The Assignee Primary Residence: Tax May Drive the Decision to Sell or Rent
CompassTAX - June 2005
By Diana Matwichuk, CompassGUIDES Tax Specialist
The primary residence is the single most important investment that most people make. Often, strong emotions are attached to the family home, and it is natural that impending international assignments should raise a certain amount of angst over the issue of selling versus renting.
Personal goals, company policy and the housing market are always considerations, but often the decision comes down to the tax savings involved.
Jean Krieger of Boswell Krieger Management & Realty Ltd, a Calgary-based property management service, currently advises his clients to rent their Canadian dwelling while abroad if they answer yes to any of four critical questions:
- Do you like the home?
- Do you like the area?
- Are you coming back?
- Do you like the idea of having roots in Canada while abroad?
He explains that if assignees anticipate that their circumstances will have changed when they return home, for instance with a larger family, or as empty-nesters, then there is no point in renting because the house will no longer be suitable and the assignee will be too far removed on assignment to be watching the Canadian housing market.
Jean also notes that with the current trend of low interest rates, the hot housing market in Calgary is putting downward pressure on rental rates. Most people moving to Calgary want to get into the market, due to a perception that if you don’t do so now, it will be even more difficult to buy real estate in the future. Even inbound workers are currently more inclined to buy instead or rent, despite the fact that they will not be here long term.
This being said, native Calgarians know that anything can happen to the housing market. For instance, sudden steep declines in housing values were experienced in the early 1980’s. The future is difficult to predict, and decisions should not be made on the housing market alone.
Assuming that there are no personal attachments to the family home that would sway the assignee’s decision, financial considerations become more of an influence in the decision-making process. Company policy related to the handling of relocation expenses, and the tax implications of the sale or rental of the primary residence are both major considerations.
Existence of Company Policy
Always of immense interest is company policy regarding the handling of assignee real estate. This assignment policy should anticipate and deal with all questions related to the family home, including:
- Home buy-out programs
- Moving policy
- Tax treatment of relocation expenses
- Lease cancellation assistance
- Equity advance in lieu of second mortgage financing
- Assistance in closing of sale on Canadian property in assignee’s absence
- Tracking of relocation expenses
- Home appraisals
- Compensation for losses incurred through the rental of primary residence
- Provision of accommodation while finding suitable housing
- Compensation for the lack of comparable housing in host country
- Rentals in the host country
Assignees are in a better position to make the decision to sell or rent their personal dwelling if they have been adequately informed through assignment documentation of the tax aspects of both options, and how the company will assist in achieving the respective tax savings.
What is done with the primary residence during an international assignment affects the determination of the assignee’s Canadian residency status. The Canada Revenue Agency (“CRA”) looks at many factors when determining residency, but foremost is the existence of an assignee-owned dwelling in Canada.
Housing scenarios which are considered in this determination process include:
- rental at arm’s length (that is, to a relative);
- kept vacant (and therefore available for the owner’s use during return visits); and
- supporting a person in the dwelling.
Non-Resident Tax Implications
Significant Canadian tax savings can be gleaned by non-resident international assignees, who, in most cases, are not subject to Canadian taxation. Unfortunately, being declared non-resident is currently not a simple task. The CRA has, of late, been rejecting seemingly watertight non-residency claims. Individual analysis of non-residency requirements is advisable for assignees, in order to take advantage of tax savings.
This application would normally be part of a multi-national employer’s Assignment Tax Program.
Tax Advantages of Retaining Canadian Resident Status
International assignees who intend to rent their Canadian primary residence while abroad, and therefore retain Canadian resident status, may be eligible for the Overseas Employment Tax Credit (“OETC”). The OETC is a credit which allows employees working abroad to shelter up to $80,000 from Canadian taxation. Employees who meet the eligibility guidelines must apply for the tax credit and have the application certified by their employer.
Disposing of Rental Property as a Non-Resident
Assignees considering becoming non-resident yet maintaining a Canadian rental property should be informed in assignment documentation that, should they choose in the future to sell this property, certain steps would have to be taken.
For a sale after departure, a tax clearance certificate will have to be obtained from the CRA to prevent a Canadian non-resident 25% withholding tax from being assessed on the gross proceeds received from the sale. Clearance certificates are time sensitive – necessary filings with the CRA must be made no later than 10 days after the sale. If any tax is owed on a capital gain resulting from the sale of this property, it must also be remitted at that time.
All or a portion of the non-resident withholding tax paid will likely be retrievable upon filing a Canadian income tax return to report the sale of the house, and it is possible to claim any legal expenses, commission fees, accounting fees and other related expense on this tax return.
Residency reviews should be part of pre-departure tax counseling that is provided by the corporation to employees being sent on assignment.
Retention of the Primary Residence
Retaining the assignee home for the purposes of maintaining ties to Canada, and thus keeping Canadian resident status, has certain advantages. There are then no capital gains to be reported to the CRA on a sale of the home, the assignee may be eligible for the OETC, and the assignee is able to stay in the Canadian real estate market. Assignees keeping their homes vacant should check with their insurers, who may impose certain conditions.
In some cases, assignees return from assignment to find that the real estate market has taken off while they were away, and the monetary gains that they enjoyed abroad were not enough to offset this spike in Canadian housing costs.
Depending on the location of the assignment and the expected level of taxation in that country, these considerations may be convincing enough for the assignee to decide to retain, and therefore rent, their home while on assignment. Such rental income may need to be reported in a tax return in the host country.
Assignees electing to rent their dwelling while abroad are advised to hire a property manager. This ensures that the non-residency requirement of rental at arm’s length is met. A property manager provides the added benefit of relieving the assignee of onerous administrative tasks from an international location.
When entering into a business relationship with a property manager, the assignee should have a comprehensive agreement in place. At CompassTAX, we advise our clients to include specific tax clauses in this agreement, and we provide a suggested addendum to cover this.
Assignees should also be made aware of the special tax reporting required for rental properties owned by Canadian non-residents. These items should be discussed with the assignee during pre-departure tax counseling.
Assignees should be aware that if they are selling their primary residence, they will be required to report any capital gains in their Canadian income tax return. Again, the Canadian tax services provider should outline these requirements during pre-departure counseling.
The sell versus rent debate which rages in the assignee mind can be alleviated through the presentation of company relocation policy and tax implications in assignment documentation. Personal goals aside, it is usually this information about company financial assistance and related tax implications which actually sway the assignee one way or the other.
What is most important is that the assignee be well-informed so that they can make a decision that is right for their personal situation.
At CompassTAX, we develop cost-effective assignment tax programs for Canadian companies sending employees around the world and bringing international consultant expertise to their Canadian projects. These Assignment Tax Programs provide detailed advanced tax planning, including policies, procedures and employment contracts, which serve to minimize costs and mitigate any risk of litigation.
CompassTAX™ also offers clients with international assignees pre-departure and re-entry tax planning with a view to minimizing tax and providing experienced tax representation with the Canada Revenue Agency (CRA). CompassTAX™ specializes in all areas of cross-border taxation for consultants coming to Canada temporarily, Canadians moving back to Canada, and individuals living outside Canada with Canadian business ties.
The author wishes to thank Peter J. Simpson, CA, and Jean Krieger of Boswell Krieger Management &Realty Ltd for their contributions to this article.