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I inherited a cottage in Sweden in 1986, valued to SEK 46000 (CAD 5.12 kr).
In 1990 we renovated to a cost of CAD 20000. Only upkeep since then. This
cottage is not deeded, the land is rented. I own it with my husband 50/50
split. We both pay yearly taxes in Sweden. We have never rented it out or
had any income from it. Since 2005 we spend 3-4 months of the year there.
Now we plan to sell. We will pay capital gains in Sweden (23% on purchase
price minus real estate fees and renovations) the year after the sale.
What can we expect in Canada? We have never reported it to CRA as it makes
us no money. Can it be considered principal residence for the 3 months for
the last 20 years? I have seen that we can deduct the Swedish capital gains,
but can we also deduct the real estate fee, transfer cost of sales money when
sent to Canada, renovation costs from 1990, and other costs for its betterment?
What is the level of capital gains in Canada and Newfoundland?
Hi Bittan,
Thank you for your question. Here’s what you can expect from a Canadian tax perspective when you sell your Swedish cottage.
As a Canadian tax resident, you are taxed on your worldwide income, including capital gains from selling foreign real estate. Your capital gain will be calculated as the difference between the sale price (converted to Canadian dollars on the date of sale) and the adjusted cost base (ACB). Your ACB is the value of the property at the time you inherited it in 1986 (converted to CAD using the 1986 exchange rate), plus the cost of capital improvements, such as your $20,000 renovation in 1990. From the proceeds, you can also deduct selling costs, such as real estate commissions, legal fees, and transfer costs. Only 50% of the resulting capital gain is taxable and included in your income for the year of sale.
You are correct that you can claim a foreign tax credit on your Canadian tax return for the Swedish capital gains tax you will pay (23%). This will reduce or eliminate double taxation.
In terms of other deductions, you may claim capital improvements, selling costs, and legal fees, but you cannot deduct routine maintenance, travel costs, or wire transfer fees.
With respect to the principal residence exemption, it is unlikely that this property can be designated as your principal residence if you already have a Canadian home that you normally designate. Canada only allows one principal residence per family unit per year. However, if you have not designated another property as your principal residence for some years, you may be able to designate the Swedish cottage for those years to partially shelter the gain.
The combined federal and Newfoundland tax rate on capital gains is approximately 26.6% at the top bracket, but your actual rate will depend on your other income in the year of sale.