Federal tax rules allow some breathing room for the exemption when a homeowner is transitioning between properties in Canada.
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What happens if you leave Canada before selling your home or withdraw money from a TFSA (tax-free savings account)? Those were among the topics raised in the latest batch of reader questions.
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Q: I will be relocating to the U.S. this year on a work permit and plan to stay a few years. My intention is to sell my principal residence but keep a couple of investment properties I own. If I can’t sell the house right away, does that affect the principal-residence exemption? Are there tax implications for the investment properties if I don’t reside in Canada for a few years? Do I still have to file Canadian tax returns for 2021, and if so, will my Canadian taxes be adjusted to account for the months in the U.S. after the relocation?
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A: Canadian tax rules allow some breathing room for the principal-residence exemption when a homeowner is transitioning between properties in Canada. Assuming the house is not rented out while awaiting a buyer, it would still be covered by the exemption for that year even if you bought another home (which would also be exempt that year). Unfortunately, the rules are different if you’re no longer a resident of Canada. In that case, the exemption applies only for the years you resided here.
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You have a couple options for the house as you depart. If you make the election to file Form T2061A and report a deemed disposition on the tax return of the year you cease being a resident of Canada, you’ll be considered to have disposed of it at fair market value and reacquired it on the date you leave. Any appreciation in value from then until the time you sell would be taxable. If you don’t make that election, the taxable portion of the transaction will be determined when you sell, using the number of resident years relative to the total number of ownership years.
Keeping the investment properties means you’ll continue having tax obligations here, even as a non-resident. You’ll need to withhold and remit to the Canadian government 25 per cent of the gross rental income as a non-resident tax. That can be considered your final tax obligation to Canada for the rental income, or you can choose to file a Canadian tax return that would allow you to pay tax on net rental income rather than gross and perhaps reclaim part of the tax withheld. You’ll also be expected to file a Canadian tax return for 2021, reporting your worldwide income for the months you lived here and Canadian income only for the subsequent months.
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Q: If my TFSA contribution limit is, for example, $10,000 this year, and I contribute the $10,000 and invest it in equity markets that increase its value to $15,000 the same year, then withdraw the $15,000, how much does my contribution limit increase the following year?
A: Your contribution limit the following year will grow by the amount the government is according for TFSAs in that calendar year (it’s been $6,000 since 2019 but was $10,000 once in 2015), plus the $15,000 that you removed. Amounts withdrawn from TFSAs get added back as contribution room the year after they’re taken out. If you’ve never contributed anything to a TFSA, and were 18 or older in 2009, you’ve now got $75,500 in contribution room sitting unused for what is arguably the best savings vehicle available to Canadians. The rules even allow you to give money for a TFSA contribution to a spouse or common-law partner, without the income being attributed back to you for tax purposes. For those who have turned 18 since 2009, TFSA contribution room begins to accumulate the year of your 18th birthday.
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Q: Are capital gains in a personal trust calculated and taxed the same way and at the same rate as outside a trust?
A: Yes in how they’re calculated, no in how they’re taxed. The same capital-gains inclusion rate of 50 per cent applies to dispositions in a trust, with capital losses deductible from gains. Personal trusts are subject to a flat rate of federal tax on taxable income for the year equivalent to the highest rate for individuals, but they can get offsetting deductions for capital gains distributed to and reported by their beneficiaries.
The Montreal Gazette invites reader questions on tax, investment and personal finance matters. If you have a query you’d like addressed, please send it by email to Paul Delean at gazpersonalfinance@hotmail.com.
Delean: Rules for principal-residence exemption change if you leave Canada - Montreal Gazette
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