By MATT CHANDLER
Buffalo Law Journal

By his own estimate, it takes Dan Kohane 14 minutes to commute from his driveway to his downtown Buffalo office. It's a travel time that would make his counterparts in Washington, D.C., Los Angeles or New York City green with envy.

It's even more impressive when you take into account one significant detail - his commute is international.

Kohane, a member attorney with Hurwitz & Fine PC, is among a growing number of Americans purchasing second homes in Canada and spending part of the year crossing the border twice daily. While the idea of owning land in another country may have built-in appeal, what about the potential tax complications and estate-planning snafus that could be part of the package?

"When we started looking at property, we didn't pay much attention to what the legal implications were," Kohane said. "We did it just to get a nice piece of property where we could relax and enjoy it. It was definitely an afterthought for us, but at the end of the day it didn't make any difference because we were going to buy that property in any event."

A taxing transaction

Joe Falbo, a partner in Tronconi Segarra & Associates LLP, says there are tax consequences involved with over-the-border property purchases but he doesn't see them as a deterrent to buying that lake-front cottage you've always dreamed of. Instead, Falbo suggests buyers do their homework prior to purchase. He offers potential homebuyers a glimpse at how international tax laws could affect their purchase.

"On this day in 2000, the foreign exchange on the Canadian dollar was just under $1.50. If somebody went to Canada 10 years ago and bought a cottage for $150,000 Canadian, they paid $100,000 U.S.," he said. "If they were to sell that cottage today, the exchange rate is almost par. So the $150,000 Canadian is now $150,000 U.S., leaving them with a $50,000 gain."

In addition to owing taxes on that gain, Falbo points out that the equation assumes no gain in value on the property. Any such gain would inflate that liability even more.

He also points to a common misunderstanding about paying for that gain. He says Americans often think that because they didn't earn any traditional income in Canada, there is no need to file a Canadian tax return. Not so says the Williamsville CPA.

"The Canadian government has what they call a withholding at source for the sale of a property by a person that is not a Canadian resident where they withhold 25 percent of the gain on the sale," he says. "The only way for that U.S. taxpayer to get their money back is to file a Canadian tax return. Then, any tax that was paid in Canada you would get either a deduction or a credit on your U.S. tax return so that you wouldn't pay tax on the same gain twice."

Adding to the tax issue is the importance of limiting time spent over the border in your new house.

"We can't live up there more than half of the year," Kohane said, " because as we understand it, if you do, they treat you like a Canadian citizen and want you to start paying income taxes."

"Tax laws don't discourage Americans from owning Canadian property," says Richard Halinda, a Fort Erie, Ont.-based attorney who specializes in helping Americans navigate the murky waters of cross-border real estate purchases. "You aren't going to get around the taxes, you just have to deal with it. The thing is to have the best plan that covers them on both sides (of the border)."

Leaving behind liability

Americans purchasing Canadian real estate also need to be mindful of setting up the proper estate planning tools, says Cohen Lombardo PC attorney Terrie Benson Murray.

"What usually happens is that somebody comes in and they want to update their will or talk about a trust and in the course of interviewing them I discover that they have property across the border," she says. Her advice: Everyone should have a valid, updated will in place, regardless of where they own property.

"There are different tax considerations, different documents that need to be prepared and we would want to consult with a Canadian attorney to address all of those issues," she says. "If there is a will, it gets probated here in Erie County first."

Murray said she is commonly asked whether it would be beneficial to obtain a Canadian will to cover the cross-border purchase. Both she and Halinda say while that is an option, it is generally unnecessary.

"To me, that's just added expense to the client," he says. "A New York state will, if properly prepared by a U.S. attorney, will be honored by the Canadian court. Our rules of will preparation are the same as they are over there, so there is no problem bringing a probated New York state will into Ontario."

Falbo agrees, saying the treaty in place makes cross-border land purchases relatively seamless, providing you have sound professional representation on both sides of the border.

"With Canada, it is one of the oldest treaties we have, and it's a fairly taxpayer-friendly treaty so the individual gains quite a bit of relief if they avail themselves of the treaty," he says. "From an estate planning standpoint, you would need to seek out assistance from somebody that is familiar with availing themselves of that relief."

Halinda says that while Canada does not have a traditional estate tax like the United States, there is another potentially huge tax liability property owners must consider.

"We have a deeming rule that says anyone who owns Canadian taxable property is deemed to have sold it the day before he or she died," he says.

Halinda says that rule means Revenue Canada requires that by April 30 of the year following your death, your estate must file a Canadian tax return, reporting that you had ownership in the property and then pay any applicable capital gains tax on that property.

"That capital gain is determined to be the value of that property at the time that you died, less what you paid for it, less any capital gains improvements and any provisions available under the Canadian-U.S. treaty," he says. "So any American who owns a Canadian cottage and dies has to go through this and I deal with a lot of American families who never realized they had to do this."

Having crossed the border last month to begin his summer in Canada, does Kohane think the tax liabilities and estate planning outweigh his new beachfront home?

"You know the first thing that happens when you cross the border into Canada?" he said. "Your blood pressure drops and you just have the feeling of ahhhhh."

• Currency fluctuation. Though there may not be a way to avoid the ebb and flow of the currency exchange rates, be mindful of the impact those changes will have when it comes time to sell your Canadian property.

• File twice, pay once. Though you may not earn any traditional income over the border, Revenue Canada will automatically withhold 20 percent of the gains from the sale of property by non-Canadian residents. If you want that money back, thus avoiding paying taxes twice on the same gain, you need to file a Canadian tax return.

• Seek professional advice. Given the complexities of income tax as well as estate planning for cross-border purchases, seek out the advice of not only your American attorney, accountant or financial professional, but also their Canadian counterparts who are likely to be more versed in the intricacies of laws north of the border.