If you’re not a professional accountant it can be difficult to understand how to calculate your Capital Gains Tax Rate and understand how U.S. and Canada Capital Gains Tax and Attribution Rules differ. Capital gains rules can have significant consequences for U.S. expats in Canada or Canadian expats in the U.S. Let’s first take a look at how the two compare.
U.S. vs. Canada Capital Gains Tax on Principal Residences
We’ll start by comparing how capital gains tax is applied to principal residences for the U.S. and Canada.
Canadian Capital Gains Tax of Principal Residence
American citizens in Canada are bound to find selling their principal residence complicated. That’s mainly because of how both the U.S. and Canada treat capital gains tax. Canadian tax law exempts such a sale from taxation if you are a Canadian resident. Moreover, if you’ve been calling that place home throughout the years of ownership, then the capital gain after its sale will be totally exempt from Canadian taxation.
U.S. Capital Gains Tax of Principal Residence
Now that you’re aware of how the Canada Capital Gains Tax and Attribution Rules from the CRA (Canada Revenue Agency) work, let’s look at how they function in the U.S.
Unlike in Canada, the U.S. will not consider you exempt from capital gains tax when you sell your principal residence. You can, however, exclude up to $250,000-$500,000 from the profit as a taxpayer. ($500,000 applies to those who file a joint return).
Note: the property in question should have been yours for 5 years and the principal residence for at least two of those. Additionally, the full exclusion will only be available to you once every two years. Aside from that, you cannot claim foreign tax credit against this U.S. income tax since Canada already considers the transaction tax-free.
U.S. vs. Canada Capital Gains Tax on Investment Properties
Next, let’s compare how capital gains tax is applied to investment properties for the U.S. and Canada.
Canadian Capital Gains Tax of Investment Properties
Under the Canada Income Tax Act, you only have to pay tax on 50% of the profits as capital gain tax to the CRA. The amount of tax is determined by total income and tax bracket.
U.S. Capital Gains Tax of Investment Properties
In the U.S. (as per IRS), capital gains tax rate for investment properties is determined based on ownership duration of the investment asset or properties.
- Long-term capital gains tax, profit from the sale of asset or property held a year or longer, rates are 0%, 15% or 20%.
- Short-term capital gain tax, or profit from the sale of an asset held for less then a year, is taxed at the standard income tax rate.
How to Calculate Canada Capital Gains Tax in 5 Steps
In order to calculate any tax, we need to first determine capital gain. Start with calculating Adjusted Cost Base (ACB) of the investment and then Net Sale Price.
5 Steps to Calculate Canada Capital Gains Tax
- Adjusted Cost Base (ACB) is equal to Book Value (the original purchase price of the assets/investment), plus Acquisitions Costs such as commission, local tax, transfer tax, transfer fees, and, if applicable, any reinvested dividends on stock.
Formula: ACB = BV + Acquisitions Costs
- Selling Price is equal to the total net of commission, local tax, and fees.
Formula: Selling Price = Net of Commission + Local Tax + Fees
- Capital Gain or Loss is calculated by subtracting the Adjusted Cost Base from the Selling Price.
Formula: Capital Gain = Selling Price – ACB
- 50% of your Capital Gain is taxable, minus any offsetting capital losses.
Formula: Taxable Capital Gain = Capital Gain x 50% – Capital Losses
- Add your Taxable Capital Gain to your total income. You will then be taxed at the standard rate based on your type of investment and your marginal income tax rate.
Formula: Your Total Taxes = (Taxable Capital Gain + Income) x Your Marginal Income Tax Rate
Note: Your Capital Gain Tax can vary depending on the type of investment. To be sure, contact us for help.
How to Calculate U.S. Capital Gains Tax
In order to calculate any tax, we need to first determine capital gain. Start with calculating your initial basis of the investment and then net sale price.
U.S. Capital Gains Tax Calculator
- First, you’ll need to calculate your Basis. Basis is Purchase Price plus Acquisition Costs, such as commission, local tax, transfer tax, transfer fees. If applicable plus any reinvested dividends on stocks.
Formula: Basis = Purchase Price + Acquisition Costs
- Next, you’ll need to calculate the Selling Price. Selling Price is equal to Net of commission, local tax, and fees.
Formula: Selling Price = Net of Commission + Local Tax + Fees
- To determine your Capital Gain or Loss, subtract the Basis from the Selling Price.
Formula: Capital Gain or Loss = Selling Price – Basis
- Tax Rate on Capital Gain is determined by type of gain such as long-term and short-term and your total income. If you have a long-term capital gain, you will be taxed at 0%, 15% or 20%. If you have a short-term capital gain, you will be taxed at your standard income tax rate.
Long-Term Gain Formula: Capital Gain Tax = Capital Gain x (either 0%, 15%, or 20%
Short-Term Gain Formula: Capital Gain Tax = Capital Gain x Your Standard Tax Rate
Note: Capital Gain Taxes can vary due to your specific financial situation. For the most accurate calculation, contact us for help.
Generally, in Canada, the attribution rules prevent you from transferring your tax liability by income splitting with minor children or other family members. So, if you do transfer property to your spouse with the intent of splitting capital gains between spouses and they sell it, you get to pay the tax on capital gain – not them.
Besides knowing this, you should also know that the attribution rules in both countries consider you and your spouse owners of the property. Therefore, you’ll both have the joint onus to pay capital gains taxes.
Failing to realize that you might owe U.S. taxes on your property in Canada — whether principal or investment — in the above circumstances can be a mistake.
Considering Investing in Cross-Border Property?
If you’re considering a cross-border investment, make sure you understand the U.S. and Canada Capital Gains Tax and Attribution Rules. Or, get in touch with expert expat accountants who can help you mitigate the tax liability. Ours know all the exclusion and deduction available to you too well. So, contact us before the IRS contacts you!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Akif CPA will not be held liable for any problems that arise from the usage of the information provided on this page.