Tax Implications for Canadians

[CanadaDisney05]

As the title suggest, I'm having a hard time understanding if there are any tax consequences for Canadians buying into DVC.

I understand that on the sale there is a 15% withholding tax. This can be recovered by filing a US tax return. Whether it's worth it or not can be subjective.

Are there any other tax implications?

- Sales tax on purchase?
- Rental income when renting out your points (with CRA or IRS?)
- Capital Gains when selling (with CRA or IRS?)
- etc???

Edit: Summary of replies received so far.

1) On sale, there is a 15% withholding tax from IRS. You should be able to get it back, but it's up to you to determine whether it is worth it.
2) On sale, you have to report capital gains to CRA. This is calculated as Sale Price - Purchase Price - Commissions - Closing Costs. Each of these items is stated in CAD at the time of the respective transactions. Of course, as a Capital Gain, this is taxed at 50%.
3) When renting points, there is no obligation to the IRS. There is an obligation to the CRA. This can be reduced by maintenance fees. Nobody has mentioned this yet, but I also would assume you would be able to deduct a portion of your purchase price. I'm not 100% sure of the mechanics of this because it is a prepaid expense rather than a capital asset, so CCA would not really make sense. I would assume you can take the purchase price and divide it by length of contract to give you an annual portion. You would then be able to carry forward any previous unused years. This would essentially eliminate any liability.

Summary: The only real issue is the 15% withholding on the sale by IRS. Unless the contract is large, probably not worth getting tangled into the IRS system. In terms of capital gains and rental income, as long as you keep the documentation, the $$$ will likely be pretty immaterial.

 

[AdamsMum]

When I sold a small contract I chose not to bother as it was only 10% at the time, and the company that processes it was charging just about what I would get back. I did receive a letter from IRS telling me how to get an ITIN (?) number and that I could apply for a refund or not. My choice.

I've thought about the tax implications of renting out my points. I think I would just enter it as rental income and deduct the maintenance fees from it. I also thing that a lot of people don't bother. David's doesn't issue any tax slips for their rentals, and wouldn't give me any advice about it. I can understand that they might have a conflict of interest or be liable if they gave me the wrong advice. In the end I didn't need to rent out the points, so I never found out. I'd be interested to know though.

 

[Madame]

As the title suggest, I'm having a hard time understanding if there are any tax consequences for Canadians buying into DVC.

I understand that on the sale there is a 15% withholding tax. This can be recovered by filing a US tax return. Whether it's worth it or not can be subjective.

Are there any other tax implications?

- Sales tax on purchase?
- Rental income when renting out your points (with CRA or IRS?)
- Capital Gains when selling (with CRA or IRS?)
- etc???

Rental income needs to be claimed like any other income to the CRA. You can also deduct your MF and any interest paid if you’ve taken out a loan to pay for your contract, in order to offset the income.

2 yrs ago I owed taxes & this year I got money back as I’d rented out over 2 yrs. We don’t mess around with the CRA. My DH works in investments and is under federal oversight & I’m in education. I’m sure many don’t claim the income, but why invite problems?

You’d also need to report any capital gains to the CRA upon the sale of your DVC.

 

[Mikamarii]

we've been exploring selling given the increased value in points and weak Canadian Dollar. We could make a very nice profit on our points so we are exploring those options. As such I've done some research on the topic. I am not an accountant!!

As far as the FIRPTA withholding tax it is 15%. However, you would be entitled to a full refund. Basically capital gains increase your yearly income and are taxed accordingly. Unless you work in the USA your only US income that year would be the sale of your DVC. So essentially they take the 15%, you fill out an IRS tax return showing your low yearly income and get a refund. I believe the basic Tax exemption is around 37K in the USA so if you have less than that you don't pay tax.

In researching DVC resale sites there is a name that seemed to frequently come up. One, that I believed is a sponsor of this site, also has her listed. She charges $500 and does all the paper work for you. If I understand correctly, she will apply for a with holding certificate which identifies that your potential income will be way less then the tax exemption so they hold the 15% in escrow. What it sounds like is essentially you still pay the 15% initially, it is held in escrow, and then refunded without a tax return and occurs much quicker. You would still need a US Tax ID number but that is taken care of by the tax professional.

As far as Capital Gains in Canada yes you need to report. Whether you choose to is up to you but I wouldn't mess with the CRA either. Keep in mind that when you report your capital gains in Canada you need to use Cdn Dollars so you need to know the exchange rate of when you bought the points and when you sold them. There are websites that list that historical data. In our case the dollar was almost at par when we bought but much lower if we sell. With Capital gains you include all the fees you paid when you bought (initial purchase, document fees, etc) and all the costs when you sell (commissions, legal fees, estoppel, etc) this helps minimize some of the gains. Again, gains are tied to your yearly income so the amount you get taxed varies depending on your tax bracket. Also, if it is jointly owned you split the gains. In our case my wife works part time so is in a way lower tax bracket. So half our gains will go to her and be taxed at a much lower rate.

I don't think you need to report rental income with the IRS but you would require to do so with the CRA. If you do report to the IRS you can apply for certificates showing you paid tax so you aren't double dipped by the CRA.

Hope this helps and someone please correct me if I am wrong

 

[AdamsMum]

That's very helpful, thank you.

 

[gscott8075]

Your basis is increased by the part of maintenance fees allocation to capital reserves. Over time, this becomes a pretty big chunk of change....

 

[CanadaDisney05]

Thanks for the input. Just to summarize my understanding.

1) On sale, there is a 15% withholding tax from IRS. You should be able to get it back, but it's up to you to determine whether it is worth it.
2) On sale, you have to report capital gains to CRA. This is calculated as Sale Price - Purchase Price - Commissions - Closing Costs. Each of these items is stated in CAD at the time of the respective transactions. Of course, as a Capital Gain, this is taxed at 50%.
3) When renting points, there is no obligation to the IRS. There is an obligation to the CRA. This can be reduced by maintenance fees. Nobody has mentioned this yet, but I also would assume you would be able to deduct a portion of your purchase price. I'm not 100% sure of the mechanics of this because it is a prepaid expense rather than a capital asset, so CCA would not really make sense. I would assume you can take the purchase price and divide it by length of contract to give you an annual portion. You would then be able to carry forward any previous unused years. This would essentially eliminate any liability.

Summary: The only real issue is the 15% withholding on the sale by IRS. Unless the contract is large, probably not worth getting tangled into the IRS system. In terms of capital gains and rental income, as long as you keep the documentation, the $$$ will likely be pretty immaterial.

Thanks so much

 

[CanadaDisney05]

Your basis is increased by the part of maintenance fees allocation to capital reserves. Over time, this becomes a pretty big chunk of change....

If I'm understanding correctly, what you are suggesting is that a portion of the annual maintenance fees is considered capital. Therefore, this amount is not deductible from rental income. However, you should be able to claim some sort of CCA on this amount. This portion would also factor into the capital gains calculation.

Can you clarify if my understanding is correct

 

[Mikamarii]

Of course, as a Capital Gain, this is taxed at 50%.

Just to clarify you are not taxed 50% of capital gains. You are taxed 50% OF the capital gains at whatever your tax rate is. So if you made 1000$ 500 of that would be taxed at whatever tax bracket you end up being in.

 

[CanadaDisney05]

Just to clarify you are not taxed 50% of capital gains. You are taxed 50% OF the capital gains at whatever your tax rate is. So if you made 1000$ 500 of that would be taxed at whatever tax bracket you end up being in.

Thanks. I knew that. Just bad wording. I edited the top post.

 

[gscott8075]

I was referring to reporting the gain/loss on a sale of a real estate interest used for personal use.

In the US, the portion of dues allocated to capital reserves is similar to replacing a roof on a home. It increases your basis and therefore reduces your gain when it is sold.

Thanks.

 

[CanadaDisney05]

I was referring to reporting the gain/loss on a sale of a real estate interest used for personal use.

In the US, the portion of dues allocated to capital reserves is similar to replacing a roof on a home. It increases your basis and therefore reduces your gain when it is sold.

Thanks.

Example) Buy 100 points for $110 per point. Assume deed is for 20 years. Own it for 5 years, and then sell for $130 per point. Maintenance fees are $7 per point, of which $2 is considered capital reserve. During the period of ownership, I rent out all of my points for $15 per point.

Year 1, 2, 3, 4 taxes would be:

Rental Income = $1,500
less: Expense portion of maintenance fees (7 - 2 x 100) = $500
less: Current Portion of Purchase Price (11,000)/20 = $550
Net Income = $450

Year 5 Taxes would be

Rental Income = $1,500
less: Expense portion of maintenance fees (7 - 2 x 100) = $500
less: Current Portion of Purchase Price (11,000)/20 = $550
plus: Portion of Purchase Price previously expensed (550 x 5) = 2,750
Net Income = $3,200

Sale Price = 13,000
less: Purchase Price = 11,000
less: Capital Reserves (2 x 100 x 5) = 1,000
Capital Gain = 1,000
Taxable Portion of Capital Gain = $500

Total Year 5 Taxable Income = $3,700

Does this make sense?

 

[Mikamarii]

I just wanted to add to my post as I have been speaking with a FIRPTA specialist as we sort out listing our contract. What she said was that we need to pay 20% on the gains regardless as it is not based on an income tax bracket.

The process she explained was that to advise the Title company that you will be using an accountant to apply for a with holding certificate. The title company holds the 15% FIRPTA tax in escrow. The With holding certificate takes about 90days to complete. Once it is submitted the Title company disperses the proceeds but 20% OF THE GAIN goes to the IRS. You can then complete a US tax return to get it back. At the point the tax the IRS takes is fairly negligible so you have to decide if it is worth it. In our situation we bought for 26K US (including all fees). If we sold at current listed prices we could sell for abt 32k US. After commissions and all fees we are looking at about 28500US so about a 2-3K profit. The initial 15% taken is about 4800 US with us owing about 400-600US in actual capital gain taxes. So for us it is very well worth filing for a withholding certificate but not really worth filling a US tax return as we can use that money paid in taxes towards what we would have paid in Canadian Capital Gain tax.

Hopefully that all made sense. What really makes a potential sale intriguing for us is we bought when the dollar was above par and now it is much lower. If the dollar holds we would look at a fairly hefty profit.