selling property in country of origin

[buddha]

Hello,
I am a canadian PR and I am selling a property in my country of origin, India to
an Indian citizen who is willing to pay me part of the proceeds of the sale by transfer from his USD account in US to my canadian account.

Is such a transaction legal from canadian standpoint? If yes, will this money be taxable in canada?

 

[Rosie1957]

Certainly the transaction is legal in Canada, but you'll need to report your capital gains or losses on the sale on Schedule 3 of your Canadian return. To calcuate these, you'll need: (1) the amount of the sale proceeds; (2) the cost basis of the property; (3) the amount of any "outlays" (legal costs, transfer fees, etc.) that you paid on the sale. All figures need to be converted to Canadian dollars.

Capital gain/(loss) = proceeds - cost basis - outlays

If you purchased the property, the cost basis will usually be the amount you paid for it. If you received it as a gift or inherited it, the cost basis will usually be the fair market value at the time you received/inherited it. if you've made significant improvements to the property since inheriting it, these might increase the cost basis, i.e., decrease your taxable capital gain.

If you have a loss, the rules for handling this depend on whether the property was personal use property or property used for business or rental purposes, as well as whether or not any of the property was depreciable. For example, buildings *are* depreciable, land is not.

Publication T4037 on the CRA site might be useful.

Failing to report the gains or losses on your Canadian tax return would definitely be illegal.

 

[buddha]

thanks Rosie1957.

1.what about part of the payment I received in Indian rupees and paid capital gains on it in India.
2.What in case I receive the full payment in Indian rupees and pay capital gains tax on it in India.

Do I report anything to CRA in both the above cases?

Please note that this is my first year as PR ; I just moved to canada in 2014.

 

[Rosie1957]

Per the Canada-India tax treaty:

Article 13 - Capital Gains
1.Gains from the alienation of ships or aircraft operated in international traffic by an enterprise of a Contracting State and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that State.
2.Gains from the alienation of any property, other than those referred to in paragraph 1 may be taxed in both Contracting States.

Since the sale is apparently taking place after you became a PR, you must report the capital gains to both India and Canada. It doesn't matter what currency the sale proceeds are paid in. The CRA will want you to report the total proceeds paid, both in rupees and in USD.

However, you can use the capital gains tax you pay to India as a foreign tax credit on your Canadian return (see Schedule 1 and your provincial Form 428), thus reducing your Canadian taxes.

 

[buddha]

thanks again Rosie1957. A few more follow up questions if you do not mind.

1.In India, if one invests part or whole of the profits of the property sale ,into buying another property, that part is exempt from capital gains tax.
Will this exemption be ignored by CRA and the whole proceeds be taxed again in canada?

2.There is a 20% long term capital gains tax in India. How much is it in canada?
Assuming I have no other income anywhere in yr 2014, and the profit from the sale proceeds is CAD 100,000. How much long term capital gains tax ( or total income tax) will I pay to CRA?

3.I was informed by the buyer that the portion of the sale proceeds being paid in USD to me will not be shown in the sale deed executed in India.
And that it is not allowed in India . So how will I explain that credit in my canadian account to CRA? It seems it is not the right thing to do.
Any comments.

 

[Rosie1957]

thanks again Rosie1957. A few more follow up questions if you do not mind.

1.In India, if one invests part or whole of the profits of the property sale ,into buying another property, that part is exempt from capital gains tax.
Will this exemption be ignored by CRA and the whole proceeds be taxed again in canada?

Back up a little - you're not getting taxed on the whole proceeds in Canada. You're getting taxed on the gain only, the proceeds less the cost and outlays.

That said, the exemption you describe would not be recognized by the CRA, so, yes, they will tax the entire gains amount.

2.There is a 20% long term capital gains tax in India. How much is it in canada?
Assuming I have no other income anywhere in yr 2014, and the profit from the sale proceeds is CAD 100,000. How much long term capital gains tax ( or total income tax) will I pay to CRA?

First off, be aware that Canada doesn't distinguish between long-term and short-term capital gains. You won't see those terms used on Canadian forms or tax publications.

Second, there is no flat rate for capital gains tax. *However*, capital gains income is included in income at 50%, and then that's taxed at whatever rate applies for that bracket.

If your capital gains are CAD 100,000 and you have no other income to report, then your taxable income will be CAD 50,000. The tax bracket amounts change a bit from year to year, but using the 2013 brackets, the federal tax on this amount would be CAD 7,951 *less non-refundable tax credits and the tax paid/owed to India*. The amount of the non-refundable credits will depend on your family situation and on how many days you were a PR during 2014.

You'll also owe provincial tax. The rates vary from province to province, but using the 2013 rates for Ontario, you would owe CAD 2,946 *less NRTC*. Also, if the tax paid/owed to India was high enough to reduce your federal tax to zero, then the remainder could be used to reduce your provincial tax.

Just as an example, say that you reinvest 60% of the sale proceeds in property in India. India taxes you only on the remaining 40% of the gains at a flat rate of 20%: CAD 40,000 x 20% = CAD 8,000. Say that your non-refundable tax credits work out to CAD 500 federally and CAD 300 provincially.

Your federal tax will be approximately 7,951 less 500 -> 7,451 less a federal foreign tax credit of 7,451 = 0.

Your provincial tax will be approximately 2,946 less 300 -> 2,646 less a provincial foreign tax credit of (8,000 - 7,451) = 2,646 - 549 = 2,097.

Your total taxes owed to the CRA will be CAD 2,097.

Now let's do it another way. Say that you reinvest 40% of the sale proceeds in property in India. The tax amount you owe India is CAD 12,000. In this case, your foreign tax credit completely wipes out the taxes owed to the CRA.

3.I was informed by the buyer that the portion of the sale proceeds being paid in USD to me will not be shown in the sale deed executed in India.
And that it is not allowed in India . So how will I explain that credit in my canadian account to CRA? It seems it is not the right thing to do.
Any comments.

No offense, but it sounds to me as if the buyer is running some sort of scam. It seems to me that if failing to show the complete sale proceeds on the deed is not allowed in India - and it certainly wouldn't be allowed in Canada either - then you ought not to do it. Have you run the details of this deal past a lawyer?

At any rate, I strongly advise that you come clean with the CRA and report the entire amount of the sale proceeds.

 

[buddha]

thanks very much for the detailed reply.

I talked to an accountant in India , who deals with Non-resident Indians and he said, by Indian laws, any Indian property sale has to be executed with money paid inside India, so there is no tax loss to the Indian govt. But people do part payment abroad, without connecting it on paper to the property sale.
You are right , it does not seem right and I do not want to do anything illegal.

THanks again, Rosie1957. Are you a professional accountant who I can consult in future?

 

[Rosie1957]

I'm certainly happy to field questions, but I'm not a professional accountant. My training is in bookkeeping and income tax return preparation, Canadian and US.

 

[EU_2010]

Hope it's ok to hi-jack this thread. Thank you so much for the insight, Rosie 1957.

I have a condo in my home country that I purchased over 10 years ago and which is currently rented out. After years of losses, the property prices have finally gone up slightly.
So far, I have rented in Toronto, but intend to buy here in the next 1-5 years and will need the proceeds from selling the condo back home.

My home country has a law that capital gains from selling property are only taxable if you've owned the property less than 10 years. So I would not have to pay taxes there on any gains (if any).
Is there a similar law in Ontario/Canada? From your previous post it does not sound like it.

Certainly do not want to do anything illegal. When the time comes, I assume I should best consult with a tax specialist?

 

[Amadan123]

Hello EU_2010,

Unfortunately, there is no such rule in Canada where capital gains won't be taxed after a certain amount of years of ownership.

Regardless of how long you've owned the property, if there is appreciation in the value of the property since you bought it to when you sell it, you will have to pay capital gain on the difference. Things get slightly complicated if you want to dispose of properties in Canada as a non-resident, if you go that route.

I hope that helps.

Madan Chartered Accountant team
www.madanca.com

 

[steaky]

if there is appreciation in the value of the property since you bought it to when you sell it,

Since EU_2010 bought the property before he moved to Canada, isn't it's the fair market value of the property at the time he became a Canadian resident for tax purposes instead of the original purchasing price?

 

[EU_2010]

Thanks Amadan, that is good to know.

Since EU_2010 bought the property before she moved to Canada, isn't it's the fair market value of the property at the time he became a Canadian resident for tax purposes instead of the original purchasing price?

This would definitely change things.
I expect the price to not move massively from the fair market value it has now. I became a temporary Canadian resident in 2010 and a permanent Canadian resident in 2014. Of course the price I paid over 10 years ago was a different one.

 

[Rosie1957]

Steaky, many thanks for mentioning this, as it affects Buddha's question as well.

Yes, you're right - see Section 128.1 of the Income Tax Act. An immigrant is deemed to have disposed of their property at FMV at the time they become a resident and to have immediately reacquired it at the same cost. There are exceptions made if the property is already in Canada (shares in a Canadian corporation, Canadian real estate) or is already being used in a business active in Canada.

A full quote from the ITA follows.

*If* the transaction were also taxable in the seller's country of origin, then the amount of gains taxable in that country might be quite different from the gains taxable in Canada. Only the portion of the foreign taxes that relates to the amount of gains taxable in Canada would be eligible as a foreign tax credit on the Canadian return.

Rosie


Changes in Residence

Marginal note:Immigration

128.1 (1) For the purposes of this Act, where at a particular time a taxpayer becomes resident in Canada,

Marginal note:Year-end, fiscal period

(a) where the taxpayer is a corporation or a trust,

(i) the taxpayer’s taxation year that would otherwise include the particular time shall be deemed to have ended immediately before the particular time and a new taxation year of the taxpayer shall be deemed to have begun at the particular time, and

(ii) for the purpose of determining the taxpayer’s fiscal period after the particular time, the taxpayer shall be deemed not to have established a fiscal period before the particular time;



Marginal noteeemed disposition

(b) the taxpayer is deemed to have disposed, at the time (in this subsection referred to as the “time of disposition”) that is immediately before the time that is immediately before the particular time, of each property owned by the taxpayer, other than, if the taxpayer is an individual,

(i) property that is a taxable Canadian property,

(ii) property that is described in the inventory of a business carried on by the taxpayer in Canada at the time of disposition,

(iii) eligible capital property in respect of a business carried on by the taxpayer in Canada at the time of disposition, and

(iv) an excluded right or interest of the taxpayer (other than an interest in a non-resident testamentary trust that was never acquired for consideration),


(v) [Repealed, 2001, c. 17, s. 123(2)]


for proceeds equal to its fair market value at the time of disposition;


Marginal noteeemed acquisition

(c) the taxpayer shall be deemed to have acquired at the particular time each property deemed by paragraph 128.1(1)(b) to have been disposed of by the taxpayer, at a cost equal to the proceeds of disposition of the property;

 

[EU_2010]

Thank you Rosie, much appreciated!

 

[newtone]

Hello,
I am a canadian PR and I am selling a property in my country of origin, India to
an Indian citizen who is willing to pay me part of the proceeds of the sale by transfer from his USD account in US to my canadian account.

Is such a transaction legal from canadian standpoint? If yes, will this money be taxable in canada?

Make your life simple, open a business somewhere around the concept of charity in Canada, sell your property and move the money to your business account. This way you are not personally liable for hefty taxes