As a result of recent economic circumstances, owning foreign real estate such as homes in California or Arizona has become an attractive proposition. But what are the tax implications of owning a foreign home upon death?
The Canadian Income Tax Act deems a taxpayer to have disposed of his or her capital property immediately before death, and to have received proceeds for that disposition equal to fair market value. There are some exceptions this deemed disposition, but this is the general rule.
This means, for example, that if you own a home in Arizona, you will be considered to have sold that home immediately before your death for its fair market value. If the property has increased in value since you initially purchased it, there will be a capital gain and you (in your year of death return) will be liable to pay tax on the taxable portion of the capital gain. This tax will ultimately be paid out of the assets of your estate.
In addition to the Canadian income tax that arises on death, the foreign jurisdiction may also tax you on the foreign real estate. This may be the case even if you are a resident of Canada, and not a resident of the foreign jurisdiction. For instance, the United States may impose estate taxes upon the death of a Canadian resident who owns real property in the United States.
The imposition of foreign tax depends on the laws of the foreign jurisdiction and the specific circumstances, so you should always seek advice from a person qualified to give advice on the foreign jurisdiction’s tax laws.
Because there are Canadian income tax consequences that arise on your death in respect of foreign real property, and because you may also be subject to foreign taxes in respect of that same property, there is the potential for double-taxation.
There may be some relief from double-taxation through tax treaties and/or foreign tax credits. In addition, there may be some tax planning that can be done to avoid the double-taxation. Watch for a discussion of these in upcoming editions of Legal Alert.