The Hidden Surprise in Your Canadian Vacation Home

I remember years ago when I almost purchased a vacation condo in Whistler. With the benefit of hindsight and the impact of the 2010 Winter Olympics it would have been a fabulous investment.  The sale of this property would have produced a routine capital gain in Canada (sales price less adjusted cost base and selling expenses) and the same result in the US, except the sales price is expressed in US dollars on the date of sale, and the adjusted cost base is expressed in US dollars on the date of purchase.

In other words, foreign currency gains and losses are included as a part of the gain or loss computation.  What the salesman did not tell you is that the payoff of the mortgage is also a potentially taxable transaction.  For example, if you borrowed $100,000 CDN when the currency exchange rate was at par, you are considered to have borrowed $100,000 USD. Assume you paid off the mortgage with $100,000 CDN when the exchange rate was 70 cents on the dollar.  Your $100,000 CDN payoff cost your $70,000 USD, resulting in a $30,000 gain.  This gain is a separate computation and not considered a part of the gain on the sale of the home.  You could find yourself with a capital loss on the sale, which might be of limited use, and an ordinary currency gain on the payoff of the mortgage.  This could be an unpleasant surprise.

Contact one of our dedicated professionals to assist in answering your questions and navigating the complexities of international tax compliance.