My plastic Bic pen was a useful tool during my elementary school years, although maybe not so much for writing.
If I took the soft plastic ink cartridge out, the remaining shell made a handy spitball rifle barrel. The spitball had to be chewed and salivated to the precise size, pulpiness and moisture consistency in order for it to travel at the appropriate velocity and precision. If I managed it just so, a little extra moisture content also ensured that it stuck to my target nicely.
Of course, all of this had to be done surreptitiously in order to avoid attracting the attention of the authorities. It was not unusual for us to engage quietly in battle during class. If my enemy timed it just right, for example, while people were laughing, I might receive a wet warm snap to the side of my head, and would have to initiate my retaliation sequence.
On one such occasion, I waited for the teacher to turn her gaze toward the back of the room as she wondered during her lecture. Just when she had her back to me, I turned and let fire toward my enemy, hoping to nail him square in the forehead. Unfortunately, I overshot him. And at that precise moment, the teacher turned around and received an unwanted projectile at the front of her neck.
She saw that I still had the dart gun at my lips, before she even peeled the offensive projectile off her tender skin. I was a boy-in-the-headlights. Busted.
I hiked my way down to the office, and took my seat outside the principal's office to await my hearing. After quite some time, he eventually came in and began his interrogation about something else entirely, catching me off-guard. It seems that some bikes had been stolen, and the spit ball warrior was a person of interest. He was severely accusatory, and unrelenting in his approach. I had been the victim of a bike theft myself, and was baffled by the suggestion that I would do that.
The lesson? Misconduct, no matter how harmless, has a contagious quality, at lease in the eyes of the accuser. Although on a much more serious level, it could be argued that a simple misunderstanding of U.S. tax issues, innocent as it may have been at its roots, could get you in some serious trouble.
Here we submit our third contribution on the subject of owning and reporting on US real estate.
Calculating the
U.S. capital gain/loss
and recapture on the sale
The capital gain/loss you report on the sale of U.S. real estate that you use as a vacation property is calculated by taking the difference between your net proceeds and your adjusted cost base (ACB) of the property.
The ACB is generally the total purchase price plus the cost of improvements. If the property is a rental property, you must also deduct the mandatory depreciation (whether or not you actually claimed it) in order to determine the ACB. You will need to report a portion of the sale proceeds, up to the amount of depreciation claimed, as "depreciation recapture" or an "un-recaptured section 1250 gain" on your U.S. tax return. The remaining balance of your sale proceeds is reported as a capital gain. Any unused capital losses carried over may be used to offset the capital gain.
Maximum U.S. capital gains tax rate - 12-month rule
If the property is held for longer than 12-months prior to its disposition a preferential U.S. tax rate applies to the capital gain.
The maximum tax rate on long-term U.S. capital gains based on the preferential tax rates is 15 per cent to 20 per cent of the capital gain depending on your income level. If the U.S. property is held for under 12 months then regular U.S. graduated tax rates, which apply to ordinary income, will apply to the capital gain. There may also be a U.S. state tax liability to consider.
For rental property, depreciation recapture and un-recaptured section 1250 gains do not qualify for the preferential capital gains tax rates.
Depreciation recapture is taxed like ordinary income and un-recaptured section 1250 gains are subject to a maximum U.S. tax rate of 25 per cent.
Principal residence exemption
For Canadian tax purposes, if the U.S. property qualifies as a principal residence, you can shelter the entire amount of the gain by claiming the principal residence exemption. However, if you decide to use this exemption, you cannot claim a foreign tax credit on your Canadian return to recoup the U.S. income tax paid unless you are reporting other U.S. source income and have a sufficient Canadian tax liability.
For U.S. tax purposes, there are rules that will exclude all or a portion of the gain on the sale of property that qualifies as a home. However, the U.S. tax rules have different criteria than Canada that must be met in order for the home to qualify. It may be difficult for many Canadians to claim the exclusion for U.S. tax purposes since a principal residence for U.S. tax purposes must generally be the home you use the most.
The information in this article is not intended to provide legal or tax advice. Readers should obtain professional advice from a qualified cross-border tax advisor before acting on it.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities, (member CIPF) and can be reached at [email protected] or 250-960-4927.
