Cross Border Tax Reporting for a legal settlement for a rental property located in Canada

[VJR-M]

A Property Ownership Civil Lawsuit in Canada - My wife and I are US residents/citizens and file joint tax returns using TurboTax (desktop versions). We were the plaintiffs in a civil lawsuit in Ontario Canada, to evict the defendants who were renting our townhouse. In addition to the rent, the defendants owed us monies for fund we loaned to them over a decade. In lieu of the payment of the owed debt amount, the defendants transferred the title of the townhouse (purchased by them using the funds we had loaned to them) seven to us seven years ago. They also agreed to pay monthly rent. They never paid any rent. A couple of year later, when we served an eviction notice, the defendants claimed, that they paid for the property with their own funds and we were holding it in trust for them. They also claimed that they we didn’t loan them any funds.

The Settlement – After several years of delays and adjournments, a settlement was reached last year to end the civil lawsuit. The main terms of the settlement agreement are:

1. The settlement agreement called for us to be paid a sum of money, say $P CAD for
   1. Any and all amounts owed to us, say $D CAD
   2. Any and all costs and expenses incurred by us after the settlement since the start of the dispute. We incurred the litigation Cost (say $L CAD) and the carrying cost for the townhouse (say $C CAD) prior to the settlement.
2. The settlement also required the opposing party to reimburse us any and all carrying costs (say, $N CAD) related to the townhouse since the date of the settlement. Therefore, the final payment to us was $P CAD + $N CAD.
3. We also incurred additional legal cost (say $LL CAD) after the settlement to enforcement the settlement agreement.
4. Upon receipt of the Settlement Funds in their entirety ($P CAD+ $N CAD) this year, we transferred the title to the townhouse to the opposing party.

My specific questions are:

1. Since the property title was transferred to us in 2017 for the owned amount $D CAD, is it ok to take $D as the purchase price of the property in our non-resident Canadian tax filings and the equivalent converted amount in USD in our US tax filings?
2. Is it ok to take the settlement amount $P CAD minus the pre settlement carrying cost $C CAD as the sale price in Canadian tax returns and the equivalent converted amount in USA in our US tax returns?
3. Is it ok to take our total litigation cost $L CAD + $LL CAD as the cost of selling in our non-resident Canadian tax filings and equivalent converted amount in the USD in our US tax filings?
4. Since the sum of $D + $C + $L (also $D + $C + $L + $LL) far exceeds $P, we will incur a significant capital loss. Is the loss in our US tax filings computed by converting purchase and sale prices and selling cost into USD (as above) or by converting the capital loss in CAD in our Canadian tax returns to USD?
5. Does TurboTax Canada provide full or expert assisted service to file taxes for non-residents for this situation in Canada and does TurboTax USA provide full or expert assisted service to handle the tax filings in the US? If so, how can I utilize these services.

I am sorry for the long questions. I look forward to your guidance and responses to my above questions. Thank you so very much for your time.

[vithalanin]

You will need to contact the Canadian Community for an answer to this question. In order to do this you will take the following steps:

1) Go to this link Canadian Community 

2) Create a new profile

3) Post your question in the the Canadian Community

4) Come back to Turbo Tax after you have discussed this with them and a Tax Attorney
Most times IRS will go with the foreign country reporting but in this case we would need to look at the treaty between US and Canada to see what the accurate reporting would be. You will need to contact a tax attorney for the tax treaty.

[FranklinF]

This question is indeed complex. As highlighted by the tax expert Vithalanin, you should begin by engaging with the TurboTax Community in Canada to gather initial insights. Then, consult the TurboTax Community in the USA to deepen your understanding of the intricacies involved in cross-border tax filing between the two countries.

Additionally, it is highly advisable to seek advice from a tax professional or attorney who specializes in international taxation between the United States and Canada. Their expertise is essential in navigating specific credits and tax benefits that might otherwise be missed. It is prudent to ensure thoroughness in order to file an accurate tax return from the start, since correcting errors later can be both stressful and expensive.

Kind Regards,
Franklin
TurboTax Expert

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