Florida Home Finders of Canada strives to update our registrants from time to time about any issues in Florida or beyond that may affect the purchase of your second home or rental income generating property in Florida. Please read below the Florida Home Finders of Canada’s tax summary of the effects of the latest agreement between the various levels of Government in the U.S. In this Newsletter we will outline the major cross border tax implications on Canadians. If you have specific questions pertaining to your individual situation, please ask us for a referral to a U.S. Tax accountant or U.S. Real estate (cross Border) Lawyer.
The US Senate has worked out a tentative deal to avoid sending the country over the “Fiscal Cliff”. The Republican-controlled Congress has also agreed to the plan, which affects numerous tax issues.
The “Fiscal Cliff” refers to the cumulative effect of spending cuts and tax increases, which were scheduled to occur January 1, 2013 as a result of the expiry of several pieces of legislation. This issue has received a great amount of press in recent months, as a failure of the White House, Congress and the Senate to compromise and work out agreements would have potentially sent the U.S. Economy back into recession.
Federal Estate (death) Tax
For Canadians with Holdings in the US, a major concern was changes to the current Estate tax structure. The Canada – U.S. Tax Treaty allows Canadian residents the same estate tax exemptions that are available to most U.S. residents. Specifically, in 2012, there was a $5.12 million exemption from estate tax which also applies to Canadians. This means that only estates worth greater than $5.12 Million would end up paying the Federal estate taxes, and the maximum rate was capped at 35%. It is important to Note that this is not a capital gains tax on death, as we have in Canada. This tax applies to the fair market value of assets at the time of death. For 2013, this threshold did not change.
If a Canadian owns U.S. Assets and/or securities worth more than $60,000, and passes away with a worldwide estate valued in excess of $5 million, U.S. estate tax will apply. It is important to note that the worldwide estate value includes all worldwide assets such as; real estate, investment accounts, RRSPs, investments, the proceeds of life insurance etc. It is important to note that the tax is only applied against the value of the U.S. situated assets. High-net worth Canadians should continue to evaluate their estate tax exposure and hold U.S. assets in a Cross Border structure that minimizes or eliminates the potential for U.S. estate tax liabilities.
Much of the press on the Fiscal Cliff has been on the increases in income tax rates in the U.S.(expiry of income tax breaks). This issue is not likely to affect Canadian residents. Canadian residents pay Canadian tax on their world wide income. Any U.S. sourced income earned by a Canadian will be added on top of their Canadian income, such that it will be taxed at a relatively higher marginal rate. U.S. sourced income will be taxed in the U.S. at lower rates and Canada will give a credit for any U.S. taxes paid. As long as the marginal rate in the U.S. is lower than the marginal rate in Canada on the same income, increases in US income tax rates will not affect Canadians.
Capital Gains Taxes
The one expiring tax cut that was not renewed under the new deal is to the long-term capital gains tax rate on the disposition of capital assets. This is the one tax increase that will be felt by some Canadians. In Canada, we pay regular income tax on half of the capital gain. The top marginal capital gains rate in Canada ranges from approximately 19.5% in Alberta to almost 25% in Quebec. Ontario is currently at 23%. In 2012, the U.S. federal capital gains tax for individuals who had held an asset for longer than one year was capped at 15% on the capital gain. For 2013 that rate has now increased to 20%. Please remember that these are all federal taxes and that Florida has no Capital gains taxes on individuals, limited partnerships and trusts.
We hope that this information is helpful to you. Florida Home Finders of Canada will continue to update you on issues that affect Canadians purchasing property in Florida. As always, if you have any questions on Florida or any of our beautiful communities do not hesitate to call or email us.
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