Avoiding Canadian tax on U.S. property

Q: I am separating (than divorcing) from my husband and we are splitting the houses we own—one in Canada and one in Phoenix. Can I use the Phoenix home as my principal residence? I have owned it since 2008. He will get the Canadian house in the divorce.

— Sonja

A: Hi Sonja, I am sorry that you and your ex are in the process of dividing up your marital assets. This time can be both stressful and liberating.

When designating a residence as your primary home, the Canada Revenue Agency requires that you ordinarily inhabited the property. There are no time-limits or prerequisites for how long you must own or live in the property or what “ordinarily inhabited” looks like. This means that you can designate a house in Phoenix, Arizona as your principal residence—which would exempt you from having to pay capital gains tax, when you sell the property, to the CRA.

But here’s where things get tricky. There is an issue of whether or not you are a U.S. citizen or a Canadian citizen. If you are a U.S. citizen you would qualify for the principal home exemption, which isn’t as generous as the Canadian exemption, but still substantial. However, if you are a U.S. citizen that’s lived in Canada for five or more years you may not be eligible for the exemption anyway. Talk to a cross-border lawyer or accountant to be sure. Finally, if you are a Canadian citizen, you can only shelter the Phoenix, AZ home sale from Canadian capital gains tax, and you are still subject to U.S. taxation as a foreign property owner.

My advice is to seek out legal advice. Even if you and your soon-to-be-ex agree that he gets to keep the Canadian house and you get to keep the Phoenix house, there may be other financial factors that must be considered in order to make the divorce settlement fair.

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Romana King is an award-winning personal finance writer, a real estate expert and speaker. She is the current Director of Content at Zolo.ca

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