Americans living in Canada fear they may have to pay huge capital gains tax bills when they sell their home as a result of the new US Foreign Account Tax Compliance Act (FATCA).
The issue concerns a rule buried in reams of Internal Revenue Service (IRS) tax guidance that states any US taxpayer selling a home in Canada worth more than US$250,000 must declare the gain on their returns and pay any tax due in the US.
Many US taxpayers failed to realise this rule affected them as the sale of a personal home in Canada is capital gains exempt under the country’s tax rules – but a saving clause in the US double taxation treaty with Canada means US citizens must still pay the tax to the IRS.
Now FATCA has been introduced and the Canadian tax authorities and financial institutions are automatically sending financial information about US taxpayers to the IRS, Americans in Canada are worried cash lump sums from house sales showing up on their bank statements will trigger an alert with the IRS to question where the money came from.
Assuming the US taxpayer in Canada is an expat, or they would not have a main home north of the border, the FATCA reporting trigger for banks and other financial institutions is if an account controlled by a US taxpayer has a balance of more than US$200,000.
However, for US taxpayers with second homes in Canada, the trigger is just US$50,000.
Although US taxpayers get tax breaks on paying mortgage interest, they should declare and pay capital gains tax if they sell at a profit.
“It’s a stealth tax that very few people understand,” said Larry Jacobson, registered financial planner in Vancouver, Canada.
Six-figure tax bill
“I had a client who owed the IRS a six-figure tax bill he had no idea applied to him.”
Until the summer of 2014, when FATCA came into force, many taxpayers did not disclose home sales on the US tax returns because the IRS had no way of checking their financial status.
FATCA has changed that – and with at least a million US citizens living in Canada, the income stream from capital gains could be considerable as house prices in many large Canadian cities have surged by tens of thousands of dollars in a short time.
According to the IRS, the first US$250,000 of any gain is exempt from tax, and that is a per taxpayer break, so a married couple get a US$500,000 exemption.
After that, capital gains tax is charged at between 15% and 20%.