Sixteen years ago my spouse (born in US but also holding Canadian citizenship) inherited a cottage in Canada from a parent, a naturalized US citizen born in Canada.
Question 1: should this asset have been reported to the IRS? If father was NOT a US citizen I think it would have been needed to, but I hope weren’t required to because he was a US citizen. Spouse does have Canadian bank account and we file the FBAR with US treasury when account balance exceeds $10,000 during a calendar year.
After buy outs from other siblings at the time of inheritance my spouse ended up with a 40% share, with one other sibling holding a 60% share.
Assessed total value of cottage at time of transfer 16 years ago was CAN$500,000. (Numbers are representational only).
The other sibling is a Canadian citizen who lives 30 min from cottage and looks after it. That sibling coordinated many improvements over the years, with most projects being handled by nearby relatives who did expert and competent work. However, record keeping (receipts etc.) often lacking.
After some soul-searching last year while doing estate planning, my spouse (who has no children) decided to sell the 40% share to the other sibling (who has a son that wishes to keep cottage in the family and will inherit it).
The latest appraisal was CAN$1,000,000. Spouse agreed to sell share to sibling for CAN$300,000.
Total improvements CAN$100,000. They split the improvement costs 50:50. Sibling provided spreadsheet listing improvements and values but no dates.
2022 Canadian taxes were handled by a Canadian accountant.
Per instructions from Canada Revenue Agency, because the sale was non arms-length, the assessed value of spouse’s 40% share (CAN$400,000) was used when calculating capital gains, not actual sale price of CAN$300,000.
At time of transfer in the fall of 2022, a Compliance Certificate T2062 was filed with CRA.
On 2022 Canadian T1 Tax form (which has been completed) the amount withheld on T2068 Compliance Certificate was CAN$40,000.
Spouse will receive a CAN$20,000 refund in 2023 (if T1 is accepted).
Question 2 and 3: In calculating capital gain, should the assessed value of CAN$400,000 be used for US taxes as well, or actual sale price of CAN$300,000. Is the CAN$100,000 difference considered a gift that needs to be reported to IRS on form 709?
Question 4. If receipts and dates are lacking for improvements should those be excluded? Or can I use the best estimated date range and then use the least advantageous exchange rate for the est. date range when calculating improvements in US dollars? Are photos of the improvement adequate to document the improvement (new floors, windows, plumbing, electrical, retaining wall, new deck, etc.).
Question 5: For US 2022 taxes, is the amount withheld by CRA in 2022 (CAN$40,000) used for foreign tax credit?
Question 6: Will refund of CAN$20,000 be reported next year on US 2023 taxes? Will other details of sale carry over from 2022 US tax form?
Anything else to be aware of with this tax event? I may have more questions when I actually try to enter the values into Turbotax premier 2022.
Thank you—1shed.
