Tax and House Sales-Canada
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.
This article describes taxes on income and capital gains. A discussion of other real estate taxes is contained in the article on general Canadian taxation.
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
Since 2016, sales of UK property by non-UK residents have been subject to non-resident capital gains tax (NRCGT). Previously, disposals of UK property whilst non-resident were completely out of the scope of UK tax.
NRCGT is payable based on the inherent gain arising on the property from April 2016. Any gain arising prior to this is not subject to UK tax. In order to calculate the gain, three methods can be used depending upon which one produces the best result to the taxpayer:
1. Obtain a property valuation at April 2016 and use this as the base cost when calculating the ultimate gain.
2. Calculate the full gain arising on the property and time apportion the gain, with only the gain apportioned to April 2016 onwards being subject to NRCGT.
3. Calculate and report the full gain (this would only be beneficial where a loss arises).
A NRCGT tax return MUST be submitted to HMRC within 30 days of the settlement of the sale (i.e. the date that the price is paid and keys are handed over). This must be completed even if there is no CGT to pay. Failure to do so will result in an instant £100 penalty, with further penalties being levied for returns more than 6 months and 12 months overdue. The return is submitted online, and the link for this is below.
Any NRCGT payable on a disposal of UK residential property must be paid within 30 days of settlement of the sale.
Each individual has an 'annual exempt amount' (£12,000 for the 2019/20 tax year) meaning that, currently, the first £12,000 of chargeable gains in the UK are exempt from CGT (but a NRCGT return would still be required). For gains in excess of this, the rate of tax will be 18% or 28% (or a mixture of the two) depending upon the level of UK taxable income and other gains arising in the year.
Further details and the NRCGT return can be found here: https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-uk-residential-property
Where a UK residential property sale is subject to both UK NRCGT and Canadian Tax, the disposal must be reported in both countries. Due to the UK/Canada double tax treaty, any tax suffered in the UK is allowable as a deduction against the Canadian Tax suffered on the disposal. This double tax relief is claimed in the Canadian tax return.
Properties are exempt from CGT for the duration that the individual occupies the property as his 'principal private residence' (PPR). In addition to this, provided that the property was the individual's PPR at some point during his ownership, the final 18 months are also exempt, even if the individual does not live in the property during this time. This final 18 month exemption is being reduced to 9 months from April 2020.
If the individual used the property as his PPR at some point and then let out the property, a further exemption is currently available for the gain arising during the period of letting up to a maximum of £40,000. This relief is being withdrawn from April 2020.
There are further periods 'deemed occupation', where an exemption will apply even though the individual does not occupy the property, eg
1. Non-occupation for any reason for a period of up to three years, provided that the property was the individual's PPR at some point both before AND after the period of non-occupation.
2. A period of non-occupation of up to 4 years due to being required to work elsewhere in the UK, provided that the property was the individual's PPR at some point both before AND after the period of non-occupation.
3. Any period of non-occupation where the individual is required to work abroad. The property does NOT have to be occupied after the period of non-occupation.
Therefore, if an individual has had to move abroad for work requirements (say, to Canada :) ), if the property is sold before occupation can be resumed, it is likely that the full gain will be exempt from UK tax (but a NRCGT return will still be required within 30 days of sale). It is important to note that the reason for the move must be because it is required for a current employment (e.g. not moving abroad to find a new job).
If the above deemed occupation periods (coupled with previous actual residence) do not cover any gain arising in full, an exemption can still be claimed for any non-resident tax years where the individual or his spouse (or a combination of both) occupies the property for at least 90 days in the tax year (which runs from 6 April to 5 April). So, for example, if a couple have a house that was their PPR whilst living in the UK, when they move to Canada, inherent gains for future years will not be exempt from UK CGT (except for the final 18 months of ownership and any deemed occupation periods). However, if the couple live in the property for at least 90 days in any future tax years where they are non-resident, that year will gain exemption.
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 GBPXXX,XXX should be sufficient. However, I have not tested this.
Note that a taxable capital gain is half an actual capital gain. Also, an allowable capital loss is half an actual capital loss.
The actual 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.
With the current housing market in the UK, it is possible a house could sell for less than its fair market value on the day you arrived.
If you rented your UK property to tenants, and it has declined in value since you became resident in Canada then you will have an allowable capital loss when you sell it.
The allowable capital loss (half the actual capital loss) can ONLY be offset against other taxable capital gains - not any other type of income. You can carry back any excess allowable capital loss to use against any taxable capital gains in the last three years. If there are none you can carry it forward indefinitely.
If the property is not rented (does not produce income that is taxable in Canada) it will likely be classified as personal use property. Capital gains on personal use property are taxable. Unfortunately, capital losses on personal use property are not allowable.
Also note that the calculations are done using the exchange rate on the day the transactions occurred. Historical rates can be found here. So, for example, if your UK house was worth UKP200,000 on the day you landed in Canada when the exchange rate was 1.90, then the adjusted cost base in Canada will be $380,000. If you sell it later for UKP195,000 when the exchange rate is 2.00 your proceeds will be $390,000. You therefore have a taxable capital gain in Canada of $5,000 (($390,000-380,000)/2) even though you have a paper loss in the UK.
Rental income in the UK
The tax treatment in Canada of rental income from the UK is discussed in this article.
Living in Canada
In Canada a family unit can only have one principal residence at any one time, and only the principal 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? Or use part of the house as a home office or business? 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 there are some work-arounds. If the business use is incidental to use as a principal residence, or if the house is rented to a tenant for less than four years (sometimes more) then the deemed disposition rules can be avoided. You should consult an accountant to make sure you have a workable strategy in place.
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. This must be paid by the 15th of the following month. The non-resident landlord receives the remaining 75%. 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. In this case the agent is only required to withhold 25% of the net income derived from the rental. To take advantage of this concession the taxpayer and the managing agent must file form NR6, and receive approval from the CRA, before the start of the rental, and also before the start of each new tax year.
As a non-resident landlord you are not required to file an income tax return if your tenants withhold 25% from the gross rent. If you don't file a return the CRA keep the withholding tax and your obligation is at an end. Note however that if your tenants do not remit the withholding tax you are liable for interest and penalties. Section 216 of the Income Tax Act allows you to elect to file a return if you choose to do so.
If your managing agent has remitted reduced withholding tax you are required to file a T1159 income tax return each year. Even if you don't have an agent it generally advisable to file the return. The return enables you to claim expenses like repairs and maintenance, property tax and insurance and so on. The CRA will refund the difference between the tax you owe on the net profit and the amount remitted by the tenants.
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.
Note that if the property was your home while you were in Canada you will only be liable for the taxable capital gain from the date it ceased to be your principal private residence. However, the buyer is required to withhold 25% of the total sale price.
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. It will be a very good idea to get a written appraisal of the property at the time you become non-resident (or it otherwise ceases to be your main residence).
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.