Tax Strategy: Marriage affects tax exemption on principal home
David A. Altro is a frequent contributor to Paul Delean’s business column in the Montreal Gazette. Click here to view the article online or scroll down to read David’s answers to the second and third questions.
Monday, February 20, 2012
The impact of marriage on the principal-residence exemption and tax obligations in the U.S. for Canadian citizens were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.
Q: “If two people who own their own homes get married, how does the principal-residence exemption apply?”
A: A couple can designate only one property as principal residence, so marriage has the effect of eliminating the exemption for one of the two properties. If you keep both and real estate continues appreciating, the increase in market value of one property from the time of the marriage has tax implications. If you sell one property before the marriage, that’s not an issue since each partner is entitled to claim the principal-residence exemption for the years they were on their own.
Q: “I have a daughter who is a Canadian citizen but has permanent residency in the U.S. and is married to a U.S. citizen. She’s currently at home raising a daughter, but when she gets employment will she have to pay U.S. taxes and report her income in Canada as well?”
A: No. Cross-border tax expert David Altro says that if she isn’t a resident of Canada, she won’t pay tax to Canada unless she has certain types of Canadian-sourced income.
Q: “About seven years ago, I inherited a home in San Diego where I spend my winters. Am I affected by changes in the maximum tax rate on U.S. property to 55 per cent from 35 per cent?”
A: The tax you are referring to is U.S. estate tax, which applies to your U.S. property upon death. “Under current U.S. law, if you are Canadian, there will be no tax if the property market value is under $60,000 on death,” Altro said. “If above, there will still be no tax if your worldwide estate is under the exemption of $5 million. But on Jan. 1, 2013, the exemption drops to $1 million and the tax rate on U.S. property increases to a maximum of 55 per cent from 35 per cent.” Altro said it could be advantageous owning the property in a cross-border irrevocable trust to avoid taxes and probate costs.
Q: “I have an adult son with Tourette’s and severe OCD (obsessive-compulsive disorder) for whom it was recommended, by a specialized team, to hire a behaviour therapist to work with him at hospital and at home. He is under public curatorship and receives welfare. Since I paid all expenses, can I claim a deduction on my tax return?”
A: The first step should be asking the Canada Revenue Agency for a ruling. Because of the public curatorship, he may or may not meet the definition of dependant. If he does, costs would be deductible (allowable medical expenses for other dependants). There might also be eligibility for the disability tax credit.
The Gazette welcomes reader questions on tax and investment matters. If you have a query you’d like addressed in this column, send it to Paul Delean, Montreal Gazette Business Section, Suite 200, 1010 Ste. Catherine St. W., Montreal, Que., H3B 5L1, or by email to firstname.lastname@example.org
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