this needs to use a U.K. tax professional since the statutory residence test in the U.K. (the technical term is "period of temporary non-residence") is relatively new and a lot of the details are still being worked out.

It would also be necessary to look at the U.K./Canada tax treaty, and bear in mind that from 2015, this will (likely) all change again and U.K. capital gains tax will be charged on disposals of U.K. situate assets even if the owner is non resident.

JAJ

Depends - repairs and maintenance don't usually increase your cost base, however substantial renovations/upgrades may do. Remember that since Canada assumes a new resident sold and repurchased the property at fair market value on the date of becoming tax resident, you probably can't count anything before that date. But it may influence what the market value was.