U.S./Canada Tax Treaty

Some important changes to U.S. tax law could affect Canadian residents with property or pension assets in the U.S.

Capital Gains Tax on Real Estate

A special tax break applies to U.S. non-resident aliens who sell U.S. real estate in the tax years 2008 to 2010. The portion of the gain that is normally taxed at less than 25 percent is instead tax-free. This means that the whole transaction is tax-free if the gain is less than about $35,000 per individual ($70,000 per couple if the property is jointly owned). This provision is scheduled to end after December 31, 2010.

Pensions and the Tax Treaty

As of January 1, 2009, new rules came into effect regarding cross-border pension contributions and pension payments.

1. Canadian residents who hold a Roth IRA can now make an election to defer Canadian tax on income earned in the Roth IRA. Also, the withdrawal of funds from a Roth IRA will generally be tax-free in Canada. However, if a Canadian  resident contributes to a Roth IRA, income or growth from the time of the contribution will be subject to tax on withdrawal from the plan.
2. Workers on short-term assignments in the U.S. may want to contribute to a qualifying retirement plan (QRP) in Canada, and vice versa. New legislation allows for these  contributions to be deducted from income in the country where the individual is temporarily working.
3. Individuals who are resident in Canada or the U.S. and commute across the border to work may want to contribute to a QRP in the country in which they work. The new rules allow for these contributions to be deducted in the country of residence.

Note that, in order to claim these deductions, you have to meet a complex set of requirements. Nothing is easy when you’re dealing with the tax man! If you are affected by any of these changes, please contact your PWL advisor.